Monday, October 28, 2013

Georgia Imposes Restrictions on Transfer Fee Covenants

[NOTE: This article first appeared in the Summer 2013 Edition of Hyatt & Stubblefield, P.C.'s "Community Developments"]

Georgia recently adopted a statute which prohibits the imposition of a non-exempt restriction or covenant running with the land on real property which obligates the seller or purchaser of the real property, or their heirs, successors, or assigns, to pay a fee in connection with the transfer of such property to the person establishing the restriction or covenant or to a third-party (often called a "transfer fee covenant").  A transfer fee covenant, however, may be imposed under limited circumstances.  The statute makes only new non-exempt transfer fee covenants created on or after July 1, 2013 void and unenforceable and does not affect existing transfer fee covenants.
The prohibition does not apply to a restriction or covenant running with the land that requires the fee to be paid in connection with the conveyance of property to:

a condominium association;
a property owners' association that has elected to be subject to the Georgia Property Owners' Association Act;
a property owners' association that has not elected to be subject to the Georgia Property Owners' Association Act, but only if the association complies with the provisions of such Act requiring an association to give an owner a statement of amounts due upon request (O.C.G.A. § 44-3-232(d));
a "community land trust" or "community development corporation" that is tax-exempt under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code, provided the transfer fee funds collected are applied to expenses incurred in the administration of ongoing community program services or rights provided to "shared equity property interests" within the land subject to the community land trust or the geographic area served by the community development corporation; or
a licensed real estate broker for brokerage services rendered in connection with the property transfer.
The terms "community land trust" and "community development corporation" are not defined in either the Georgia statutes or the Internal Revenue Code, so it is unclear how the exception for those type organizations is to be applied.  Various federal statutes define those terms for purposes of the particular federal statute at issue, but, in every context, the term involves affordable housing for low-income individuals.
If the community development corporation and community land trust exception is interpreted as involving only affordable housing organizations, then the uses for which transfer fees may be used in the future will be limited.  For example, no longer may new transfer fee covenants be created for the purpose of funding environmental, conservation, educational, or community building activities, unless these activities are conducted by a property owners' association that satisfies the Property Owners' Association Act. 
In addition, a new restriction or covenant on the land may not require the property owner to buy a membership in, make an equity contribution to, or pay some type of initiation fee to a recreational or social club that is separate from the property owners' association.  New restrictions or covenants may still require that a property owner acquire a membership in a club, but the transfer of the property cannot trigger a payment.  In other words, the property owner can be required to pay periodic dues or assessments during the term of membership, but they cannot be required to "buy" into the club.
While the statute does not abolish transfer fee covenants already in existence, it will substantially limit (in future applications) the purposes for which transfer fee covenants have traditionally been used.  New mechanisms will need to be developed to fund many of the future environmental, conservation, and social programs that have customarily been funded through transfer fee covenants.

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