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Evaluating Agricultural Real Estate for Development in Colorado

Evaluating Agricultural Real Estate for Development in Colorado. September 26, 2006 John R. Heronimus, Esq. Agreement for Purchase and Sale: Letter of Intent. What is a Letter of Intent? A Letter of Intent is an outline of the key business terms associated with a particular transaction.

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Evaluating Agricultural Real Estate for Development in Colorado

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  1. Evaluating Agricultural Real Estate for Development in Colorado September 26, 2006 John R. Heronimus, Esq.

  2. Agreement for Purchase and Sale:Letter of Intent • What is a Letter of Intent? • A Letter of Intent is an outline of the key business terms associated with a particular transaction. • It generally comes in one of two forms: structured as a letter, or structured as a term sheet.

  3. Agreement for Purchase and Sale:Letter of Intent • Why use a Letter of Intent? • A Letter of Intent helps to focus the negotiations. • It can be a useful tool to confirm that the parties are in general agreement on the key business terms. • With a complex real estate transaction, it can help to identify potential issues before large expenditures are made.

  4. Agreement for Purchase and Sale:Letter of Intent • When should you use a Letter of Intent? • The usefulness of a Letter of Intent increases as the complexity of the underlying transaction increases. • Assembling large blocks of land for a developer from one family, with multiple issues that need to be negotiated. • If you have multiple sellers/ownership of the underlying parcels, a Letter of Intent can help ensure all parties are in general agreement, which helps make the purchase agreement drafting much more efficient.

  5. Agreement for Purchase and Sale:Letter of Intent • Is a Letter of Intent enforceable? • Generally, the parties do not want a Letter of Intent to be enforceable. • The Letter of Intent should just help to clarify the major transaction points, so that those points can be drafted into an enforceable agreement. • However, if you aren’t careful, you could inadvertently draft a Letter of Intent that becomes an enforceable contract.

  6. Agreement for Purchase and Sale:Letter of Intent • Essential Elements to enforce Specific Performance of a Contract to Sell Real Property in Colorado: • The contract must be in writing. (§ 38-10-108) • The names of the parties must be clear. • The terms and conditions of the transaction must be included. • The interest or property affected must be specified. • The amount of consideration to be paid must be included. Eppich v. Clifford, 6 Colo. 493 (Colo. 1893) Absent language that clearly expresses the parties’ intent otherwise, a Letter of Intent with these elements would therefore be enforceable.

  7. Agreement for Purchase and Sale:Letter of Intent • Reasons why courts have held a Letter of Intent to be unenforceable: • The Letter of Intent is not sufficiently specific to be binding. • The Letter of Intent is specifically conditioned upon the execution of a final agreement. • The Letter of Intent has specific language stating that it is the intention of the parties that the Letter of Intent is unenforceable. • The Letter of Intent fails to specify material terms of the transaction. • Conduct of the parties after execution of the Letter of Intent shows that the parties had no intention of being bound. (i.e. continued negotiation of material terms)

  8. Agreement for Purchase and Sale:Letter of Intent • Should some provisions be enforceable? • Exclusive Dealing: The Buyer will generally want the Seller to agree not to negotiate with any other third parties while Buyer and Seller are working on the draft Agreement. • Confidentiality: The parties will probably want any due diligence materials exchanged to be kept confidential. • Indemnification: If the Buyer is going to begin a preliminary investigation of the property prior to the execution of the Agreement, the Seller will want to be indemnified for any damages caused. • Term: Generally the Letter of Intent will contain a specific term within which the parties agree to execute a formal Agreement.

  9. Agreement for Purchase and Sale:Letter of Intent • Suggested Language: The parties acknowledge and agree that, except as specifically set forth below, the terms of this Letter of Intent constitute a preliminary basis upon which to discuss and negotiate the Purchase and Sale Agreement between the parties, and do not constitute a binding offer or agreement because they do not contain all material matters upon which agreement must be reached in order for such transaction to be consummated. The understandings reflected in this letter of intent are therefore subject to, and expressly conditioned upon, negotiation and the execution of the Purchase and Sale Agreement and the satisfaction of the conditions described therein. Notwithstanding the foregoing, in consideration of the costs and expenses to be borne by the parties in pursuing the transaction, and further in consideration of their mutual undertakings as to matters described herein, the parties do agree and do hereby expressly state their intention that the provisions set forth in paragraphs ___ through ___ hereof shall constitute the legally binding and enforceable agreements of the parties. All other provisions not specifically set forth above shall be nonbinding and unenforceable.

  10. Agreement for Purchase and Sale:Standard Form • Why use the CREC approved Contract to Buy and Sell Real Estate? • The form is widely used in practice. • The standard form is generally much more readily accepted by brokers to the transaction. • It generally can take much less time to complete the standard form. • It is much easier to review a standard form that you are familiar with.

  11. Agreement for Purchase and Sale:Standard Form • Be careful! • Using the form can lead to lazy drafting because you assume the issue must be covered in the pre-printed language somewhere. • You still need to read the form to make sure all issues are covered, because if it is prepared by an attorney, pre-printed language can be omitted and/or modified.

  12. Agreement for Purchase and Sale:Standard Form-Specific Language • §2(c) – Dates and Deadlines: • Try not to use specific dates. Use “30 days after MEC” or similar language to ensure flexibility. • Keep the dates reasonable, make sure you give yourself enough time. • Try to keep as many deadlines on the same date as possible: • Survey Objection Deadline, Title Objection Deadline, Off-Record Matters Objection Deadline, Inspection Objection Deadline.

  13. Agreement for Purchase and Sale:Standard Form-Specific Language • §3 – Inclusions and Exclusions: • Water Rights are a major issue when developing real property in Colorado. • Unfortunately, the form doesn’t leave enough room to adequately cover the possible Water Rights inclusions. • We recommend adding the following language to the Additional Provisions of §24: • The Purchase Price includes all water rights appurtenant to and currently or historically used in conjunction with the subject Property including, but not limited to, all of the Seller’s interest in all groundwater rights whether tributary, non-tributary or not non-tributary water and water rights, well, well rights, and associated well permits, ditch and ditch rights, reservoir and reservoir rights and those specific rights as described on Exhibit “B” attached hereto and made a part hereof. Any and all such water rights shall be transferred by bargain and sale deed free and clear of all liens and encumbrances. In the event such water rights are evidenced by stock certificates, such stock certificates shall be referenced in the bargain and sale deed and the original stock certificates shall be delivered to the Buyer at the closing properly endorsed or accompanied by a fully executed stock power.

  14. Agreement for Purchase and Sale:Standard Form-Specific Language • §4(a) – Earnest Money: • We recommend having the earnest money held by the title company. • If Seller’s counsel, or Buyer’s counsel holds the Earnest Money in their trust account, it creates an inherent conflict of interest if there is a dispute.

  15. Agreement for Purchase and Sale:Standard Form-Specific Language • §4 – Loan Provisions: • As Buyer’s counsel on a development acquisition, I generally will remove the following provisions and draft a new custom clause as necessary. These provisions simply provide Seller with an easy out: • §4(b) - New Loan • §4(c) - Assumption • §4(d) – Seller or Private Financing.

  16. Agreement for Purchase and Sale:Standard Form-Specific Language • §10(a) – Inspection: • Inspection clause references “physical condition” of the property. If you represent the developer, this needs to be clarified to ensure that Buyer can terminate the contract if any matters come up during due diligence that would prevent Buyer from wanting to develop the property. • We recommend adding the following language to the Additional Provisions of §24: • “Physical condition" of the Property for purposes of Section 10 shall include all aspects of the Property and Inclusions which are the subject of this Contract, including without limitation: compliance with applicable codes; soils, mill tailings and similar test reports; environmental assessment; property tax, land use and subdivision matters; utilities availability and facilities; water rights, ditch rights and irrigation facilities; matters of survey; and any other matter, fact, restriction or condition relevant to Buyer's contemplated use of the Property.

  17. Agreement for Purchase and Sale:Standard Form-Specific Language • §24 – Additional Provisions: Mineral Rights • Since the acquisition is for development purposes, you want to make sure you obtain as much of the mineral rights as you can to help protect your development. You should add the following language to ensure the mineral rights are included: • The Property shall include all oil, gas and minerals, and all oil, gas and mineral rights, gravel and gravel rights (collectively, “Minerals”)[, provided, however, the Seller shall reserve all royalties, overrides and income from current and future wells located on the Property or otherwise produced from existing leases upon the Property]. The executive rights, consisting of the right to grant future Minerals leases, shall pass with the Minerals from Seller to Buyer. • Only include the bracketed language if the Seller demands to reserve the royalty payments. At a minimum, you want to make sure that Buyer obtains title to the underlying minerals, with the associated executive rights.

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