More on Private Transfer Fees…The Debate Continues.

Another week and more debate on the issue of Private Transfer Fee Covenants. On Friday, March 5, 2010, Ken Harney wrote an interesting article in the Washington Post discussing Private Transfer Fee Covenants. In A new real estate cost to watch for: Developer's private transfer fee Ken Harney described what a Private Transfer Fee Covenant is and talked about Freehold Capital Partner’s involvement in trying to create a securitized market for these things. From my reading of the article, it appears that Mr. Harney is trying to approach this issue from an unbiased perspective. However, apparently Freehold Capital Partners did not agree.

On Tuesday of this week, Freehold Capital Partner’s sent out an e-mail to an unknown list asking people to post comments in favor of Private Transfer Fee Covenants on the message board for Mr. Harney’s article as well as on any blogs that discuss Private Transfer Fee Covenants. Specifically, the e-mail asks people to post comments on “AS MANY ARTICLES AS YOU CAN.” The e-mail then goes on to list “some themes” for posters to consider. Oddly enough, a couple of those themes were included in the comments that “Bob” posted on my last blog post.

It makes me happy to see that my blog has reached this status where a reader has gotten an e-mail from a company such as Freehold Capital and has in turn posted comments on one of my blog entries. Thanks for your time, Bob! Since you were gracious enough to comment, I would like to respond to each of your comments.

Bob’s Point 1---It makes sense to spread the cost of the development across multiple generations of homeowners rather than put it on the first homeowner.

My response: The market inherently already does this. Basic economics would show that this development cost is placed on the first homeowner when he or she buys her house. When that homeowner decides they are going to sell that house, they are going to strongly consider what they originally paid for the house when they decide what price they will accept to sell the house. If anything, it hurts the homeowner to have this fee tacked on because any purchaser of the house will have to pay the purchase price plus this fee. Furthermore, the seller is not getting the benefit of the fee since that benefit is going to the developer. I am sure this argument could be spelled out much more eloquently, but keep in mind; this is a blog, not a book.

Bob’s Point 2---Realtors are worried that a 1% fee will cut into their 6% fee.

My response: I don’t think it is realistic to expect that a Transfer Fee Covenant is going to have much, if any, effect on the commission paid to real estate brokers (I thought I would be politically correct since all real estate brokers are not realtors). I recognize that commissions are negotiable, but I do not think these new concept fees are going to have an effect on long established commission rates.

Bob’s Point 3---Title insurance companies are worried that their fees will be exposed as super inflated.

My response: Well, that certainly is an interesting article. We have title insurance in North Carolina. I have done title insurance claims work in North Carolina. I own title insurance on my house. From my experience, I can’t say that title insurance is “super inflated.” I have seen title insurance save many a homebuyer and lender from mistakes committed by attorneys that could have resulted in disaster for those homebuyers or lenders. I don’t think the premiums charged for this protection is exhorbitant. You certainly are entitled to your opinion, but I completely disagree with it on this point.

Again, Bob, I thank you for commenting and I encourage further comment about this because I think this really is an interesting new development in real estate law. I think that a developer who imposes one of these covenants is going to face backlash from potential buyers, which backlash will impede the development more than the funds created by one of these things will help the development. I also think that serious questions exist as to whether these covenants would be enforceable under North Carolina law. That being said, even if the covenants are enforceable, I think there may be ways for homeowners in developments that are subject to these covenants to either “get around” the covenants or at least “terminate” the covenants.

No Reformation….But Where’s The Constructive Trust…

The Court of Appeals took another look at reformation law and handed down a harsh decision that was sure to make Fifth Third Mortgage Company very unhappy in its decision in Fifth Third Mortgage Company v. Alan Miller, et al. In reiterating a long held standard in North Carolina in its decision in Fifth Third, the Court of Appeals ruled that an instrument will not be reformed when such reformation would impair the lien of a third party who is an innocent bona fide purchaser.

The facts of Fifth Third are as follows. Alan Miller executed and delivered a promissory note to Fifth Third on March 20, 2007. Simultaneously therewith, Mr. Miller also executed a deed of trust that was for the benefit of Fifth Third and that was supposed to secure the Fifth Third Note with property located at 9911 Strike the Gold Lane, Waxhaw, North Carolina. Unfortunately for Fifth Third, the drafter of the Deed of Trust did not name a trustee and did not properly describe the property. Despite these errors, the Fifth Third Deed of Trust was recorded on March 21, 2007.

On June 11, 2007, Mr. and Mrs. Miller entered into an equity line agreement and Deed of Trust with BB&T. The BB&T Deed of Trsut secured the equity line agreement with the Strike the Gold Lane Property. The BB&T Deed of Trust was recorded on June 25, 2007.

Mr. and Mrs. Miller defaulted on the Fifth Third Note and the BB&T Equity Line Agreement. After BB&T commenced foreclosure proceedings of the BB&T Deed of Trust, Fifth Third filed an action seeking the following relief: (i) reformation of the Fifth Third of Deed of trust, (ii) declaratory judgment, (iii) quiet title, (iv) judicial sale, and (v) monetary judgment. Noticeably missing from the relief sought in the Fifth Third Complaint is a claim for constructive trust.

As part of its appeal, Fifth Third tried to argue that reformation was proper because BB&T was not a bona fide purchaser. In support of this argument, Fifth Third cited affidavits and discovery responses that apparently show that BB&T had knowledge of the Fifth Third Deed of Trust at the time the BB&T Equity Line Agreement was executed. Fifth Third also cited the fact that the correct street address for the Strike the Gold Lane Property was included on the Fifth Third Deed of Trust.

The Court of Appeals did not bite on Fifth Thirds argument. Instead, the Court of Appeals ruled that “[a] deed of trust containing a defective description of the subject property is a defective deed of trust and provides no notice, actual or constructive, under our recordation statutes.” In doing so, the Court of Appeals made clear that reformation will not hinder the rights of a bona fide purchaser (or bona fide lienholder) if that purchaser does not have record notice as provided by the North Carolina Recordation statutes. In essence, the Court of Appeals ruled that actual knowledge means nothing in a reformation action that is predicated on the recordation statutes.

This case is a harsh outcome for Fifth Third, or more likely their title insurer. However, it is possible the outcome could have been avoided. In Arnette v. Morgan, 88 N.C. App. 458, 363 S.E.2d 678 (1988), the North Carolina Court of Appeals recognized that constructive trusts do not fall within the recording statutes. The import of this rule is that the strict outcomes necessitated by the recordation statutes can be avoided.

Consequently a grantor of land who retains land that he or she had intended to convey but for a mistake will hold the land in a constructive trust for the intended grantee when consideration is exchanged for the conveyance. When the constructive trust is present, the grantee of the ineffective instrument is entitled to reformation, even if there is a third party lienholder, unless the third party lienholder can show that (i) they did not have notice of the conveyance that went wrong and (ii) they in good faith advanced new consideration or incurred some new liability on the faith of the apparent ownership of the grantor.

If constructive trust were raised in this case, it is unlikely that BB&T would have been able to stave off the reformation. The evidence of actual notice that Fifth Third advanced in its reformation argument would likely have been enough to provide the notice required under constructive trust. Hind sight is always 20-20, but I think the Fifth Third case would have come out differently if the constructive trust claim would have been brought.

This case proves instructive for anyone bringing a reformation action in North Carolina. Don't forget about constructive trust!

Private Transfer Fees...A Distressing New Trend In Real Estate

More and more I am hearing about the possibilty of placing private transfer fees on the transfer of real estate through the imposition of private transfer fee covenants. In an article that hit the PR Newswire today,Private Transfer Fee Covenants Give Buyers a Choice About How To Pay for Rising Infrastructure Costs , the writer makes an argument that Private Transfer Fee Covenants provide a good way for infrastructure costs to be spread over the life of the development rather than being carried only by the first time buyers in the development. I would note that the source of this article is Freehold Capital Partners. Freehold Capital Partners has attempted to patent the idea of Private Transfer Fee Covenants in the past.

I'd recommend anyone interested in this issue to take a look at two blog entries from the Source of Title Blog. One entry is entitled Banning Transfer Fee Covenants in Ohio. The other entry is entitled Freehold Licensing, NKA Freehold Capital Partners, At It Again. I'd also direct people to a white paper issued by the American Land Title Association that discusses the negative consequences of Private Transfer Fees Covenants. In this white paper, the American Land Title Association points out that these negative consequences include the fact that (i) private transfer fee covenants steal equity from consumers, (ii) private transfer fee covneants cost consumers money, (iii) private transfer fee covenants depress home prices, (iv) private transfer fee covenants have no positive effect on consumers property tax liability, (v) private transfer fee covenants increase procyclicality of real estate markets, and (vi) private transfer fee covenants reduce transpacrency and exploit the complexity of real estate transactions.

I understand the America Land Title Association has issued proposed legislation that prohibits transfer fees. I am not aware of any such legislation that has reached our legislature in North Carolina. However, I do understand that this topic is on an upcoming agenda North Carolina Bar Association's Real Property Council so a movement may be under way soon.

Even if legislation banning Private Transfer Fee Covenants is not enacted, legal arguments will still exist that Private Transfer Fee Covenants are invalid and unenforceable. Also, there are other possible ways for landowners subject to these covenants to try to attack them. After seeing the article supporting Private Transfer Fee Covenants hit the wire today, I felt obliged to post as soon as possible that it would be wise to take a look at this thing from all angles rather than just believing what is in that article verbatim. In the near future, I will post further on what effect this push for Private Transfer Fee Covenants may have on real estate and real estate litigation in North Carolina.

Supreme Court Rules That the Court Gets To Play Connect the Dots, Not the Jury

In Pardue v. Brinegar, an opinion filed on January 29, 2010, the North Carolina Supreme Court overturned the North Carolina Court of Appeals in regard to whether a judge or a jury gets the final decision on what a boundary line should look like when the parties can only agree to the markers that are located on the boundary line. In doing so, the Supreme Court accepted the logic of Judge Steelman dissent. See Pardue v. Brinegar, ____ N.C. App. ____, 681 S.E.2d 435 (2009).

In Pardue, Pardue commenced a quiet title action against her neighbors, the Brinegars, to determine the true boundary between the two parties’ respective properties. In reality, the parties were fighting over who owned 0.79 acres.

The deeds in the Pardue chain described the boundary with Brinegar as follows:

BEGINNING on a white oak in the old S.P. Smith line and runs up the branch, South 11 ½
degrees West 32 poles to a maple, at the forks of said branch; then South 62 degrees East
up the east prong of said branch 56 poles to a post oak on the east side of the public road.

The deeds in the Brinegar chain described the boundary with Pardue as follows:

[From two white oaks in the S.P. Smith line on the west bank of a branch] then South 20
deg. West up said branch 32 poles to a maple at the fork of the branch; thence South 60
deg. East up the left prong 56 poles to a white oak (now down) on the South side of the
public road.

The parties agreed that the boundary line was marked by (i) the white oak in the S.P. Smith line, (ii) the maple at the forks of the branch, and (iii) the oak on the public road. The parties disagreed about whether “up the branch” meant that the boundary between the markers was following the meandering path of a stream or whether it meant in straight lines from each marker.

The boundary dispute made it to a trial. At the close of evidence, Pardue moved for a directed verdict on the theory that “up the branch” meant that the boundary between the markers was following the meandering path of the stream. The Court denied the directed verdict motion and submitted the issue to the jury. The jury determined that the boundary was made up of straight line segments between the three markers.

In his dissent that was accepted by the Supreme Court, Judge Steelman noted the accepted law that a deed is to be construed by the court and not the jury. Thus, Judge Steelman reasoned that when the language of a deed is clear and unequivocal, the deed must be given effect according to its terms, and a court could not speculate that the grantor intended otherwise.

Applying this law, Judge Steelman noted that the Pardue deeds and the Brinegar deeds each stated that the boundary runs “up the branch.” Judge Steelman also noted that neither the Pardue deeds nor the Brinegar deeds referenced straight lines between the markers. In North Carolina, “up the river” is established to mean the same thing as “along the river” unless there is something else besides course and distance to control it. Therefore, Judge Steelman found that the express language in the deeds showed that the grantors intended for the boundary line to run along the branch.

Judge Steelman’s pointed out that the cases cited by the majority recognized that the call for a permanent natural monument controls the boundary rather than any distance contained in the deed. Applying this law, the fact that the branch was a natural monument controls over the fact that the distances included in the deed lend more to an interpretation that the boundary was in straight line segments.

There are two key points to take away from the Supreme Court’s decision to accept Judge Steelman’s theory.

1. In determining boundaries, “Up the river” means the same thing as “along the river” unless there is something else besides course and distance to control it.

2. A reference to a permanent natural monument control a boundary over any distances contained in a description.