According to the American Land Title Association, the first reported private transfer fee covenant was created to pay money to the Sierra Club and the National Audubon Society in order to fund an open space preserve. Since then, developers and homeowners’ associations alike have borrowed the mechanism to generate a form of income that was previously unavailable. Over the past decade, private transfer fee covenants have been heavily used in California and Texas, prompting lawmakers to consider banning the provisions altogether.
In 2007, the Texas Legislature addressed private transfer fees in Section 5.017 of the Texas Property Code. The provision provides that a deed restriction on residential property that requires the buyer to pay a third party a fee in connection with his purchase of the property is unenforceable. However, the statute’s broad prohibition of private transfer fee covenants has a few major exceptions. Texas’ private transfer fee prohibition does not apply to 1) property owners’ associations, 2) certain not-profit organizations, and 3) governmental entities.
Texas’ approach is not without criticism. First, many argue that the law does not go far enough because it only applies to residential property. Commercial developers are free to include private transfer fee covenants in the deeds of commercial property. Second, private transfer fees are legal and enforceable if made payable to homeowners’ associations. Some find fees payable to homeowners’ associations to be less objectionable than fees payable to the developer. After all, the money goes to improve common property and maintain the premises. On the other hand, homeowners complain that they already pay homeowners’ association monthly dues. What gives the HOA a right to 1% of their home’s purchase price?