McAfee & Taft AgLINC - Fall 2013: More than just a handshake - Due diligence, purchase contract required for real estate purchases

McAfee & Taft
Contact

In western Oklahoma, where this author was born and raised, a handshake is often all that takes place to solidify a deal for the sale or purchase of a piece of land. The need for a purchase contract or anything other than a deed may likely be viewed as unnecessary, especially when the buyer and seller had known each other — maybe even were friends — for years. And so it goes: the gentlemen shake hands, a check is given to the seller in exchange for a deed to the buyer, and this transaction is complete.

Now let’s say the proud owner of this new piece of property, the buyer — Mr. Smith — sets out to establish and develop his agricultural business, including constructing large storage sheds, feed barns, and equipment barns on his new land. In this unfortunate circumstance, due to his lack of diligence prior to purchasing the land, Mr. Smith failed to realize that ABC Company had been granted an easement to lay a pipeline anywhere in the quarter section containing Mr. Smith’s land. ABC Company has drilled a well on adjoining land and needs to run a transport pipeline to its main line, and the only cost-efficient location for the transport line runs through the middle of Mr. Smith’s largest and most expensive barn. Legally, ABC Company has the right to lay its pipeline anywhere in the quarter section it chooses and can require Mr. Smith to tear his barn down for that purpose. Mr. Smith is now faced with losing his investment on this land and his business, not to mention possibly losing any hopes of reselling the land to someone else.

This unfortunate scenario could have been avoided had Mr. Smith first entered into a purchase contract with the seller that, as explained below, permits the buyer a period of time prior to finalizing the transaction to inspect the legal title to the property as well as the physical condition of the property. Inspecting legal title can be performed in many ways, but it most often is performed by the buyer in connection with the buyer obtaining title insurance for the land to be purchased.

McAfee & Taft regularly represents clients in all aspects of the purchase and sale of agricultural real estate, including negotiating and drafting purchase agreements and title and survey due diligence. This article will briefly detail the importance of utilizing a purchase agreement outlining the business points agreed to between the parties, as well as the importance of obtaining title insurance in modern real estate transactions.

As you might imagine, real estate purchase contracts can range from extremely complex to extremely simple. Generally, for an unimproved piece of land (dirt only, no buildings), the purchase contract can be less complex as there is no concern for the quality of the improvements (buildings, parking lots, etc.) to be considered. In the event the buyer plans to perform any environmental inspections or assessments of the land or if the land includes improvements such as barns, warehouses or other buildings, the purchase contract should include an inspection or due diligence period. This concept allows the buyer a set amount of time to perform inspections on the land and, if the buyer is unsatisfied for any reason with the results of the inspection or anything else regarding the land or any improvements, the buyer may terminate the purchase agreement before the stated inspection expiration date.

Other terms to consider including in a real estate purchase contract are (a) the inclusion of any personal property or other property besides the land in the sale (for example, if the land is irrigated and includes irrigation pivots, etc.), and (b) how the closing costs will be allocated and paid between the parties. Standard closing costs include abstracting fees, title insurance premiums, title company closing fees, documentary or transfer taxes, and document recording fees. Typically in Oklahoma, a buyer pays for document recording fees, a seller pays for documentary or transfer taxes and abstracting fees, and the parties split the title company closing fees. The title insurance premium payment is generally negotiated on a case-by-case basis, but more often than not the buyer pays that premium. Keep in mind, though, each of these items may be negotiated differently by the parties and in any given transaction a buyer or seller may pay all closing costs alone.

Another crucial consideration in real estate transactions is protecting your investment and legal rights in the land. For many years, obtaining an abstract of title and accompanying attorney’s title opinion was common in real estate transactions. Recently, title insurance has become the more popular method for protecting landowners in connection with their investment in land.

An attorney’s title opinion is simply a letter from an attorney who, based on his review of the abstract for a particular piece of land, determines who actually owns the land. The title opinion also typically sets forth any required actions necessary to make title to that land “marketable” under prevailing title standards. A title opinion by itself does not include any insurance as to the conclusion stated in the opinion, nor does it create any legally binding protection for a prospective buyer. For example, if the reviewing attorney misses something in his title review and legal title to the land is challenged, with the exception of a suit against the attorney alleging malpractice, there is no recourse for the buyer/owner arising from the title opinion in the event there is in fact an issue with title to the land.

Conversely, title insurance offers a landowner affirmative coverage over certain issues with respect to title of the covered land. If a title issue is claimed, the landowner/policyholder can simply rely on the policy to protect their investment in the land. An added feature of title insurance is that during the preparation of the policy, the title company will perform a review of the abstract of the land and note any currently present issues affecting the land that would be an exception to the policy. For example, in the scenario above, the title company would note the easement to ABC Company as an exception, and Mr. Smith could then take the steps necessary to cure the issue or choose not to purchase the land altogether. In either event, the buyer is aware of any potential risks associated with the land. Additionally, a title insurance policy would cover a buyer in the event of human error. It is important to note that, while title insurance does provide the landowner protection, a standard title insurance policy does not provide complete coverage over any issue affecting title to the land. Just as in any other form of insurance, there are exceptions to the policy. These exceptions can often be revised or deleted by having a real estate attorney review the title commitment and negotiate with the title company accordingly.

The benefits for both the buyer and the seller of using a purchase contract and the benefits of a buyer in obtaining title insurance are numerous. So, the next time you plan to buy or sell the farm (or any other land), keep in mind the importance of these considerations before signing on the dotted line.


LINKS

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McAfee & Taft | Attorney Advertising

Written by:

McAfee & Taft
Contact
more
less

McAfee & Taft on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide