Arizona Law Now Prohibits Transfer Fees

Effective July 29, 2010, Arizona law effectively prohibits charging transfer fees in connection with the sale of real property in the state. Section 33-442 of the Arizona Revised Statutes provides that any provision in “a declaration, covenant or any other document relating to real property” in Arizona is “not binding or enforceable” if it purports to both (a) bind successors in title to the property, and (b) obligate either the transferor or transferee to pay any fee or other charge to a declarant or a third person in connection with the transfer of an interest in the property. The statute goes on to say that a transfer fee provision prohibited by the statute is unenforceable whether or not it is included in a recorded document.

Among the supporters of this legislation were brokers groups that believed that high transfer fees had a chilling effect on sales of residential properties. However, the statute seems to go far beyond that narrow concern. First, the statute is not limited to transfers of interests in residential properties. Further, the statute prohibits transfer fees on “transfers” of interests in real property, not just sales; under the new law, “transfer” is defined as a sale, gift, conveyance, assignment, inheritance or other transfer of an interest in real property located in Arizona.

The statute also creates some confusion regarding its effect on transfer fees under declarations or other documents recorded or effective prior to July 29, 2010. ARS Section 33-442(D) says that any provision in a document executed after that effective date purporting to permit a transfer fee or create a lien securing such a fee is not binding or enforceable. However, the same section goes on to say that it must not be “construed to imply” that a transfer fee covenant or other document executed before that effective date is enforceable or valid. While this subsection of the statute could be read as leaving open the possibility that transfer fees in older documents might be enforceable, there is risk in attempting to continue charging such fees.

The statute makes clear that neither loan assumption fees charged by a lender in connection with a transfer nor brokers’ commissions are prohibited by the new law. Likewise, fees paid to a nonprofit corporation “for the sole purpose of supporting recreational activities within the association” are not prohibited, and fees can be charged in connection with a transfer of a club membership.

Also, a fee can be charged if that fee (a) “touches and concerns the land” and (b) it is paid to an association (i.e., a property owners or homeowners association) so long as no portion of the fee is passed through by the association to a declarant or to a third party “unless the third party is authorized in the document to manage real property within the association” or “was part of an approved development plan.” Frankly, this exception raises at least as many questions as it answers. When will a fee “touch and concern the land”? And if the fee is passed on to a property management company, must the recorded document giving rise to that fee expressly so state? And is a typical fee, nominal in amount and passed on by the association to a property manager for purely administrative purposes, impermissible because it does not “touch and concern the land”?

Obviously, there are many risks associated with trying to levy, collect and enforce transfer fees in connection with a transfer of an interest in Arizona real property. Such attempts are likely to be challenged by buyers and sellers of homes, and to create confusion among parties to transactions involving all kinds of interests in real property in this state. We will also likely see creative attempts to get around the prohibitions in this new law in documents drafted after its effective date.

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