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Ohio Association of Independent Title Agents

March 18, 2010

Senator B ill SeitzSenate Judiciary-Civil Justice Com mitteeSenate B uilding1 Capitol Square, 1s t FloorColumbus, Ohio 43215

RE: H B 292 (To Prohibit Transfer Fee Covenants in Certain Real Estate Transactions)

Dear Senator Seitz, mem bers of the Committee:

The Ohio Association of Independent Title Agents (OAITA) is an Ohio non-profitcorporation consisting of independent title insurance agents and interested real estate settlementservices industry stakeholders from across Ohio who share a common philosophy about thevalue of independence and autonomy in real estate transactions. We join the Ohio State BarAssociation, the Ohio Land Title Association, and other supporters of this bill in urging itspassage to prohibit "private transfer fee covenants" in Ohio.

The covenants at issue purport to bind subsequent homeowner to pay a 1% fee to theoriginal covenantor on each sale of the property for a period 99 years. Under the common law,in order for a covenant to run with the land, three requirements must be met. First, the partiesmust intend for it to run with the land. Second, the covenant must "touch and concern" the land.And, third, there must be privity of contract. The second req uirement, that the covenant "touchesand concerns" the land is lacking with covenants that merely burden a homeowner with arequirement to pay a fee w ith no contemporaneous benefit to the property.

Traditionally, transfer fee covenants have been used by homeowners' and condoassociations to fund their continuing existence. Because the purpose of such an association is toenforce restrictive covenants, maintain common areas, and generally enhance the value of the

property, there is a sufficient nexus between the transfer fee and the property to make thecovenant enforceable. This bill includes appropriate exceptions for legitimate uses of transferfees such as these.

Private transfer fees, on the other hand, are not used for any ongoing purpose thatbenefits the property. Freehold Capital Partners, formerly Freehold Licensing, which has apatent pending on "Springing Interests Flowing From Benefits That Run With Land," describesthe covenant in their marketing materials as a "mere obligation to pay money." They also claimthat it creates "a long-term income stream" for the covenantor. This is a personal covenant, not a

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real covenant that should be unenforceable against subsequent homeowners under the commonlaw.

However, Freehold Capital has been creative in arguing that these covenants are, in fact,

enforceable. They irrevocably assign a "portion" of the income stream to non-profitorganizations that "reallocates resources back into the community." They also argue that underthe modem Restatement 3d of Property pertaining to Servitudes, that the touch and concerninquiry has been superseded by the rules governing contracts.

Under the Restatement approach, a servitude "is valid unless it is illegal orunconstitutional or violates public policy." A servitude is against public policy, and invalid, if itis "arbitrary, spiteful, or capricious," or if it is "unconscionable." The Restatement provides anillustration which is similar to the covenants a t issue in this legislation.

Restatement 3d Prope rty: Servitudes 3.7, Illustration 3:

The declaration of covenants for Greenacres, a residential subdivision, includes aprovision obligating the owner of each lot to pay the developer, or its assigns, aroyalty of one percent of the gross sales price on each resale of each lot in thesubdivision in perpetuity. In the absence of u nusual circumstances, the conclusionwould be justified that the prov ision is unconscionable. If not unconscionable, thecovenant would be subject to termination under the rule stated in 7.12(Modification and Termination of C ertain Affirmative Covenants).

We believe that this bill codifies the common law with respect to these types ofcovenants and it will make it clear that they are against public policy and not enforceable inOhio. It would essentially eliminate the need for expensive litigation in response to creative

arguments that these covenants run w ith the land.Furthermore, this legislation is in the best interest of Ohio's homeowners and title

insurance agents. We agree with the other proponents of this bill that private transfer feecovenants hinder the safe and efficient transfer of real property; reduce the transparency andexploit the complexities of real estate transactions; erode fee simple title and restrain alienation;and depress home prices.

A private transfer fee, buried in the conditions, covenants and restrictions on realproperty could have dev astating consequences for a homeo wner, First, it is not comm on practicefor appraisers to conduct title searches in the course of valuing real property. Thus, it is unlikelythat the encumbrance filed in the public records would be adequately reflected in the appraised

value of the home.

Second, if a coven ant is missed at a closing it will result in a lien that will need to be p aidthe next time the home is sold. In such a situation, the buyer who was unaware of the covenant,who did no t successfully negotiate a reduction in the sales price to account for the encum brance,will be forced to pay the previous transfer fee that was missed, his transfer fee due on the sale,and most likely be forced to reduce the price of the home once the covenan t is discovered.

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A hom eowne r who finds himself in this predicament m ay be left without recourse againstthe prior owner if the deed by which he acquired title contained common language such as"subject to all easements, covenants, conditions and restrictions of record." There would likelybe an increase in title insurance claims; although even title insurance is no assurance that such ahomeowner would be protected from these covenants. In some parts of the state, where thecustom is for the buyer to pa y for his own er's policy if he desires the protection, owner's policiesare rare. Even if a policy is issued, it will most likely contain an exception for the covenants,conditions and restrictions by reference to the volume and page of the recorded document,regardless of whether the homeowner actually read them or not.

For all of these reasons, the OAITA urges the Committee to recommend the passage ofthis very important bill for the protection of Ohio's homeowners and title insurance agents. Thiswell drafted bill clarifies that such covenants do not run with the land in Ohio and it containsapprop riate exceptions that will continue to allow transfer fees to be used for legitimate purposesthat benefit homeowners.

Robes B. Holman, Esq.Counsel for OAITA

Cc: OAITA Trustees