As you know, Ohio has proposed legislation to ban private transfer fee covenants. This past week, a Senate committee held a second hearing on the bill and I was able to make it to the Statehouse to attend. In favor of the bill was the Ohio State Bar Association and the Ohio Land Title Association. In opposition, a representative from Freehold Capital Partners. The interesting thing was that the issues addressed have all been debated here on the Source of Title Blog. I guess you could say that we have been ahead of the curve!
On Wednesday, March 3, the Ohio Senate Judiciary-Civil Justice Committee held a second hearing on H.B. 292. This bill is the one I have previously written about that will ban private transfer fee covenants in Ohio, if passed.
I was in the office on the morning of the scheduled hearing and I just happened to check the status of the bill when I noticed that it was scheduled for a hearing at 2:30pm. I cleared by calendar for the afternoon and drove to the Statehouse out of curiosity. I'm glad I did.
There were two proponents of the legislation testifying. This first was attorney Steve Buchenroth, an attorney with Vorys, Sater, Seymour and Pease LLP in Columbus, Ohio. He testified on behalf of the Ohio State Bar Association Real Property Section, of which he is a member of the Section Council. The OSBA conceived the proposed legislation and, of course, urged the committee that it be enacted.
The OSBA does not support transfer fee covenants. The covenants could cloud titles for an extended period of time. The original holders of the covenants could be difficult to track down to obtain releases. The covenants have no apparent economic merit other than to create an undeserved windfall, but would cause a nuisance for the title industry.
The second proponent was attorney James Havens, whose firm represents and litigates for title insurance underwriters. He is also the president and founder of Cardinal Title Insurance Agency has has been a licensed title agent for more than 25 years. Havens is a member, and testified on behalf of, the Ohio Land Title Association.
These covenants hinder the safe and efficient transfer of real property. These covenants create an unnecessary and unacceptable risk for lenders, homeowners and land title professionals. They make the transfer of real property more costly and less certain. The long, 99-year timeframe of most of these covenants increase the chances that these restrictions could never be known by the homeowner or are undiscovered during a search of title records. Further, the long timeframe makes it likely that beneficiaries of these covenants will never be found due to death or dissolution.
These covenants reduce transparency and exploit the complexity of real estate transactions. These opaque and confusing covenants are hidden from consumers buried in a veil of legal documents. They can often be difficult for even experienced professionals to comprehend, much less be understood by consumer.
These covenants erode fee simple title and restrain alienation - the unrestricted right of an owner to transfer property. They may be subject to legal challenges as courts have been unwilling to recognize or create new interests in land and they fail the common law "touch and concern" test, which requires that covenants benefit and burden the land. The American Law Institute argues that these covenants are "arbitrary, spiteful, capricious" and an "unreasonable restraint on alienation" and "unconscionable."
Private transfer fees depress home prices. When a private transfer fee covenant is attached to a property, it causes the value to be decreased due to the built in nature of a fee encumbrance. Everyone can agree Ohio home prices do not need to be depressed further.
"The Ohio Land Title Association is pleased the General Assembly is addressing this issue before it becomes as pervasive in Ohio as it has in other states," Havens testified. "OLTA joins the OSBA, the Ohio Association of Realtors and others in supporting this critical bill."
There was one lone opponent of the legislation who testified, Joe Alderman, CEO of Freehold Capital Partners. Alderman did not have a print-copy of his testimony to submit to the committee, so I apologize that I cannot quote him verbatim. However, the impetus of his testimony was that the covenant was designed to inject liquidity into development projects. Basically, through securitizing pools of covenants, developers would have much needed access to funds to complete their projects and buyers in the subdivision would benefit from lower acquisition costs.
He testified that, given the choice, buyers would rather pay $245,000 for a home knowing that they would be required to pay a 1% transfer fee when they sell, than pay $250,000 for the same home without the future obligation. As has been argued by Freehold proponents on this blog in the past, buyers are free to negotiate a reduced purchase price in return for the obligation.
Alderman also testified about the legislation in other states. First, he mentioned the Texas legislation doesn't prohibit transfer fees, but only requires that they be paid by the seller, not the buyer. This has been debated on this blog, too, and I disagree with his interpretation of the Texas statute.
He also mentioned that the other states that have passed bans on the Freehold-type covenant did so without the benefit of public hearings. If that is true, it is shocking. I do not believe that legislatures should ever pass laws without holding public hearings. But, either way, I do believe that they were acting in the best interest of their citizens with the approach they have taken to eliminate private transfer fee covenants.
Lastly, Alderman explained the California legislation, which is centered around requiring disclosures whenever a property is sold with a Freehold-type covenant. This is the approach he urged the Ohio Senate committee to adopt, rather than an outright ban.
After the hearing, I got the opportunity to meet briefly with Mr. Alderman. I spoke with him on the phone a couple of years ago, but this was the first chance I had to meet him in person. As one would expect, he seemed to believe in the value of the Freehold covenants and sees them as a useful tool for developers and consumers alike. I got the impression he was sincere about it. Despite the fact that the program has been described as a "scam," or a "sophisticated pyramid scheme" as one a Kansas Senator wrote, I do not believe that Alderman is out to "rip anyone off."
He tried to persuade me to his line of thinking, but we just have very different opinions on the issue. We managed to find some bit of common ground on the issue of required disclosures, but that was still a bit contentious. In a perfect world, there would be theoretically nothing offensive about the covenant if every buyer and seller were aware of the covenant and negotiated in good faith to take it into account in reaching a fair sales price.
I believe that there would still be some negative implications. Even with the disclosure, there may be problems selling homes encumbered by the covenants. Some homeowners might find that they can't sell without a drastically reduced sales price - even less than they thought it might be when they negotiated their purchase price.
But, beyond that, we don't live in a perfect world. It would only be a matter of time until someone bought a home unaware of the covenant. He would pay full fair market value and still be burdened by the required payment at the time of sale. Such a homeowner would lose significantly on the transaction - he would have to pay the missed transfer fee from when he purchased the property, his transfer fee, and he would have to sell the home at a loss. Mr. Alderman's response was that this can happen with any type of missed encumbrance and the owner would be able to go back on his predecessor in title to recover his losses. He may be correct, but it seems to be a better course of action to protect homeowners from having to worry about this scenario through well-crafted legislation.
It was nice to be able to attend the hearing. I haven't had the opportunity to do that since my internship in the Ohio Senate when I was in law school. And, I was glad that I got an opportunity to meet Mr. Alderman. Although we don't see eye-to-eye on the issue, he was a genuinely nice guy and it was a pleasure to meet him. I have enjoyed the legal debate over the issue and from an academic perspective I have learned a lot more about real covenants than I otherwise would have. There will certainly be more on this topic as it gains national exposure. There was even an article in today's Washington Post.
Robert A. Franco
SOURCE OF TITLE