Controversial New Uses of Transfer Fee Covenants

Controversial real estate transfer fee covenant programs that promise to create an annuity for property owners who record the covenant against their property prior to selling it have been marketed in other states. The covenant requires that a transfer fee (often a percentage of the sale price) be paid to the original transferring owner on each subsequent sale of the property.  Companies have recently begun marketing these "annuity" transfer fee covenant programs in Colorado to individual homeowners and real estate developers. These transfer fee covenants are distinguishable from the transfer fee covenants historically used in Colorado, which are typically valid and are discussed in more detail below.

Promoters of the new "annuity" transfer fee programs offer to sell the program to individual property owners and real estate developers to create a future income stream from each subsequent transfer of the property during the term of the covenant, which may last up to 99 years. The covenant also imposes a lien against the property to secure payment of the fee at the time of a transfer. Certain program sponsors also offer to purchase the resulting income stream at a discounted lump sum price. The enforceability of such "annuity" transfer fee covenant programs is questionable because the property burdened by the covenant is not benefited by the covenant.

In contrast, covenants which impose a real estate transfer fee for purposes such as assisting with the financing and ongoing maintenance and operation of public improvements, project amenities and similar benefits to the burdened property have been used in Colorado for many years. The proceeds of such covenants are often paid to homeowners' associations, public improvement companies and/or special districts. Such covenants are generally valid and enforceable if properly drafted and implemented.

Critics of "annuity" transfer fee programs argue that they (a) are unreasonable and contrary to public policy, (b) "cloud" or make title unmarketable, (c) delay or prevent closings from occurring if the payee cannot be located or a release of the covenant cannot be obtained, (d) create a nuisance for the title insurance industry, and (e) are unenforceable under the common law. At least one title company has reportedly circulated an advisory instructing its agents not to close any transactions which include these types of transfer fee covenants.

Legislation may be introduced in the next session of the Colorado legislature attempting to ban or otherwise restrict use of "annuity" transfer fee covenants. Due to the concerns highlighted above, property owners and developers should consult experienced legal counsel prior to imposing any real estate transfer fee covenant on their property.

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Otten Johnson's Real Estate and Land Use practice groups have substantial experience dealing with issues relating to real estate transfer fees. For more information on this Client Alert or on addressing real estate transfer fee issues, contact any of the attorneys in the Real Estate or Land Use practice groups (for a listing, click here).