You are the owner of this article.
You have permission to edit this article.

'Predatory' hidden covenants on more than 100 Denton homes were thrown out by a judge. Hundreds more remain unchallenged.

  • 0
  • 10 min to read

Private transfer fees affecting more than 100 Denton homes were ruled invalid by a Denton County judge last month. But the practice has brought in billions of dollars from homeowners across the United States, according to its top originator, and in Denton County, hundreds more of the covenants remain unchallenged — and likely undetected — by homeowners.

The controversial practice of collecting private transfer fees — also known as reconveyance or capital recovery fees — involves the original developer or builder writing a fee into neighborhood restrictions that would entitle them to 1% of the sales price every time a home is sold, usually for a period of 99 years. The fees are a guaranteed revenue stream for developers and other investors named as beneficiaries in the contracts, and proponents say they mean lower initial sales prices for buyers.

Texas-founded Freehold Capital Partners, the largest originator of these fees, often provides licensed documents and advice on creating private transfer fee covenants to developers and, in exchange, is named as a beneficiary in the covenants. The fees were marketed as a boon for developers after the 2008 housing crisis, allowing them guaranteed gains.

“Working with Freehold Capital Partners represents the best a joint venture has to offer by combining your property with Freehold’s expertise in reconveyance fees, creating flexibility for sellers and buyers, all while generating either a long-term income stream or the possibility of significant capital today. It is a true win-win scenario,” a Freehold brochure reads.

North Texas developer Randy Smith said several of his developments in Denton currently have or have had similar covenants, initiated about a decade ago. Freehold proposed pooling the capital generated from private transfer fees and selling securities to investors, generating money to give Smith a percentage of the development’s total value upfront.

“They [Freehold] were anticipating either 1% or 10% of the ultimate developed value upfront, so say if you’re producing a 100-lot subdivision and they were going to be $300,000 houses, that would be $30 million, so they would pay — I think it was 10% — $3 million,” Smith said. “All they wanted was the right to claim 1% on every sale thereafter. So from the developer’s standpoint, he’s getting upfront cash plus half of the reconveyance fees for 99 years.”

But critics say that while private transfer fee covenants paid to homeowners associations or condo associations benefit homeowners and the community, the practice popularized by Freehold does not. Often done without the buyer’s knowledge or consent, these fees do not offer any benefit outside of making the developers and other beneficiaries money. There is no guarantee of a lower sales price, and they create equity losses for homeowners as well as problems for lenders, according to the American Land Title Association.

“These fees are predatory,” ALTA general counsel Steve Gottheim said. “It’s a developer putting some sort of covenant lien on the property to basically strip the level of home equity every time the home is sold, whether it’s something they’ve attributed to the value of the home or not.”

ALTA helped spearhead state and federal efforts in the early 2010s to outlaw the type of covenants that are marketed to developers by Freehold. Though they were successful in most states, getting laws passed before any covenants had been filed in many instances — and the Federal Housing Administration confirmed they would not insure mortgages with such covenants attached — an unknown number of covenants already existed in Texas. Legislation from 2011 banned the type of private transfer liens Freehold popularized but grandfathered in existing covenants.

Trustees were required to file a notice of fee obligation with the county the real property was in before Jan. 31, 2012, and refile at regular intervals for the obligation to remain valid.

‘This is a scam’

When Denton resident Barbara Pritchard and her husband signed up for property alerts through the Denton County Clerk’s Office website, they did not think much of it. But in June, they received an alert through the system that a notice of payment obligation was filed against their home — as well as more than 100 of their neighbors’.

“We weren’t quite sure what to think,” Pritchard said.

Documents filed by Covenant Clearinghouse with the Denton County Clerk’s Office in June claimed entitlement to 1% of the sales price of all 54 homes in Phase 5 of the Sundown Ranch neighborhood in south Denton and 52 in Phase 3 of Unicorn Lake for 99 years.

The Pritchards, who live in the Sundown Ranch neighborhood, reached out to their HOA management company, but they had never heard of Covenant and did not know what the fees were for. The couple had purchased their home in 2014 from homebuilder D.R. Horton and found no covenant documents in with their title papers.

D.R. Horton told the Pritchards they had no record of the obligation, and that any prior liens had been released in 2011, before the couple purchased the home.

Pritchard contacted her neighbor Christa Foster, and the two started trying to find out more about Covenant.

Covenant, it turned out, is a servicer for Freehold Capital Partners. Documents filed with Denton County claim Covenant is a trustee collecting payments as part of a Declaration of Covenant filed by land developers Robert B. Shelton and JoAnn Shelton in August 2009.

Like most covenants Freehold is a party to, it enabled private transfer fee obligations against homes in the neighborhoods outlined. The Sheltons would receive 50% of the collected fee, Freehold Capital would receive 33%, OLT Properties would receive 10% and DTF Holdings Co. would receive 5%. Covenant would receive $100 or 2%, whichever was greater.

But that covenant had been terminated by the Sheltons more than a decade ago, in January 2011. Clause 25 of the agreements gives declarants the sole right to terminate the covenants, without the beneficiaries’ participation.

“This is a scam,” JoAnn Shelton told Foster during a series of email exchanges in August that are now part of the public record. “I talked to my attorney last night and he’s sending a letter to these people demanding that this has got to stop and return the money that has been taken. I don’t know how far this will go.”

Concern about the covenants began to spread in the neighborhood, with some residents reaching out to state and local representatives to try to find out what to do next.

“The biggest struggle for us was not knowing who to go to,” Sundown Ranch resident Jordan Ray said. “The whole thing was so damn confusing.”

Like Pritchard, neither Ray nor Foster found any information about a covenant in their title documents. That’s because in Texas, there is no requirement to disclose private transfer fees in a standalone document since the restrictions are built into the neighborhood. Homeowners agree to accept restrictions common to a subdivision under most standard Texas real estate contracts, and unless homeowners regularly check for documents filed against their property with the county, they may not be alerted of public notices of obligation that trustees are required to file.

“Most homeowners don’t become aware of these liens until they’re asked to pay up,” Gottheim said. “It’s a shock to them and becomes something that ruins their financial plans.”

That was the case for Sundown Ranch residents Scot and Delta Morris, who paid around $2,800 in private transfer fees when they refinanced their home in early July.

“We get within two weeks of being ready to close, and we’re told, ‘There’s a lien against your property, and you have to pay the lien to be able to close,’” Scot Morris said. “The only other option would be to contest it and go through all those proceedings, and then if it’s lifted, we can close then.”

Like others in the neighborhood, they had no knowledge of the covenant when they bought their home more than seven-and-a-half years ago. The price they paid in July was 1% of the home’s original selling price.

“My wife and I just had to make the decision to go on and close, and hopefully there would be an avenue for us to try and get our money back,” Scot Morris said.

‘We’ve never received any money’

Covenant Clearinghouse also had filed a notice of obligation on homes in phases 1B, 2 and 4 in the Villages of Carmel neighborhood — and, like in Sundown Ranch, referenced a covenant that had been terminated years prior. The filing claimed rights to an assessment of 1% of the sales price of 225 homes in the Villages of Carmel neighborhood based on a covenant filed in 2009 and later dissolved by the developer, Holigan Land Development Ltd., in January 2013.

“When I went and looked it up, it was an LLC that had been dissolved involuntarily by the state of Texas, and that was the point that I was like, ‘Wait a minute — did they just file a lien on every property in Villages of Carmel, on behalf of a company that no longer exists?’” Foster said.

Records from the Texas Secretary of State’s Office show Holigan Land Development was involuntarily dissolved in 2012, but calls to the number on file connected the Record-Chronicle with Holigan Communities, a Dallas development firm with the same founder as HLD, Harold Holigan.

Holigan Land Development is no longer a viable entity, Holigan Communities CFO Max Hampton said. Hampton joined the company in September 2020, well after the dissolution of HLD, but confirmed Holigan and Holigan Communities have received no payments or communication from Covenant Clearinghouse or Freehold Capital Partners, and neither are acting as trustees on Holigan’s behalf.

“Part of what we used to do was stick-built homes, and a former company at some point that the Holigans were involved in — Holigan Land Development — had actually engaged these guys to do this lien work, but the company was dissolved, and then they [the Holigans] never thought about it again,” Hampton said. “We’ve never received any funds from them.”

‘Those were filed fraudulently’

After finding the dissolved covenants and confirming that the Sheltons were not a party to the claims, Foster decided to take her case to the courts.

“After spending the last four months researching it and learning what we can, talking to people and talking to our title companies, it looked very much like at least those properties [referenced in the dissolved covenants] were filed fraudulently,” Foster said.

Foster consulted an attorney and filed a motion with the Denton County District Court for judicial review of the claim on Sept. 24. The following week, she received notice that the court had ruled the covenant invalid, and as a result, the covenants on all of her neighbors’ homes — along with those in Unicorn Lake, which were part of the same filing — were also invalidated.

Now, Foster said she’s using her original motion as a template to help residents in Villages of Carmel also get the covenants removed, reaching out through a contact in the neighborhood’s HOA.

“I went ahead and updated the motion and highlighted the things that would have to be changed, put together the evidence pack and emailed it to a contact at Villages of Carmel with detailed instructions on the step-by-step, so they can do the same thing hopefully with the same result,” Foster said.

Covenant’s response

But Covenant says it has not received any notice of a ruling against the company — and that its claims for right to payment are valid.

In an email Friday to the Record-Chronicle, Joe Alderman, managing partner of Covenant Clearinghouse and founder of Freehold Capital, said the terminations were invalid because they were filed after the initial sale of the homes by the declarants.

“Here, the Declarant’s right to terminate is governed by the Covenant and the Declarant’s agreement,” Alderman wrote. “In order to terminate a covenant the Declarant must comply with the terms of the deed restriction, just as a homeowner must comply with HOA restrictions. By way of example, the plain language of the Covenant provides that a termination must be filed prior to a sale by the Declarant. […] In consequence, in the event a Declarant files a termination after the Declarant has sold the property, the purported termination would be invalid under the express terms of the Covenant and as a matter of law.

“An invalid notice of termination does not terminate a covenant any more than an invalid deed conveys property.”

But the ruling in Foster’s case suggests otherwise, invalidating Covenant’s claim based on the documents Foster submitted to the court, which include the terminated covenant.

Alderman also highlighted what he said were positives of such agreements, with a portion of the funds collected going to nonprofits in North Texas and across the U.S. But detractors have pointed out the donations are a way to circumvent laws restricting collection of private transfer fees to certain groups including nonprofits, with 5% of the collected fees going to charity and Freehold and other beneficiaries collecting the rest.

“This industry felt like they could create a nonprofit and get around it,” Trent Thomas, then-chief of staff for state Rep. Drew Darby, R-San Angelo, told the San Antonio Express-News in 2010. Darby owns a title company and previously sponsored legislation to try to further restrict private transfer fees, according to the Express-News.

The Record-Chronicle requested an interview with Freehold via its media line Monday, but a representative was not made available by late Friday.

For Smith, the Denton land developer, the covenants represent empty promises. Smith said he never received any money as part of the agreements, although Freehold marketing materials said a timeline of 12 to 24 months was typical, and Alderman told him several times that payment was just around the corner.

“He kept communicating with us, and every few months he’d say, ‘We have another meeting, funding should happen within 30 days’; then it was funding should happen within 60 days, and they just kept updating it for years because originally it was going to be within a few months,” Smith said. “They [Freehold] could never figure out how to monetize them to pay developers.”

In Smith’s developments, the covenants were presented as a part of title documents to buyers, prompting many to refuse to purchase a home unless they were removed. He has terminated many of the covenants since their creation about 10 years ago and said he plans to dissolve those that are still active.

As for how many remain on Denton County homes and whether those terminations will make a difference for homeowners, it’s hard to say. In just one notice of fee obligation filed with the county in January, Covenant laid claim to fees for more than 30 covenants.

Despite private transfer fees being largely outlawed, Freehold’s website claims the company has over 400,000 active projects and has assessed over $150 billion in fees.

In Denton County alone, public documents show that in 2021, Covenant has filed four recession notices, claiming termination documents dating back to the early 2010s that were filed by developers are invalid — and opening the door for a trustee such as Covenant to make claims without the developers’ knowledge.

To set up alerts on a Denton County home, visit the county clerk’s website.

AMBER GAUDET can be reached at 940-566-6889 and via Twitter at @amb_balam.