Sunday, December 16, 2012

Transfer Fees

Transfer fees can be a welcome way for an HOA to cover its administrative costs when a property changes hands, and for a condo association especialy, to cover repair costs for hallways and stairwells caused by owners moving furniture in and out. In addition, they can help an HOA recover some of its losses on foreclosed properties.

The North Carolina General Assembly enacted Chapter 39A, entitled "Transfer Fee Covenants Prohibited", on July 1, 2010. By its terms, this act prohibits the enforcement of any covenant purporting to require the payment of a transfer fee to any third party when a lot or condo unit is sold. The intent was to address the scheme that savvy real estate developers had invented of putting perpetual transfer fees payable to themselves in the recorded restrictive covenants of new neighborhoods, and then assigning this future income stream to investors in order to initially fund the development itself.

The prohibition does not apply to reasonable initial capital contributions payable when a lot or unit is initially sold by the developer, nor to reasonable fees for statements of current account status charged by HOAs in connection with real estate closings. Here's a link to the statute itself: http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_39A.html

The statute provides that it is effective on July 1, 2010 and that no covenants recorded after that date can contain an enforceable transfer fee provision, and that no lien can be filed to enforce any transfer fee. Therefore it is apparently legal to enforce a transfer fee created prior to that date, just not via lien.

I and a number of other HOA attorneys believe that the intent of the act was to address only the assignment-of-future-income-stream scheme by prohibiting transfer fees to third parties, not to HOAs, although by a strict reading the act seems to apply to everyone including HOAs. In any event, the HOA Subcommittee of the N.C. Bar Association Real Property Section, of which I am a member, has proposed legislation for the upcoming session of the General Assembly which will clarify that Chapter 39A does not apply to transfer fees payable to HOAs, whether initially or upon subsequent conveyances. The real estate brokerage or home building industries may oppose this, although I hope not. We on the HOA Subcommittee see it as purely a clarification of a law which, while generally good, suffers from the same lack of attention to detail that we see all to often in real estate-related statutes. Look for this bill in 2013 and be sure to support it.

Monday, January 2, 2012

What if Fred and Barney lived in your HOA?

And what if Fred and Barney were goats? Fortunately for us, the Court of Appeals had occasion to address this burning issue recently in Steiner v. Windrow Estates HOA.
                                                                                                    
Mr. and Mrs. Steiner lived in Windrow Estates in southeast Mecklenburg County, and had as their beloved pets two “certified Nigerian Dwarf” goats named Fred and Barney. Of course, the CCRs prohibited “livestock”, as most do, although interestingly, they did allow horses as Windrow Estates is an equestrian community. The case turned on whether Fred and Barney were livestock, as the HOA contended, or household pets as the Steiners argued. The trial court had found in favor of the Steiners on summary judgment.

The drafter of these particular CCRs failed to define the word “livestock”. When that happens, courts typically look to determine the “ordinary meaning” of the word in question, which means they usually simply look it up in the dictionary. Here, the Court referred to Merriam-Webster’s Collegiate Dictionary and determined that “livestock” are “farm animals kept for use or profit” whereas pets are “domesticated animal[s] kept for pleasure rather than utility.”

The Court set forth excerpts from Mrs. Steiner’s affidavit in lengthy and sympathetic detail. Mrs. Steiner had been diagnosed with health problems and her physician recommended pets to speed her recovery. After some research, she determined that Nigerian Dwarf goats made excellent pets and could also live comfortably with the horses that the Steiners already kept on their property. The goats were bought from an outfit (Peach Tree Farms in nearby Oakboro) that sells them solely as pets, she said, and they were neutered and don’t produce milk or meat, so they could not be used for profit. Mrs. Steiner also testified that the goats were “affectionate, gentle, and make great companions.” (Apparently these particular goats don’t eat everything they see like the garden-variety goats I am familiar with – especially the one that once ate my uncle’s dentures. But that is another story.)

Dwarf Nigerian Goat from Peach Tree Farms' website.

Mrs. Steiner also testified that the goats lived outside in the stable with the horses, which to me seems more suggestive of livestock than household pets, but the Court somewhat facilely glossed over this issue by stating that household pets don’t necessarily have to live inside the house to be considered pets.

As often is the case when a court chooses to quote liberally from the one side’s testimony in its opinion, the Court of Appeals decided in favor of the sympathetic plaintiffs Mr. and Mrs. Steiner, holding that Fred and Barney were indeed pets and upholding the decision of the Superior Court. But the bigger question is, why did the Court decide the way it did and what, if anything, can we learn from this opinion? I see at least three takeaways for HOAs:

The first and most obvious takeaway is that it is critically important to define terms in CCRs. Obviously, had the CCRs clearly stated that goats were included in the term “livestock”, it would have helped the HOA’s case, but most likely this wouldn’t have changed the outcome, because it appears that the goats in this case were in fact pets.

Second, the plaintiffs in this case came across very sympathetically, and since judges are people too, this was an important part of why the decision ended up the way it did. HOAs facing litigation should very carefully consider the relative sympathies of the parties involved before incurring the expense of protracted litigation, even if they feel the legalities are on their side. Don’t miss the forest for the trees when deciding whether litigation is warranted.

Finally, it is crucially important for HOAs to be aware that North Carolina courts look upon all CCRs with a jaundiced eye. The Court of Appeals spent a good portion of its opinion harping on this particular doctrine, summarizing it as follows:

“The law looks with disfavor upon covenants restricting the free use of property. As a consequence, the law declares that nothing can be read into a restrictive covenant enlarging its meaning beyond what its language plainly and unmistakably imports.”

This gave the Court the legal support it was looking for to read the term “livestock” very restrictively (even though the careful reader will note that the Merriam-Webster definition states that livestock includes “farm animals”, and I can’t imagine anyone arguing that goats are not generally considered farm animals) and to find in favor of plaintiffs it clearly found to be worthy of its support, even on summary judgment. In addition, and perhaps I am just being paranoid here, this allowed the Court to hand the HOA community another in a fairly consistent string of losses at the North Carolina appellate level on facts that seemingly could have gone either way.

The case is Steiner v. Windrow Estates Home Owners Association, Inc., 713 S.E.2d 518 (July 19, 2011). Read the full text of the opinion here: http://appellate.nccourts.org/opinions/?c=2&pdf=MjAxMS8xMC04NjUtMS5wZGY=