October 6, 2010 VIA ELECTRONIC MAIL AND FEDERAL EXPRESS Pam Simpson National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108 Re: NAIC Title Insurance Task Force Private Transfer Fee Covenants Dear Ms. Simpson: The National Association of Independent Land Title Agents (NAILTA) is a non-profit trade association consisting of independent title insurance agents and interested real estate services industry stakeholders from across the United States who share a common philosophy about the value of independence, transparency and autonomy in real estate transactions. We join the American Land Title Association and other real estate settlement professionals from across the United States who seek to prohibit private transfer fee covenants. The purpose of this letter is to introduce you to our organization and to confirm the opposition of our organization to private transfer fee covenants The covenants at issue purport to bind any subsequent homeowner to pay a 1% fee to the original 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 parties must intend for it to run with the land. Second, the covenant must “touch and concem” the land. And, third, there must be privity of contract. The second requirement, that the covenant “touches and concems” the land is lacking with covenants that merely burden a homeowner with a requirement to pay a fee with no contemporaneous benefit to the property. It is also doubtful that subsequent purchaser's would have any privity of contract other than constructive notice of the covenant, 3 Dickinson Drive, Suite 204 » Chadds Ford, PA 19317 Phone: 610 * 361 * 2655 + Fax: 610 + 361 + 2656 www.NAILTA.org2 Letter to Pam Simpson October 6, 2010 Traditionally, transfer fee covenants have been used by homeowners’ and condo associations to fund their continuing existence. Because the purpose of such an association is to enforce 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 the covenant enforceable, Most bills that have been created to prohibit private transfer fee covenants provide appropriate exceptions for legitimate uses of transfer fees such as these. Private transfer fees, on the other hand, are not used for any ongoing purpose that benefits the property. Freehold Capital Partners, formerly Freehold Licensing, which has a patent pending on “Springing Interests Flowing From Benefits That Run With Land,” describes the covenant in their marketing materials as a “mere obligation to pay money.” Freehold Capital Partners have traveled the country attempting to market and use the covenants to support residential and commercial development projects. They claim that the covenants create “a long-term income stream” for the covenantor. This is a personal covenant, not a real covenant that should be unenforceable against subsequent homeowners under the common law. 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-profit organizations that “reallocate resources back into the community.” They also argue that under the modem Restatement 3d of Property pertaining to Servitudes, that the touch and concern inquiry has been superseded by the rules governing contracts Under the Restatement approach, a servitude “is valid unless it is illegal or unconstitutional or violates public policy.” A servitude is against public policy, and invalid, if it is “arbitrary, spiteful, or capricious,” or if it is “unconscionable.” The Restatement provides an illustration which is similar to the covenants at issue in this legislation. Restatement 3d Property: Servitudes § 3.7, Illustration 3: The declaration of covenants for Greenacres, a residential subdivision, includes a provision obligating the owner of each lot to pay the developer, or its assigns, a royalty of one percent of the gross sales price on each resale of each lot in the subdivision in perpetuity. In the absence of unusual circumstances, the conclusion would be justified that the provision is unconscionable. If not unconscionable, the covenant would be subject to termination under the rule stated in § 7.12 (Modification and Termination of Certain Affirmative Covenants).3 Letter to Pam Simpson October 6, 2010 We believe that bills codifying the common law with respect to these types of covenants are legitimate measures to proactively remedy the problems caused by their use. A position statement or piece of model legislation from NAIC to prohibit the fees will make it clear that they are against public policy and not enforceable. It would essentially eliminate the need for expensive litigation in response to creative arguments that these covenants run with the land. Furthermore, legislation to prohibit transfer fee covenants is in the best interest of homeowners and title insurance agents. We agree with the other proponents that private transfer fee covenants hinder the safe and efficient transfer of real property; reduce the transparency and exploit 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 real property could have devastating consequences for a homeowner. Firs, it is not common practice for appraisers to conduct title searches in the course of valuing real property. Thus, it is unlikely that the encumbrance filed in the public records would be adequately reflected in the appraised value of the home Second, if a covenant is missed at a closing it will result in a lien that will need to be paid the next time the home is sold. In such a situation, the buyer who was unaware of the covenant, who did not successfully negotiate a reduction in the sales price to account for the encumbrance, 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 covenant is discovered, ‘A homeowner who finds himself in this predicament may be left without recourse against the 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 likely be an increase in title insurance claims, although title insurance is no assurance that such a homeowner ‘would be protected from these covenants, When 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. Finally, these covenants will add a significant burden to title searchers to not only locate these covenants in recorded documents and report them, but due to their very nature it will, over time, increase the period of time a searcher will have to review land records looking for these covenants. Thus a typical 40 or 60 year search will, by necessity, become a 100 year search.4 Letter to Pam Simpson October 6, 2010 For all of these reasons, NAILTA urges the Committee to recommend the passage of model legislation or an affirmative position statement that would favor the prohibition of private transfer covenants in order to protect homeowners and title insurance agents, NAILTA welcomes the opportunity to participate in future title insurance-related issues before the NAIC and hereby submits these written comments for your review. Charles W. Proctor, III, J.D., CLTP President NAILTA, cer NAILTA Board NAILTA Members Justin Ailes (via e-mail)