On June 14, 2010, Ohio Governor Strickland signed House Bill 292 prohibiting transfer fee covenants on a prospective basis.  Transfer fee covenants in effect prior to September 13, 2010 are not affected.

Transfer fee covenants are a relatively new phenomenon, but one that has garnered increasing popularity in recent years as real estate developers have searched for alternative streams of income.  These covenants are created by a seller (typically a real estate developer or builder) and require subsequent buyers of its grantee to pay a “transfer fee” to the Covenantor every time the property is sold.  The fees are generally between 1% and 3% of the purchase price and would affect every transfer for a period of 99 years.  These fees are usually shared between the Covenantor, the real estate agent that represented the Covenantor and the companies marketing these covenants to the Covenantor.  Ostensibly, the first buyer enjoys some benefit as the Seller may drop the price in expectation of future payments that will be paid by future purchases, thus making that particular sale more marketable.  As the average residential property is transferred every seven years, Builders and developers can earn a tremendous amount of revenue from these Covenants.
 
Unfortunately, these covenants create severe issues for subsequent title holders.  These deed covenants require payment back to the original Covenantor, however the identity and location of this party may be difficult or impossible to ascertain, especially as time passes.  In the event such fees are not paid, most of these covenants contain a provision that establishes a lien in favor of the Covenantor that accrues at an interest rate of 18%.  This lien would take priority over any subsequent creditor, making it impossible for a title insurer to guarantee that a purchase money lender would have first priority, and thus making financing of these properties by future purchasers very difficult.  Furthermore, these Covenants will become increasingly difficult to locate as they may only be contained within the original deed of the Covenantor.  Title examinations for shorter periods that do not cover the full period of the covenants existence (which is typically 99 years) will not discover these issues.  These, along with others, have raised concerns by many title insurance underwriters regarding the ultimate insurability and marketability of properties with such covenants.

In response to these covenants, The State of Ohio passed House Bill 292 prohibiting covenants that create such transfer fees:
Section 5301.057 of the Ohio Revised Code defines the fee as:
 
“a fee or charge required by a transfer fee covenant and payable upon the transfer of an interest in real property, or payable for the right to make or accept such a transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price, or other consideration given for the transfer.”  

A "Transfer fee covenant" means:

“a declaration or covenant recorded against the title to real property that requires or purports to require the payment of a transfer fee to the declarant or other person specified in the declaration or covenant or to their successors or assigns upon a subsequent transfer of an interest in the real property. “
The Statute provides that any covenant recorded after the effective date will not run with the title and is not binding or enforceable.  Furthermore any lien filed to secure the payments recorded under a transfer fee covenant that is recorded after that date is void.  The law does not affect those covenants that were created prior to the effective date of the statute.

Ohio is only the tenth state to prohibit these covenants.  The law will become effective 90 days after the Governors’ signature.

Although the Ohio bill prohibits the future creation of such covenants in that state, creditors must be mindful to have thorough title exams performed both at the time of origination of a loan and before any foreclosure action is instituted.  If such a covenant is discovered in the title to a property, creditors should verify with their title insurers and legal counsel that they have adequate title insurance coverage to avoid any possible future restraints on alienation of their interests.

If you have any questions on this information, please contact Mr. Gregory A. Anglewicz, Esq. Greg is the supervising attorney of Thoroughbred Title Agency, Inc., part of the Real Estate Default Group of Weltman, Weinberg & Reis Co., L.P.A., His practice is focused on real estate title and closing services and is located in the Cleveland office He can be reached at (216) 685-1137 or via e-mail at ganglewicz@weltman.com.