Judge Rules That Transfer Fees to Original Developer Not Enforceable pursuant to California Civil Code Sections 1098 and 1098.5

Blog post/article by David Swedelson, Senior Partner SwedelsonGottlieb, Condo Lawyer and HOA Attorney

The Daily Journal reports that Los Angeles County Superior Court Judge Madden recently ruled on the monthly fee that owners at Marina Pacifica Homeowners Association (located in Long Beach, California) paid to a developer. The Judge found that the fee constituted a “transfer fee” that was a violation of California Civil Code sections 1098 and 1098.5.

California Civil Code sections 1098 and 1098.5 took effect on January 1, 2009, eliminating real property “transfer fees,” particularly targeting fees written into the recorded CC&Rs at some California community associations. These fees are not the fees charged by an association or its managing agent for providing documents and other information as part of Civil Code Section 1368; these transfer fees were typically being paid to the original developer. Since the legislation’s enactment in 2009, we have not seen any court cases, at least until now.

The Daily Journal article indicates that the Judge’s ruling eliminates the transfer fee that hundreds of owners at this condominium association were being forced to pay. One of the Association’s lawyers said the fee would have amounted to more than $90 million in special assessment fees over the next 30 years.

California Civil Code sections 1098 and 1098.5 were enacted to address what some homeowner advocates described as “abusive recurring fees levied upon purchases of homes.”

Some history: some developers, seeking 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).

There are also transfer fees that the developer required to be paid to the associations to help with their reserve accounts. Because the statutes do not differentiate between transfer fees that went to the developer vs. those that went to the association, most associations that had transfer fee requirements terminated enforcement when this new law went into effect.

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. The California Association of Realtors voiced concern that such fees were further depressing the real estate market. 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. The code sections require those with the right to collect recurring property fees legally to record notice of their right and intent to do so.

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.

According to the Daily Journal article:

“[I]n the case of Marina Pacifica, developers of the 570-unit oceanfront project imposed the fee on condominium buyers when the project began selling in the early 1970s. For more than 30 years, the assessment hovered at around $15 to $25, according to court testimony, because the developers wanted to keep it affordable for residents.

Along the way, the original property owner sold the development to the Marina Pacifica Homeowners Association, and two of three partners in the development company sold their interests in the fee to the association.

But one of the original developers, William Lansdale, retained a 43.75 percent interest in the assessment. In 2006, the property value was reassessed to $60.6 million under an “escalator clause” in the fee contract. In late 2008, in a calculation based on the reassessment, a Lansdale company handling the fee payments began billing homeowners $387.70 per month.

In 2009, the homeowners association sued Lansdale and his company, Southern California Financial Corporation, alleging, among other things, that the fee was invalid and violated California Civil Code sections 1098 and 1098.5. Ruling Nov. 14 after a March bench trial, Madden overturned the fee, agreeing with Marina Pacifica that the defendants failed to record documents notifying residents of the fee throughout its term.

Lawyers representing the association said that homeowners, under the defendants’ calculations, could have been on the hook for more than $90 million in future fees by the time the fee agreement expired in 2041.

Judge Madden will issue a final ruling on all issues in the litigation after the parties sort out how many of the owners were overbilled and the proper fee amount the defendants should have received before lawmakers enacted the legislation under which the judge nullified the assessment.”

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