Report of the Real Property Law Section

Report of the Real Property Law Section 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 To The Council of Delegates: The Real Property Section Council respectfully requests your favorable consideration of the following proposals: A. A proposal to enact R.C.5301. prohibiting certain transfer fee covenants in Ohio. The proposed legislation is attached as Exhibit A. B. A proposal to modify the Ohio Standards of Title Examination by amending Standard 3.18 dealing with unrecorded disclosed trusts and Standards 10.1, 10.2 and 10.3 dealing with title issues relating to condominiums. The proposed amendments are attached as Exhibit B. Respectfully submitted, Robert M. Curry, Dayton Chair EXHIBIT A A. A proposal to enact R.C. 5301. prohibiting certain transfer fee covenants in Ohio. 5301. Prohibition against transfer fee covenants. 17 18 19 20 21 22 23 24 25 26 27 28 29 30 (A) As used in this Section, the term: (1) Environmental covenant means a servitude that imposes activity and use limitations on real property and meets the requirements of Section 5301.82 of the Revised Code. (2) Transfer means the sale, gift, conveyance, assignment, inheritance, or other transfer of an ownership interest in real property located in this state. (3) Transfer fee means a fee or charge required by a transfer fee covenant and payable upon the transfer of an interest in real property, or payable for the right to make or accept such transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price, or other consideration given for the transfer. The following are not transfer fees for purposes of this Section: 31 32 (a) Any consideration payable by the grantee to the grantor for the interest in real property being transferred. For the 41

33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 (b) (c) (d) (e) (f) (g) (h) purposes of this subparagraph, an interest in real property may include a separate mineral estate and its appurtenant surface access rights. Any commission payable to a licensed real estate broker for the transfer of real property pursuant to an agreement between the broker and the grantor or the grantee. Any interest, charges, fees, or other amounts payable by a borrower to a lender pursuant to a loan secured by a mortgage against real property. Any rent, reimbursement, charge, fee, or other amount payable by a lessee to a lessor under a lease. Any consideration payable to the holder of an option to purchase an interest in real property or the holder of a right of first refusal or first offer to purchase an interest in real property for waiving, releasing, or not exercising the option or right upon the transfer of the property to another person. Any tax, fee, charge, assessment, fine, or other amount payable to or imposed by a governmental authority. Any fee, charge, assessment, fine, or other amount payable to a homeowners, condominium, cooperative, mobile home, or property owners association pursuant to a declaration or covenant or law applicable to such association. Any payment required pursuant to an environmental covenant. 59 60 61 62 63 64 65 66 67 68 69 70 71 (B) (4) Transfer fee covenant means a declaration or covenant recorded against the title to real property which requires or purports to require the payment of a transfer fee to the declarant or other person specified in the declaration or covenant or to their successors or assigns upon a subsequent transfer of an interest in the real property. A transfer fee covenant recorded in this state on or after, does not run with the title to real property and is not binding on or enforceable at law or in equity against any subsequent owner, purchaser, or mortgagee of any interest in real property as an equitable servitude or otherwise. Any liens purporting to secure the payment of a transfer fee under a transfer fee covenant that is recorded in this state on or after, are void and unenforceable. 42

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 Rationale for proposal: This proposal is in response to programs developed in recent years, particularly in Texas and Florida, that permit developers, individual homeowners and real estate brokers involved in the present sale of a residential property to derive income whenever the property is resold. The companies promoting these programs provide the seller with proprietary documents that enable the seller to record a covenant on title at the time of conveyance to a third party purchaser. The covenant requires the payment of a "transfer fee" to the original seller each time the property is sold in the future, and imposes a lien in favor of the original seller to secure payment of the fee. The covenant is recorded in the real estate records as a covenant running with the land. Most of the existing transfer fee programs call for 99 year covenants, with a suggested transfer fee of 1% to 3% per transfer. The idea is to create a fee that is small enough that it will not prevent a sale or cause a future title holder to sue to challenge the covenant, but large enough to create a significant payment to the original developer/seller/broker. From the perspective of the original seller, the program provides a potential for future income at very little cost. If the seller has a strong bargaining position with the buyer (for example, the seller is the developer in a particular subdivision and owns all of the lots for sale in that subdivision), or is willing to offer a small monetary concession to the buyer, or if the buyer is simply unsophisticated as to the potential implications, the buyer may be willing to accept the covenant. Although, to our knowledge, these programs have not yet been brought to Ohio, there is a significant risk that these covenants could become more widespread. Given the relatively small size of the typical transfer fee covenant, the covenant may not be construed as an unreasonable restraint on alienation under Ohio law. Absent legislation to the contrary, transfer fee covenants could be held enforceable by Ohio courts. In the opinion of the Real Property Section Council, transfer fee covenants are a bad idea. The covenants would clog titles for an extended period of time. The original holders of the covenants would be difficult to track down to obtain releases. The covenants have no apparent economic merit other than to create an undeserved windfall, but would cause a nuisance for the title industry. The states of Missouri and Florida have adopted legislation to limit the enforceability of transfer fees. The enclosed draft legislation is modeled on the Missouri and Florida precedents. The enclosed statutory proposal would prohibit transfer fee covenants in Ohio. However, as the exclusions make clear, transfer fees do not include any consideration payable by the original buyer to the original seller. Rather, the prohibition is designed to prohibit the downstream fees in subsequent transactions. Additionally, for clarification, certain other types of charges are specifically excluded from the definition of what constitutes a transfer fee, including real estate brokerage commissions payable by the original seller or 43

112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 buyer, fees payable to a mortgage lender, environmental covenants, and fees payable to a homeowners, condominium, or other property owners association. Note: Some of the background information in this Report is taken from a presentation made by Janis E. Carpi, Senior Vice President and Senior Underwriting Counsel of LandAmerica Financial Group, in a paper presented at the American College of Real Estate Lawyers 2007 Fall Meeting and now available as part of the ACREL papers produced by ALI-ALBA. The comparable Florida statute is Section 689.28 of the Florida Statutes. The comparable Missouri statute is Section 442.558 of the Missouri Statutes. EXHIBIT B B. A proposal to modify the Ohio Standards of Title Examination by amending Standard 3.18 dealing with unrecorded disclosed trusts and Standards 10.1, 10.2 and 10.3 dealing with title issues relating to condominiums. 3.18 UNRECORDED DISCLOSED TRUSTS Problem A: Should objection be made to a title dependent upon a disclosed trust not of record? Standard A: Yes, unless there is placed of record either (1) excerpts of the operative provisions of the trust agreement, together with an affidavit that it is a true copy of the text in the trust agreement, or (2) a Memorandum of Trust, setting forth (a) the names and addresses of the settlor and trustee of the trust, (b) date of execution, and (c) those powers specified in the trust relative to the acquisition, sale, or encumbering of real property by the trustee or conveyance by the trustee, and (d) any restrictions on those powers. Such Memorandum of Trust shall be executed by the settlor and trustee, attested by witnesses, and acknowledged by a settlor and trustee in accordance with the provisions of Ohio real property law governing the execution and acknowledgment off deeds in conformity with the requirements of R.C. 5301.255. (R.C. 5301.01, effective August 10, 1994; R.C. 5301.255, effective, as amended, January 17, 2008) (Effective as amended, 2009; originally amended May 18, 1995; originally effective November 15, 1986) 10.1 CONDOMINIUMS-BYLAWS Problem A: If the bylaws of a condominium are amended must the declaration be amended? Standard A: 44

147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 Yes. Comment A: The bylaws are attached to the declaration and for the bylaws to be amended, it is necessary to amend the declaration in the manner provided for in the declaration, which shall benormally requires the affirmative vote of unit owners exercising not less than 75% of the voting powers. (R.C. 5311.05(B)(910), 5311.06(A)(2) and 5311.08(AB).) Problem B: Must the bylaws be signed, witnessed and acknowledged by the owner? Standard B: No. Comment B: A true copy of the bylaws must be attached to the declaration. Chapter 5311 makescontains no requirement as to the execution of the bylaws. However, see R.C. 5311.05(A) as to the requirements for execution of the declaration. (Effective May 20, 1976) (Amended, 2009 to revise statutory references changed by 2004 amendment to the condominium statute.) 10.2 CONDOMINIUMS-DRAWINGS Problem A: R.C. 5311.07(B) provides that the drawingseach drawing shall bear the certified statement of a registered professional surveyor and registered architect or registered professional surveyor and licensedregistered professional engineer. May the certified statement be made by one person acting in both of these capacities, if hethat person is so qualified? Standard A: Yes. Comment A: If one individual does perform both functions histhat person s certification should clearly show that he or she is making the statement in both capacities. Problem B: Must the drawing show that the building or buildings are substantially completed 45

178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 when the declaration is filed? Standard B: Yes, subject to the following comment. Comment B: R.C. 5311.05 and 5311.07 provide(b)(1) provides that the declaration shall state the principal materials of which the building a registered architect or buildings are constructed andregistered professional engineer certify that the drawings shallaccurately show them each building as built or constructed. TheyAccordingly, the improvements must be finished to such an extent that the drawings and certification required bycan identify three dimensional boundaries of the cubicles in space comprising the units. R.C. 5311.07 may be made. Some(D) permits the notation NOT YET COMPLETED to indicate improvements may be deferred, however, until the sale to satisfy the requirements and wishes of the purchaser. which have not been substantially completed. However, such exception is permitted only with respect to improvements other than units, and only with respect to improvements which have been begun. The drawings for commercial units that do not have wall surfaces shall show the monumental perimeter boundaries of those units. R.C. 5311.07(A)(3). (Standards A and B Effective May 20, 1976) (Amended, 2009 to revise statutory references changed by 2004 amendment to the condominium statute.) Problem C: Should the drawings show the building or buildings in such detail that the boundaries of the cubicles in space comprising the units can be located and reconstructed therefrom? Standard C: Yes. Comment C: The detail so required is no more than that required for a proper plat of a boundary survey. A plat of a boundary survey is sufficiently detailed if it can be used to locate and reconstruct the boundaries of the land in the field. Similarly, the drawings of the building or buildings are sufficiently detailed in this respect if the three dimensional boundaries of the cubicles in space comprising the units can be located and reconstructed in the fieldload bearing walls are shown. RC 5311.07(A)(4). 46

212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 (Standard C Effective November 13, 1976) (Amended, 2009 to reflect the 2004 amendment to the condominium statute.) 10.3 CONDOMINIUMS-DECLARATION Problem A: Must the percentages of interestundivided interests in the common area and facilitieselements appertaining to each unit that are set forth in the declaration total one (or one hundred percent)? Standard A: Yes Comment A: R.C. 5311.04 provides that the common areas and facilitieselements shall be owned by the unit owners as tenants in common and shall remain undivided, that the percentages ofundivided interest of the units in the common areas and facilitieselements shall be those percentagesinterests set forth in the declaration, and that such percentagesinterests shall not be altered except by an amendment to the declaration approved by all of the unit owners affected. If such percentages total of such interests equals less than one (or one hundred percent), an interest in the common area and facilitieselements would remain in the declarant after he no longer owned any of the units. If such percentages the total of such interests equals more than one (or one hundred percent), it would be impossible to determine the respective interest of the unit owners in the common areas and facilitieselements in the absence of a corrective amendment unanimously approved by the unit owners. (Effective November 13, 1976) (Amended, 2009 to reflect changes made by the 2004 amendment to the condominium statute.) Rationale for Proposal: The Ohio Standards of Title Examination are prepared by the Board of Governors of the Real Property Section of the Ohio State Bar Association, approved by the Council of Delegates, and promulgated by the OSBA for the primary purpose of promoting uniformity of practice pertaining to the marketability of title of real property in the State of Ohio. While not statutory, these standards establish a custom and practice regarding the examination of title and marketability of title based upon existing statutes and case law. This is done in the format of a question, the answer to the question establishing the standard, and comments regarding the standard. The current version of Title Standard 3.18 deals with title held in the name of a trustee of a disclosed trust. In order to pass good title, appropriate information regarding the trust needs to be placed of record, either in the form of an affidavit or a memorandum of trust. 47

249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 The current Title Standard states that the memorandum of trust should be "executed by the settlor and trustee, attested by witnesses, and acknowledged by a settlor and trustee in accordance with the provisions of Ohio real property law governing the execution and acknowledgment of deeds." Recent statutory amendments make some of these requirements unnecessary. Under the amendment to the Ohio Memorandum of Trust statute, ORC 5301.255 (2007 SB 134, effective January 17, 2008), the requirement that the settlor sign a memorandum of trust has been eliminated. In addition, attestation by witnesses is no longer required under Ohio law for the execution of a deed. The proposed amended version of Standard 3.18 removes these now outdated requirements and allows the establishment of title either by an affidavit or by a memorandum of trust in conformity with the requirements of ORC Section 5301.255. The proposed amendments to Title Standards 10.1, 10.2 and 10.3 are in response to the comprehensive changes to the Ohio condominium statutes that were enacted in 2004. In Title Standard 10.1, dealing with condominium bylaws, the clarification is made that amendments do not always require a 75% vote of unit owners. This reflects a change in the law that allows certain amendments without a vote of the owners. In Title Standard 10.2, dealing with condominium drawings, the revised Standard addresses various statutory changes, including the establishment of new rules for commercial condominiums and new restrictions that apply when the improvements have not been substantially completed. Title Standard 10.3 has been revised to make the terminology consistent with the definitions used in the amended condominium law (for example, that common areas and facilities are now referred to as common elements). 48