Transfer Fees vs Administrative Charges

Property management company not statutorily required to record notice of transfer fees on home sales in common interest development.

Fowler v M&C Ass’n Mgmt. Servs., Inc. (2013) 220 CA4th 1152

Fowler was charged a “transfer fee” of $125 and a “foreclosure transfer fee” of $100 in connection with the purchase of a home in a common interest development. In the purchase agreement, Fowler agreed to be responsible for all homeowners association (HOA) transfer fees, which included charges for processing paperwork, filing documentation, and updating the records related to the property. The fees were imposed by M&C Association Management Services, Inc. (M&C), as the managing agent for the HOA, rather than by the HOA directly. Fowler filed a putative class action against M&C, alleging that the imposition of the transfer fees violated CC §1098.5(b) and Bus & P C §17200 because M&C did not record the statutorily required notice. The trial court granted summary judgment in favor of M&C, finding that the recordation requirement did not apply because the fees were not “transfer fees” within the meaning of §1098. Fowler appealed.

The court of appeal affirmed, holding that Fowler incorrectly interpreted the relationship between §§1098 and 1098.5 and CC §1368. Section 1098.5(b) requires recordation of a document entitled “Payment of Transfer Fee Required” whenever a transfer fee, as defined in §1098, is imposed on the transfer of real property. The definition of a “transfer fee” in §1098(g) expressly states that a “transfer fee” does not include “assessments, charges, penalties, or fees authorized by the Davis-Stirling Common Interest Development Act.” Civil Code §1368(c)(1) (part of the Davis-Stirling Act) provides that an association may not “impose or collect any assessment, penalty, or fee in connection with a transfer of title or any other interest except,” under §1368(c)(1)(A), “an amount not to exceed the association’s actual costs to change its records.”

The court concluded that although §1368 does not explicitly state that an association may charge a transfer fee as long as the fee does not exceed the association’s actual costs, the clear inference is that the association may do so if that qualification is satisfied. Furthermore, the court found that because M&C was the HOA’s agent, it could directly impose the fee on Fowler even if the fees included M&C’s profit from its services because the total fee constituted the “actual cost” to the HOA for the transfer. The court held that the fees charged were authorized by the Davis-Stirling Act and therefore fell within the recordation exception in §1098(g). The court’s conclusion was bolstered by the legislative history of §§1098 and 1098.5, which made clear that the recordation requirement was not intended to apply to transfer taxes and HOA processing fees that were generally expected when purchasing homes in California.

THE EDITOR’S TAKE: A decade or so ago, a company called Freehold Capital Partners invented the private transfer fee covenant, imposing a 1-percent transfer fee on each successive buyer of any property that had been made subject to that restriction. That device gave the original developer a future stream of income on top of its current sales price, which could be converted into additional present value by selling it to Freehold, who then pooled those income streams for sale to the secondary market. The arrangement was also supposed to help local community and environmental organizations by giving them a share of the stream.

Legal justification for the device derived from the then recently enacted Restatement of Servitudes, which had proposed abolition of the old “touch and concern” requirement necessary for covenants to run with the land. The pre-Restatement common law rule on that topic was that the burden of a covenant would not run if its benefit failed to touch—a principle that was codified in California in CC §1462 (“Every covenant contained in a grant of an estate in real property, which is made for the direct benefit of the property or some part of then in existence, runs with the land.”) Since the benefit of a transfer fee covenant is clearly personal (“in gross”), it would not run and could, therefore, bind only the original purchaser under the old common law standard. Once touch and concern is eliminated—as the Restatement proposed to do—then the burden could run and future owners would each have to pay the fee each time the property was sold.

Apart from some developers and Freehold, everybody in the real estate industry came out vigorously against the transfer fee idea. Model legislation prohibiting it was proposed by the NAR and ALTA and endorsed by the Joint Editorial Board for Uniform Real Property Acts. See Freyermuth, Putting the Brakes on Private Transfer Fee Covenants, 24 Probate & Property Mag No. 4 (July/Aug. 2010). To date, about half of the states have enacted such prohibitory legislation.

California has had a transfer fee covenant statute since 2007, but unlike most other states that took legislative action, ours does not prohibit such charges. Instead, CC §1098.5 merely requires that a special document be employed to provide for it and that a special notice of it be recorded—disclosure rather than prohibition. California attorneys representing residential buyers need to keep their eyes open for such covenants because they are legal here. Seller and buyer cannot bargain away these charges, since they run with the land and benefit third parties, but of course the sales price can be adjusted to account for them.—Roger Bernhardt

37 Real Property Law Reporter #1 (Cal CEB Jan. 2014, © The Regents of the University of California, reprinted with permission of CEB.