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Minnesota, Latest State to Ban Private Transfer Fees
by Robert Franco | 2010/05/20 |

Yesterday, Minnesota Governor Tim Pawlenty signed a bill that bans private transfer fees in the state.  This makes the 10th state to implement such a prohibition and more than a dozen other states are currently looking at the issue.  Minnesota's ban follows a similar ban in Maryland that went into effect earlier this month. 

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The Minnesota law states that a private transfer fee "does not run with the title to real property and it is not binding on or enforceable at law or in equity against any subsequent owner, purchaser, or mortgagee of any interest in real property."  But... it goes further than that...

The law also creates liability for a person who "records or files or enters into an agreement imposing a private transfer fee obligation." If a declarant violates the statute, he becomes liable for any transfer fee paid, as well as any attorney's fees, costs, and expenses incurred by a party to the transfer to recovery any transfer fee paid or to quiet title to the property. And, it goes further still...

With regard to those transfer fees already on record, the law creates a notice requirement.  The notice must be filed before December 31, 2010 in the recorder's office and set forth the following:  the amount of the fee; the date or circumstances under which it expires; the purpose for which the fee will be used; to whom the fee must be paid; an acknowledged signature of the payee, and the legal description.  Failure to comply with the notice requirement renders the transfer fee unenforceable and the property may be transfered free and clear of the burden.

It appears that the bans are becoming more comprehensive as more states address the issue. 

Maryland's bill declares that private transfer fees "violate the public policy by impairing the marketability and transferability of real property by constituting an unreasonable restraint on alienation regardless of the duration of such covenant or the amount of such transfer fees."  Further it acknowledges that "courts consistently have turned back attempts by landowners to create new estates in land beyond those recognized at common law." 

The bill in Maryland, which was passed as "an emergency measure" and became effective immediately upon the governor's signature, simply declared that "a covenant that requires the payment of a transfer fee on the conveyance of a fee simple interest in real property is void."

Other states with current bans on private transfer fees include: Florida, Missouri, Kansas, Oregon, Arizona, Iowa, Utah, and Texas.  Although some have argued that the Texas legislation didn't outright ban them, I disagree.  And, in California they opted for a disclosure statute.

Ohio is one of the other states currently working on passing legislation.  The concept of a compromise has been floated by Freehold (the company with a patent filed on this unique "strategy").  They would prefer to see legislation that requires disclosure and would limit the use of private transfer fees.  Such limitations would include a maximum duration of 99 years, prevent stacking multiple covenants on a single parcel, and cap the fee at 1%. 

I am opposed to such compromises because, as I see it, they are already unenforceable under common law.  If the legislature passes some sort of compromise, it could be construed as a declaration that private transfer fees do not violate public policy, and that they are enforceable, so long as the parties comply with the statute.  This would make it harder to challenge them in court.  Thus, I believe that it would be better to do nothing than to pass a compromised bill. 

Most recently, Freehold has proposed that the legislation apply only to residential property and that it include a sunset provision so the issue can be revisited later.  Not surprisingly, I don't like that idea either.  First, what is going to change between now and the time the legislation would sunset?  These covenants are bad for consumers now, and they will be in two years.  If Freehold wants to revisit the issue in a couple of years, they could always lobby the legislature to repeal the statute. 

Second, I believe that the same hazards exist with respect to commercial property.  Although it is true that commercial property owners are more sophisticated and they are more capable of representing their interests, the future owners who would have to pay the fee aren't a party to the negotiations.  There is no negotiations, they are left with only a choice to buy the property... or not.  If these types of covenants become common, there really wouldn't be any choice.

We'll have to wait and see what happens in Ohio.  My best guess right now is that they will get something passed by the end of the year.  I don't think it will include any compromises, but it may be too soon to tell.




Categories: Legislation, Title Industry

1160 words | 4859 views | 5 comments | log in or register to post a comment

Ground Rents?

It's interesting the Maryland would pass this ban.  Although not quite the same as these private transfer fee covenants, many properties in the City of Baltimore are still subject to ground rents.  They survive in a few other east coast states as well.  My understanding is that many of the houses in Baltimore are actually owned as leaseholds and require the payment to the descendants of the holders of these ground rents in order to receive fee title.  Otherwise they must pay the annual ground rent which usually appears as a covenant in the deed.  These ground rents apparently date back to the 18th century and are still enforced.  The private transfer fee covenants don't seem much different in character than ground rents.

by David Jenkins | 2010/05/20 | log in or register to post a reply

Ground rents


You are correct in that many properties in Maryland are still subject to the archiac ground rents that date back as far as the 18th century and as recently as the early 2000's.  The creation of new ground rents has been banned in Maryland for several years now.  Ground rent owners were actually ejecting the rightful owners of these homes for what equated to a debt of less than $50.00!  After many many years of the ground rent owners and their attorneys "stealing" these properties out from under the leasehold owners, the legislators finally acted.  Additionaly, existing ground rents must now be registered with our local State Dept. of Assessments and Taxation (SDAT) and, if the fee owner does not register his/her ownership of the fee interest, they lose their right to collect these ground rents and the property reverts to fee. I find it interesting that the owners of the existing ground rents are balking at the registry and have in fact filed a law suit alleging that the state is violating their rights.  The registry is not complicated, it's not overly expensive and it will make it so much easier for those of us doing business in Maryland to actually PAY THE RENT.  In the current environment, ground rent leases are sometimes so old that they are not even legible, having been hand written at the time of their creation. Thus, we have no idea who owns the right to collect the ground rent unless the current owner is in receipt of a bill from the fee owner.  In the case of foreclosure no one ever knows who owns the fee interest. Because there is no complete central registry yet, we are forced to hold an escrow from the seller equalling 3 years worth of ground rent and a legal fee in the amount of $500.00.  We have to hold this money for 3 years.  Now you do the math, do you know how many escrows I service just for ground rents?  Thousands!  Ground Rents, like private transfer fees simply allow for the collection of fees by persons whose interest in the subject property has long ago been transferred. Neither private transfer fees nor ground rents exist to help homeowners. As you might notice I am a serious critic of ground rents and I just as opposed to private transfer fees. 

by CHARLENE PERRY | 2010/05/20 | log in or register to post a reply

a choice
Per Robert's commentary-"the future owners who would have to pay the fee aren't a party to the negotiations. There is no negotiations, they are left with only a choice to buy the property... or not. If these types of covenants become common, there really wouldn't be any choice." Are you saying the buyer ultimately has a choice to negotiate the price and buy or not buy? That is horrible public policy and something has to be done! Is that they worst thing that can or not buy?! The KEY here is "they are left with only the choice to buy the property.... or not". How is this any different that any other real estate decision? If the buyer takes everything into consideration and it still makes sense to purchase, they purchase. If not, they don't. Anyone buying in a commercial development or residential development were probably not part of the initial negotiations that have affected a contract in some way (HOA fees, trash fees, other deed restrictions, etc.) Maybe the potential buyer doesn't like the fact that he/she has to keep his grass at a certain level in their yard based on a bylaw of the subdivision. He was not part of the "intial" negotiation of that bylaw but HAS to take it into account before purchasing....or not. I am not an attorney but this whole argument seems a bit "overthought" (regardless if you are for or against this concept). The bottom line is that the buyer (residential or commercial) is left with a CHOICE. Buy or don't buy. Seems pretty simple. Regardless if they are the first buyer or the 20th buyer of the property, they have a CHOICE. Also, I know a lot of very smart attorneys and understand that the "public policy" reasoning is the last ditch effort in an argument. It is kind of like pulling the "race card" in a debate. Everyone knows it is BS but noone wants to be called a racist and noone wants to be against "the public good". These are "private" negotiations between buyers and sellers. Nothing to do with the "public". This is not a TAX forced on the public. Last I heard, I don't have a choice if I want to pay taxes or not. But again, I know that I am simple minded about all of this and the devastation that it will cause to the real estate market. Please continue to educate me on how this is a public policy issue and how these covenants will cause utter chaos in the real estate market for years to come. 
by Paul Daniels | 2010/05/21 | log in or register to post a reply

It is simple...

If these covenants are allowed, why would any developer NOT use them.  They have nothing to lose and a potential for a "long-term income stream."  If every new construction project includes a transfer fee covenant, there really is no choice.  You will have to pay this ridiculous fee no matter where you buy.  

You keep pointing out HOA fees and other deed restrictions, but as I have pointed out these all benefit the property.  They actually increase the value of the property, whereas private transfer fees reduce the value of the property.

As for your take on the "public policy" argument, you are just wrong.  All laws further some sort of public policy and it is a major factor in interpreting legislation.  It is just bad public policy to burden land owners who haven't even been born yet, with no corresponding benefit.  Worse yet, we are talking about land owners whose grandparents haven't even been born yet

And, if these private transfer fees are allowed, they won't be limited to just developers.  Any Joe Seller could tack one on to his property any time it might help him sell the property for less money to attract a buyer.  Anyone who puts a new roof on a home, or new aluminum siding, could use them to help finance the cost for the homeowner.  It is utterly ridiculous to allow parties to bind future owners to pay for their contract. They have no incentive to negotiate on behalf of those future owners, they obviously have a conflict of interest.


by Robert Franco | 2010/05/21 | log in or register to post a reply

Public policy argument simply wrong

To say that these bans are based upon "public policy" is simply wrong.  They are supported and lobbied by the National Association of Realtors and the American Land Title Association.  They are trying to protect their 6% commissions and title insurance profits and nothing more.

To say that once all of the developers use the fees there would be no choice and the consumer would be left with only buy or not buy limits the ingenuity of the market place.  If the consumers are so opposed to these fees, it would not take long for a developer to market his developments as not having them.  The market will and should dictate whether the fees are viable or not. 

As for  choice, try negotiating a lower commission with your realtor or a lower title insurance premium.  Good luck.  Here in Texas there was a company that was offering to represent seller's for 1%.  The realtors here took that company to court and tried to ruin it by not allowing it access to the MLS system.  And these are the folks who are out there championing the rights of the consumer.  

If there is a legitimate concern about these fees that is not based upon realtors protecting their commissions, those can easily be addressed through regulation and disclosure.  The ban are only there to protect their self interest and all  of the statements regarding public policy will not change that.

by Robert Wilson | 2010/06/10 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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