Attorney General Says Limits on Transfer Fees Not Retroactive

Attorney General Says Limits on  Transfer Fees Not Retroactive

A recent opinion by Texas Attorney General Greg Abbott states that statutory restrictions on real estate transfer fees:
1. operate prospectively only, and
2. do not apply to restrictive covenants that were in existence and recorded prior to the statute’s effective date.

Texas State Senator Glenn Hegar requested the AG’s opinion as to whether the statute restricting transfer fees applied to pre-existing, recorded restrictive covenants.

Private Transfer Fees Restricted
In 2007, the Texas legislature enacted a statute that prohibits and declares void deed restrictions and other covenants running with the land that require certain transfer fees. The statute, which became effective January 1, 2008, was intended to address the burdensome and disruptive private property transfer scheme unveiled in recent years by Freehold Capital Partners.

Freehold, a company originally started in Texas, came up with the idea for builders and developers to sign up for a service that would attach private transfer fees to homes. Freehold sold the concept to developers that they should be entitled to future royalties since their creations “will be enjoyed for generations to come….” These transfer fees typically were buried in a development’s deed restrictions and covenants which created title insurance issues and problem closings.

The Statutory Fix
By early 2007, the Texas legislature was poised to address the disturbing trend of hidden and recurring property transfer fees – typically 1% of the sales price. And so Section 5.017 of the Property Code was enacted to prohibit and restrict certain transfer fees. The new law carves out three exceptions to fees that are payable to property owner’s associations, charitable entities, and governmental entities. Other than those three exceptions, Texas law prohibits and declares void deed restrictions and other covenants applicable to land that require certain transfer fees.

The AG Opinion
But did the new law wipe out pre-existing restrictions in effect at the time of the statute’s enactment? The answer is no, it did not. The transition clause for the statute preserves the law in effect for a deed restriction established prior to the statute’s effective date.

Thus, the AG’s expressed opinion is that the statute operates prospectively only and is not retroactive. In fact, the Texas Constitution prohibits the Legislature from making a “retroactive law or any law impairing the obligation of contracts”.

As a practical matter the statute’s desired effect is already realized. Many developers and builders who included private transfer fees in their covenants and restrictions have since abandoned and disclaimed the fees due to recurring problems in closing transactions where the transfer fees became an issue.

Several states have banned private transfer fees altogether. Texas’ approach was to restrict and limit fees as opposed to a total ban.

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