Articles Posted in Property Owners Associations

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In the recent case of Tarr v. Timberwood Park Owners Association Inc. the Texas Supreme Court considered whether a deed restriction that limited use of homes “solely for residential purposes” prevented a homeowner from using his home for short-term rentals. Based on the language of the restrictive covenant, the Court decided that renting the home — even for short time periods — was not a “business purpose.” The rentals were considered to be a “residential purpose” and so the homeowner did not violate the deed restriction. In addition, the Court refused to conflate two restrictions into a ban on use of the home for multi-family units and also held that when a restrictive covenant unambiguously fails to address some particular property use — such as use for short-term rental — Texas courts must not to read such covenants into the deeds.

Facts of Case

 Tarr involved a homeowner’s use of his home for short-term rentals in San Antonio’s Timberwood Park subdivision. Two years after Mr. Tarr bought his home, his employer transferred him to Houston. Thereafter, he began advertising the home for rent on websites such as Vacation Rentals by Owner. Tarr also formed a limited-liability company to manage the rental of the home. Between June and October of 2014, Tarr entered into 31 short-term rental agreements, ranging from one to seven days each. He rented his home to various-sized rental parties up to 10 people. For example, nearly one quarter of the rentals were to two adults accompanied by as many as six children.

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texas_flag.jpgAccording to the American Land Title Association, the first reported private transfer fee covenant was created to pay money to the Sierra Club and the National Audubon Society in order to fund an open space preserve. Since then, developers and homeowners’ associations alike have borrowed the mechanism to generate a form of income that was previously unavailable. Over the past decade, private transfer fee covenants have been heavily used in California and Texas, prompting lawmakers to consider banning the provisions altogether.

In 2007, the Texas Legislature addressed private transfer fees in Section 5.017 of the Texas Property Code. The provision provides that a deed restriction on residential property that requires the buyer to pay a third party a fee in connection with his purchase of the property is unenforceable. However, the statute’s broad prohibition of private transfer fee covenants has a few major exceptions. Texas’ private transfer fee prohibition does not apply to 1) property owners’ associations, 2) certain not-profit organizations, and 3) governmental entities.

Texas’ approach is not without criticism. First, many argue that the law does not go far enough because it only applies to residential property. Commercial developers are free to include private transfer fee covenants in the deeds of commercial property. Second, private transfer fees are legal and enforceable if made payable to homeowners’ associations. Some find fees payable to homeowners’ associations to be less objectionable than fees payable to the developer. After all, the money goes to improve common property and maintain the premises. On the other hand, homeowners complain that they already pay homeowners’ association monthly dues. What gives the HOA a right to 1% of their home’s purchase price?

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house1.JPGImagine buying your dream house and everything is going swimmingly. The closing date approaches, but you notice something odd in the paperwork. A “reconveyance fee” is listed as a deed restriction and requires all future buyers over the next ninety-nine years to pay one percent of the home’s sales price as a “transfer fee” to a homeowners’ association.

Over the past decade, thousands of Texas home buyers have found these strange “reconveyance fee” and “transfer fee” provisions in their dream home’s deed. Commonly referred to as “private transfer fee covenants,” these types of fees are completely foreign to most home buyers and sellers.

A private transfer fee covenant is a fee payable to a private third party (frequently the property’s developer or the local homeowners’ association) which becomes due every time the property is sold to a new buyer. These fees frequently purport to continue for ninety-nine years, and they are usually recorded in the county records or included as a covenant in the deed for every home in a new subdivision. The transfer fee is usually 1% of the final sales price, and either the home’s buyer or the home’s seller could be required to pay it.

If the fee goes unpaid, the private party who is entitled to the fee can obtain a lien against the property in the amount of the total unpaid fee, plus interest. The lien remains on the property and can create a cloud on the property’s title, which makes the property unmarketable.

If this system sounds crazy to you, you’re not alone. Many states have completely banned private transfer fees, and the federal government is also considering taking action. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, recently proposed a rule that would prohibit Fannie, Freddie, and all federal home loan banks from investing in mortgages that carry private transfer-fee covenants.
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As a Texas attorney representing Texas homeowner and property owner associations in residential and commercial developments, I find that very often the greatest service I can perform for my clients is education. I ran across a recent article by Richard Thompson with Regenesis in Realty Times, entitled the “HOA Health Survey”. The article sets out a questionnaire to determine just how healthy your association is. The questionnaire contains very specific and pointed questions, and the answers will indeed tell you just how “healthy” your association is. Very interesting and informative article.

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As a real estate and development attorney in east Texas, I have represented Texas property or homeowners associations (HOAs) on quite a number of occasions. My legal services for my homeowner association clients have ranged from preparation of corporate documents and restrictive covenants, to mediating disputes, to overseeing annual meetings, to filing and collecting assessment liens, to litigation to enforce deed restrictions. As any lawyer who has represented HOAs knows, few things engender as much conflict and heated debate as interpretations of restrictive covenants among the members of the HOA. A recent case illustrates this situation.

In Jennings v. Bindseil, the Texas Court of Appeals in Austin considered just such a dispute. The neighborhood in question, in rural Comal County, Texas, had restrictive covenants in place. One of the restrictions prohibited mobile homes. The Defendant, Jennings, purchased a modular home, which was delivered in sections and assembled on Jennings property. The other members of the HOA cried foul, claiming that a modular home is the same thing as a mobile home, and sued Jennings for the removal of the structure.

The Court considers that modular and mobile housing (the term “mobile”, as the Court notes, has been replaced by the term “manufactured” housing) are governed by different codes, differ as to their foundation requirements (modular houses must be placed on a permanent foundation) and in titles (titles are issued for mobile homes but not for modular housing). Because the case had been decided in the trial court on a motion for summary judgment (in other words, there had been no evidentiary hearing as to the details of the Defendant’s house), the Court of Appeals reversed the summary judgment against the Defendant and sent the case back to the trial court for an evidentiary hearing.