Newly Enacted California Civil Code Section 1098 Targets Homeowner "Transfer Fees": Developer Revenue Source, Bane of Homeowners
July, 2009
On January 1, 2009, California Civil Code sections 1098 and 1098.5 took effect, eliminating a broad category of real property "transfer fees," particularly targeting fees written into residential real estate sales contracts that are binding on and assessable against succeeding property owners.
The Legislation. In California Civil Code sections 1098 and 1098.5, the California Legislature addressed what homeowner advocates described as abusive recurring fees levied upon purchases of homes.
History. Some developers, seeking durable revenue sources (beyond the actual home sale), originated a category of fee payable each time a covered home was sold. Called "transfer fees," they took a number of forms: (1) fees payable just once on the occasion of each sale, (2) fees that become due and owing once each new owner takes possession, but payable over time, and (3) fees associated with the provision of a good or service. In the first two instances, the homeowner receives back nothing of value. The fee is strictly one-way performance via homeowner payment to the developer (or the developer's successor). Only in the final instance does the homeowner receive back anything of value (such as a provision of services).
Intent and Effect of Legislation. The legislation affects each category of fee, but is most likely to invalidate the first two: where the homeowner pays but receives nothing in return.
The Legislature was addressing what it considered to be a longstanding problem: many California homeowners paid so-called private transfer fees to original homebuilders, developers or middlemen upon the purchase of their property. While such fees originally were designed to fund community benefits, the practice evolved and fee assessments were not always linked to the provision of benefits of any kind.
Because almost all such fees were contained in contracts, and because fee provisions appeared valid and enforceable, legislation was required to define what types of fees could actually be enforced. Civil Code sections 1098 and 1098.5 resulted, taking effect on January 1, 2009.
What is a "Transfer Fee?" Civil Code section 1098 defines a transfer fee as "any payment requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid upon transfer of the real property." Civil Code section 1098(i) then goes on to provide that even transfer fees not mentioned within covenants, conditions, and restrictions must substantially comply with sections 1098 and 1098.5.
The legislation is aimed not only at full disclosure, but also at existing fees deemed abusive. Since California law states that remedial legislation is to be liberally construed to accomplish its evident purpose, the definition of "transfer fee" is expected to be broadly applied. See, e.g., Murray v. Oceanside Unified School Dist., 79 Cal.App.4th 1338, 1356 (Cal.App. 4 Dist., 2000).
What the Legislature Said. In support of Civil Code sections 1098 and 1098.5, the Senate Judiciary Committee explained its concern for homeowners, specifically that transfer fees have been used "as a mechanism for the [original] owner of a parcel of property to receive a steady stream of income from their property after it has been sold." Cal. Bill Analysis, A.B. 980 Sen. "Background," 7/10/2007. The Committee explained that "in light of the novel transfer fees" that had been and were being created, and "the general lack of knowledge regarding those fees," AB 980 would require that an easily-recognizable document be recorded with the County Recorder containing very specific information about any such "transfer fee."
The Effect on Fees Imposed Before January 1, 2008. Recipients of fees existing and imposed before January 1, 2008 were required to file detailed information about the fee with the appropriate county recorder, and to do so by December 31, 2008. Recording of the disclosure is a condition to future collections of the fee. The penalties for noncompliance are severe: the right to collect the fee is permanently extinguished as to existing and subsequent homeowners.
The Effect on Fees Imposed After January 1, 2008. The person or entity imposing a transfer fee on or after January 1, 2008 is required to file a statement entitled "Payment of Transfer Fee Required" along with the instrument creating the fee, also with the appropriate county recorder. The penalties for noncompliance are severe: failure to record invalidates the fee.
Expectation. The new law is expected to be litigated by stakeholders, developers, homeowners' associations and homeowners.
If you have any questions about the impact of the new law on any transfer fees that you currently pay or impose, please contact your Bullivant Houser Bailey attorneys for assistance.