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Colorado Restricts Private Transfer Fees

On May 23, 2011, Governor Hickenlooper signed into law Senate Bill 11-234 – Concerning Residential Real Property Transfer Fee Covenants. The bill is targeted at prohibiting fees payable upon the transfer of residential real property to individuals and entities where such fees do not touch and concern the real property. The common law likely already prohibited such fees. Nevertheless, the bill became effective immediately, the General Assembly having determined that such was necessary "for the immediate preservation of the public peace, health and safety." Apparently, the General Assembly identified a rising trend for such fees, and it wanted to thwart their growth in Colorado.

The bill does essentially four things. First, it prospectively prohibits fees payable upon the conveyance of residential real property, except for various categories of permissible fees. Second, it narrows the circumstances under which prohibited fees established prior to the effective date of the bill are payable. Third, it provides penalties for recording documents requiring the payment of such fees. And fourth, under certain circumstances, it provides a quick mechanism for removing covenants requiring the payment of such fees.

Here's how it works. The bill contains a number of definitions that identify what constitutes a (1) conveyance of residential real property, (2) transfer fee, (3) transfer fee covenant, and (4) fee excluded from the definition of prohibited transfer fee covenants. Conveyance is defined to include sales, gifts, assignments, inheritance and any other transfer of an interest in residential real property. Residential real property means real property containing residential improvements and real property upon which construction of residential improvements has commenced. A transfer fee is a fee required to be paid either partially or fully upon conveyance of residential real property. A transfer fee covenant is a provision in a recorded or unrecorded document that requires payment of a transfer fee, but not including the excluded fees. Excluded fees essentially include those transfer fees that touch and concern residential real property, including payments to lenders, brokers, lessors, governmental and quasi-governmental entities, homeowners' associations, and certain non-profit entities.

Having set forth the relevant terms, the bill makes any transfer fee covenant recorded on or after May 23, 2011, unenforceable. Any person who records a transfer fee covenant on or after May 23, 2011, and fails to release the covenant when requested to do so, is liable for all damages resulting from the transfer fee covenant, including the amount of the transfer fee, reasonable attorney fees related to recovering the transfer fee, quiet title actions, and show cause matters.

For those transfer fee covenants pre-dating May 23, 2011, the bill requires that the person or entity entitled to receive payment record a specified notice against the residential real property in question. If such notice is not recorded on or before October 1, 2011, then the transfer fee covenant is unenforceable. Where the notice is timely recorded, the owner of the residential real property subject to the transfer covenant may send a written request to the beneficiary of the payment identified in the notice inquiring about the amount of the payment due upon transfer. If the beneficiary does not timely respond to the inquiry, upon the recording of an affidavit by the owner indicating the lack of a response, the transfer fee covenant becomes unenforceable.

Any individuals or entities that have either considered or implemented a transfer fee should be aware of the enforceability issues raised by this bill.

Otten Johnson's Land Use practice group has substantial experience with private transfer fee covenants. For more information on this Client Alert or on addressing issues relating to such covenants, please contact any of the attorneys in the Land Use practice group (for a listing, click here).

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