A private transfer fee is a covenant that crafty developers could use to require every future owner of a lot in a subdivision to pay the original developer a 1% fee every time the home sells.  Developers argue that this could provide capital for them to continue developing in a turbulent market where they can't get traditional financing.  The Ohio legislature has determined that this would be damaging to the real estate market and, thus, is working on getting them banned in Ohio.

The economic theory is that the homes will be sold for less, because nobody would be willing to pay as much for a home with such a burden as they would a home without.  However, there are concerns that unaware homeowners would be caught by surprise when they are ready to sell.  Covenants are filed in the county recorders' office and buyers are deemed to be aware of them, whether they have actually read the "covenants, conditions, and restrictions," or not.

Transfer fees have been commonly used to fund homeowners' associations.  But, unlike homeowners' associations' fees, there is no benefit to the homeowners or the property where there is a private transfer fee that benefits the developer.  This is merely a covenant to pay a sum of money with no corresponding benefit.

I believe that these covenants would be unenforceable under the common law, which requires that such covenants must "touch and concern" the land in order to be binding on subsequent owners.  But there have been some creative arguments raised that really make the application of such covenants questionable.  The Ohio legislature is working to make it clear that these will not be enforceable in Ohio.

The bill was supported by several organizations in Ohio, including the Ohio State Bar Association, the Ohio Land Title Association, the Ohio Association of Independent Title Agents, the Ohio Bankers League, and the Ohio Association of Realtors.  All of these groups believe that private transfer fees will further depress home values and create clouds on title to Ohio real estate.

Opponents of the bill, the company that has attempted to patent the "business strategy" and the Ohio Builders Association, urged the Senate to adopt legislation that simply required disclosure of the covenant.  However, Sen. Seitz explained to the full senate why they opted not to do that.

And, so while I respect the idea that we need to help home building and development, and normally would say it's a free market and maybe we could have dealt with this by simply saying we will let the buyer be aware and put it on the form:  'notice you are now subject to a 99-year covenant where you are going to pay somebody one percent every time the property sells;' even on stuff that subsequent buyers developed and improved at their own expense.  We could do it by way of disclosure and that's what some states have done.  But most of us realize that if you've ever been to a loan closing on your house, you're not going to sit there and read that pile of paperwork.  Your just going to say 'give me my money' so I can get this house, and your not going to read the disclosures. So we opted not to do that.

And we opted after careful consideration in a very democratic process, the unanimous view of the committee was that this bill is appropriate.

Because there was an amendment added to the bill, it must now go back to the House for a vote.  Because this bill originated in the House, it is expected to pass.  Hopefully, yet this year it will go to the Governor to be signed and Ohio will have joined about 10 other states which have passed similar bans on private transfer fee covenants.  About a dozen other states are considering legislation to deal with these types of covenants.