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.
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.