Understanding the Essentials of Land Contracts
What Are Land Contracts?
A land contract is essentially a lease-to-own arrangement where the buyer makes installment payments over a period of time. Once the final payment is made, title to the land is transferred to the buyer.
It’s all in the name
Land contracts are frequently referred to by many different names including contract for deed, installment land contract, long-term land contract, installment sale contract, bond for deed, and land sale contract. We’re using the name land contract throughout this guide. Regardless of the name, the attributes are the same.
There are really three phases to the land contract:
The parties discuss and decide on a price and a timeline for when the buyer makes installment payments. They put all the terms of the deal in an agreement and sign it, which is the actual land contract.
2. Physical possession
The buyer takes physical possession of the land, often having to put little or nothing down; however, the seller retains legal title throughout this phase, which runs until the buyer makes the final installment payment.
3. Transfer of legal title
After the buyer makes the final installment payment, the legal title transfers to the buyer. This is the third and final phase, and the buyer now officially owns the land.
Sometimes the timeline of a land contract covers a very long period of time—15, 25, or 30 years—similar to a mortgage. However, often the seller insists on a balloon payment at a particular time—often several years down the road—at which time the buyer must pay in full. If this is the case, the buyer may have to take out a loan or a mortgage to cover the balloon payment. Or, perhaps the farmer will have established a profitable farm operation by this time and will be able to afford the payment without a loan. That’s the ideal scenario.
Even though the buyer does not have title to the land during the second phase of the land contract, she is typically obligated to pay taxes, maintain the premises, and keep insurance. However, these are all things that can be negotiated between the buyer and the seller when crafting the land contract.
What are the Benefits and Risks of Land Contracts?
Land contracts are speedy, simple, and less costly
Land contracts are particularly attractive to beginning farmers who ultimately want permanent tenure in land but don’t have a lot of capital, and for whatever reason cannot qualify for an institutional loan. Land contracts are often much faster, easier, and less costly to finalize than land purchase transactions involving banks and mortgages. These are the essential benefits of land contracts. They don’t require tons of upfront costs, including a large down payment, origination fees for a mortgage, or high closing costs. They basically take out the middle man—the institutional bank—and let the buyer and seller negotiate the deal themselves on their own timeframe and their own terms.
The buyer risks losing everything on default
However, land contracts may carry significant risks for the buyer. The biggest risk of all is that land contracts typically include a forfeiture clause, which allows the seller to cancel the contract if the buyer defaults on the contract, which could include making a single late payment. This is a harsh consequence. If the buyer defaults and the seller terminates the contract, not only would the farmer-buyer lose her possession of the farmland, she would also lose all the previous payments she made. Imagine all that hard work and money spent enhancing the soil, maintaining farm buildings, building fences, learning the subtle nuances of the land in anticipation of owning it outright—all abruptly lost because of one late payment!
Oftentimes courts will step in and give the buyer time to cure the default, which we’ll discuss more next, but the time period for correction can be as short as 30 days. Additionally, many states require the buyer to come up with the entire remaining balance owed on the land contract, not just the amount of the late payment, to reinstate her right to own the land.
The buyer may face challenges in coming up with the balloon payment
Another key risk is the balloon payment that some land contracts require. Many people have lost their homes and land because they weren’t able to come up with this balloon payment. Five or more years may seem like a far off time to make such a payment, but it can come up surprisingly quickly. If the farm business doesn’t turn a profit or doesn’t go as well as planned, the farmer-buyer could have a hard time coming up with the money. If this is the case, the farmer-buyer will pretty much be back to square one—looking for a loan from an institutional lender to cover the balloon payment and having to “qualify” and pay added costs such as origination fees to secure the financing. And if the farmer-buyer doesn’t make the balloon payment at the time specified in the land contract, it would be considered a default, and she risks losing the property and all the previous payments made.
Can I take out a mortgage to pay my balloon payment?
An increasing number of states are allowing a buyer to take out a mortgage on property to be owned under a land contract; however, the actual method in which the buyer takes a mortgage varies state by state. Farmers should be sure to check with specific state laws before taking out a mortgage on farmland subject to a land contract.
Of note, some states treat a land contract as a normal mortgage, which is explained in the next section. In these states, when a buyer takes out a mortgage on land subject to a land contract, the land contract is treated as the first mortgage and the mortgage that the buyer undertakes is treated as a second mortgage. Should the buyer default on either mortgage, the seller could foreclose on the property and the bank which held the second mortgage would be treated as a junior creditor, as the seller would have priority. This may make it challenging for a farmer-buyer to secure a mortgage to pay the balloon payment as institutional lenders prefer not to be second in line as a junior creditor and will most likely increase the interest rates or require other costs or restrictions in such a case. Keep this in mind when negotiating the timeframe of your land contract and be honest with yourself about the realities of making a future balloon payment.
The buyer risks losing out on any improvements made to the land
One other risk is that farmers often want to make improvements to the land right away, such as installing fences, renovating out buildings, or constructing a new packing shed. Unless the land contract adequately addresses what happens to these improvements upon a potential default, the farmer-buyer risks losing all the costs incurred. Farmer-buyers who intend to make changes or improvements to the property before making all the required installment payments under the land contract should pay careful attention and try to negotiate favorable terms for how these improvements are handled. For example, the land contract could specify that the seller compensates the buyer for the improvements or it could establish a formula for determining how much the seller owes the buyer for the improvements upon default. Either way, farmers need to know the risks involved.
Additional Protections for Buyers May Be Available
Some courts and legislatures have stepped in to address concerns over equity and fairness for the buyer
Typically contract law carries the underlying principle of “freedom to contract,” which allows parties to decide whatever terms they want—within the confines of the law—and the courts will enforce the contract as written. An employment contract can’t, for example, say that the employee agrees not to accept minimum wage if the law requires employers to pay minimum wage, as that would be outside the confines of the law. But anything that is “legal” is typically fair game when parties sit down at the negotiating table. The land contract, however, has become a unique kind of contract. Some states have put restrictions on forfeiture clauses that are written into land contracts based on principles of fairness or equity.
Some state courts and legislatures have stepped in to offer buyers using land contracts additional protection even though the parties have freely contracted and agreed to harsh forfeiture clauses. Another way of looking at it is that some courts and state legislatures think of the land contract as a unique legal document given the extended timeframe and all that is at stake—an irreplaceable piece of land. They’ve basically said that in fairness to the buyer who has invested in and grown attached to the land, somewhere along the span of a land contract—during phase two—the title to the land “equitably converts” from the seller to the buyer. In effect, at this equitably manufactured point in time, the title is deemed to be no longer in the hands of the seller despite the fact the land contract says otherwise.
This is what’s known as the equitable conversion doctrine. Once the title equitably converts in this way, the legal concepts of property override the contract terms calling for forfeiture.
Based on this reasoning, some courts and state legislatures have transformed the land contract into something that is functionally similar to a lease or a mortgage. For example, by drawing upon mortgage law, some states grant the purchaser some or all of the protections enjoyed by people who bought land under a mortgage, such as the rights to reinstate the contract after default, to redeem property, to seek restitution of excess payments, and in some cases to demand foreclosure. This serves to reduce some of the risks farmers face in entering a land contract to purchase farmland.
The parties are free to negotiate their own terms, but the courts may step in if the buyer defaults and the terms are not fair to the buyer
As we discussed before, you can go ahead and negotiate and draft your own land contract as you want. That is always a helpful initial approach; going through the negotiation and drafting process itself can help clarify expectations, which ultimately helps prevent confusion, problems, and disputes down the road.
But let’s say things do go wrong. Despite all your intentions, you might want to go to court to resolve the dispute, and as we discussed, the court could do something different than you agreed. Some folks benefit from knowing beforehand what the court might do, just so they have it in the back of their minds. Others don’t want to know until things go down. If you are one of those people who wants to know, the following provides some general summaries of how forfeiture clauses in land contracts are handled in various states. For the curious farmer who wants to learn more about the legal idiosyncrasies of land contracts, be sure to read Section 5, Why Are Land Contracts Treated Differently by the Courts.” Keep in mind that this is a state-specific area of law, and the details and differences by state are far too detailed and nuanced for this guide to cover. Farm Commons strongly recommends that farmers choosing to enter a land contract seek the advice of legal counsel in their state to more fully understand how forfeiture clauses are dealt with and to fully grasp the specific risks and processes involved.
Equity of redemption—a grace period to reclaim the property upon default
A number of states lessen the harsh nature of forfeiture clauses by allowing the buyer a “grace period” in the case of a default, during which she can pay the contract balance. In essence, once a buyer misses a payment, she can pay the remaining balance on the contract and obtain legal title, rather than entirely forfeiting her right to the property. States allow a grace period, usually between 30 and 90 days after the seller provides notice of default, during which the buyer can pay the balance owed in full. Some states additionally require that the buyer has established “substantial equity” in the property already, meaning that a significant number of payments have been made. Other states are even more specific and require that the past payments exceed the fair rental value of the land. They treat it as a lease-option scenario, and say to the buyer, “You essentially paid ‘rent’ to use the land and you lose your option in buying the land when you default.”
This safeguard is what courts refer to as the equity of redemption. It basically allows a grace period for the buyer to reclaim the property upon default. While the buyer must come up with a substantial payment to avoid forfeiture, this method does afford the buyer some additional protection in a final opportunity to fulfill the contract. The farmer will have anywhere between 30 and 90 days to pay the remaining balance owed and retain the property. Otherwise, she loses everything.
States allowing equity of redemption: California, Florida, Hawaii, Missouri, Montana, South Dakota, Arizona, Iowa, Minnesota, North Dakota, Oregon, Texas, Washington
Restitution to the buyer—an opportunity to get some payments back
Other states offer less protection, but still allow the buyer to recoup part of the payments to the seller. In these states, when the buyer misses a payment she still forfeits her interest in the land, but the seller will be required to repay the buyer for all payments in excess of the “actual damages.” Often courts will calculate damages as the fair rental value plus any repair costs. Let’s say a farmer makes 20 monthly payments of $500 under a land contract and isn’t able to make the next payment. The seller provides a notice of default. Based on the land contract, the farmer won’t have a chance to pay the contract balance and will forfeit her $10,000 equity in the land. However, in states that allow restitution to the buyer, the farmer could recover anything above the fair rental value of the land. If the court determines that the fair rental value of the farmland is $400 per month, and the farmer did not damage the property, the seller will be forced to pay $2,000 back to the farmer. While this payment is a small consolation, it affords the farmer more protection than forfeiting all of the land.
States allowing for restitution to the buyer: California, Alaska, New Hampshire, Hawaii, and Pennsylvania. Utah and Idaho also allow restitution; however, they require that payments made before default be “significant.”
Treatment as a mortgage—requiring the seller to foreclose on the property
A growing number of states are giving buyers under land contracts greater protection by transforming land contracts into mortgages in certain situations and giving the buyer all the rights and privileges of a mortgagor. For example, many state laws allow the buyer to retain the right of redemption so long as she has made “more than nominal” payments on the land contract. The equity of redemption is the right granted to the debtor whose property has been foreclosed upon to reclaim the property if she is able to come up with the money to repay the debt. However, if the buyer cannot pay the contract balance within the statutory period (typically between 30 to 90 days), the land will be subject to a foreclosure sale. Under this scenario, the normal mortgage laws apply, meaning that the purchaser can still pay the balance owed on the land until the date of the foreclosure sale. Also, just like a traditional mortgage foreclosure, if the property sells at a higher price than the land contract price, the buyer retains the surplus. However, if the land sells for less, the seller can bring suit against the buyer for the difference.
For example, let’s say that Gene entered a land contract with Chris for $100,000. The land contract has a forfeiture clause that specifies that Chris gets to keep all the payments upon default and that Gene loses out on buying the property. Over a span of eight years, Gene makes 80 payments of $1,000 each. He then fails to make the 81st payment, so Chris enters a notice of default. In the states that transform land contracts into mortgages upon a default, instead of automatic forfeiture, the mortgage laws would now automatically kick in. This forces Chris to go through the foreclosure process and file all the necessary paperwork to foreclose on the land to preserve his rights to the land. If Chris starts the foreclosure process, Gene then has a set period of time under his right of redemption to come up with the $20,000—usually somewhere between 30 to 90 days. If Gene does so before the foreclosure sale, the property is his. Let’s say Gene doesn’t come up with the money and the property goes to judicial auction on the courthouse steps. If the property sells for $104,000, Gene would get the $4,000 surplus; however, if the property sold for $96,000, Chris could sue Gene to recover the $6,000 loss.
As this example illustrates, treating the land contract as a mortgage provides the buyer the greatest degree of protection. Upon default, the onus is really on the seller to preserve his interest in the land. If the seller does nothing, the land contract is still in place and if the buyer continues to make payments the land will ultimately be his. is more likely for a buyer without good credit or for whatever reason is not able to “qualify” for a traditional mortgage. Nevertheless, if a farmer can find a seller who is still willing to enter a land contract despite this, it can be an ideal scenario.
As this example illustrates, treating the land contract as a mortgage provides the buyer the greatest degree of protection. Upon default, the onus is really on the seller to preserve his interest in the land. If the seller does nothing, the land contract is still in place and if the buyer continues to make payments the land will ultimately be his.
While this is all good news for farmers who want to purchase land under a land contract, the backlash is that, in such states, sellers are becoming more reluctant to enter land contracts with buyers who would not ordinarily qualify for a mortgage. They fear that they will end up having to go through the time and expense to engage in the drawn-out mortgage process to get their land back upon a default, which is more likely for a buyer without good credit or for whatever reason is not able to “qualify” for a traditional mortgage. Nevertheless, if a farmer can find a seller who is still willing to enter a land contract despite this, it can be an ideal scenario.
States treating land contracts as mortgages: Indiana, Kentucky, Maryland, and Oklahoma. Ohio treats land contracts as mortgages as long as the contract is at least five years old and 20% of the principal has been paid. Additionally, courts in Nebraska, New York, Florida, and California are moving in the direction of treating land contracts as mortgages—allowing purchasers many, but not all, of the protections.
Mortgage foreclosure procedure: All states have slightly different foreclosure laws, but in general they follow a similar procedure.
- The seller files suit in court
- Buyer receives notice in the mail demanding payment
- Buyer must respond within 30 days with payment in order to avoid foreclosure
- If payment is not made after a certain time period, the mortgaged property is then sold through judicial auction
The Importance of Creating a Customized Land Contract
Identifying the objectives of the parties and thinking through how to best handle the worst-case scenarios and possibilities is vital in ensuring that the land contract will serve the interest of both the buyer and seller. While the courts may step in upon a default to override a harsh forfeiture clause, the parties can avoid a lot of this potential mess by taking time to understand the laws of their state for land contracts and to customize the land contract to meet both of their needs.
Of course, an essential component of a successful land contract situation is to do everything you can to not default on the contract. Regardless of how the state treats the forfeiture clause, a default pretty much opens a can of legal worms. You’ll be asked to explain how you followed the contract to the letter and why you deserve greater protection. Therefore, be sure to really think through the timeline and carefully and conservatively crunch the numbers of your farm operation before signing a land contract. A smart business plan and financial analysis can help you stay out of trouble and ensure that the land contract plays out to its full potential by providing you permanent tenure to your dream piece of farmland. This includes preparing a monthly cash flow analysis to help give you an accurate sense of whether you’ll have enough cash to make due on the payments year round, especially during the off season.
How to Use This Guide
Farm Commons focuses on creating flexible, adaptable tools that empower farmers to move forward in addressing their legal matters. Farmers, and business owners of all types, are sometimes under the misimpression that legal matters can be addressed by simply using the “correct” form or language. This often isn’t the case. This toolbox is designed primarily to help farmers build their own strategy to avoid legal problems through good communication, which is also good legal protection should a problem materialize. This toolbox IS NOT legal advice specific to any circumstance and should not be used as such.
The tools we provide are meant to help farmers who are seeking alternative ways to finance farmland—by not having to go through an institutional bank. It is also helpful for farmers who are in the process of negotiating or creating a land contract with a willing seller. The checklist and sample land contract contain a variety of options to help farmers craft provisions that are most suitable to their specific situation. The story of the purchase and sale of farmland between Farmer Claire, the buyer, and Penny, the seller, using a land contract is woven throughout to highlight the key issues that arise in land contracts and illustrate the importance of negotiating the terms up front.
For farmers who are curious about the peculiar nature of land contracts and want to learn more about why state courts and legislatures have gotten so involved, be sure to read Section 5, “Why Are Land Contracts Treated Differently by the Courts?” Given that land contracts are a very state-specific area of law, Farm Commons highly recommends that farmers entering land contracts work with an attorney in their state to either help draft or review the final land contract.
After opening this toolbox, farmers should:
- Understand the potential attributes for using a land contract to finance farmland
- Know the basic elements of a thorough land contract
- Gain a sense of how to adapt land contract elements for different situations
- Have the resources they need to negotiate and begin to create a land contract adapted to their own unique situation
Story of a Land Contract
Serendipitous Meeting of Penny and Farmer Claire
Penny Gordon swore to herself that she was not going to be a farmer. Growing up on a 20-acre farm right outside the center of town in Zinc, Sun State, Penny longed for the minute she could escape to college and leave her rural roots behind. And for a while, she did exactly that. Penny worked in a bustling city as a marketing manager for 25 years before the death of her parents brought her back to Zinc. Dragging Mark, her urban-raised husband reluctantly along, Penny returned to her inheritance and threw herself into the world of farming with a fierce desire to continue her parents’ legacy and preserve their vision of Zinnia Farm.
After a few years, tensions were high between Penny and Mark. Mark was not charmed by the rural way of life, nor the cold and blustery winters that Zinc was known for. Penny and Mark had a son who lived with his wife in sunny Calisun. One day, their son called up to give his parents the exciting news that they could expect a grandchild in the coming year. Penny and Mark decided that the time was right to make the move to Calisun to repair their marriage and be there while their grandchild grows up. But, before they can take off, Penny has to figure out what to do with her land and Zinnia Farm.
One day, Penny is at the local co-op chatting with some other farmers about her dilemma: She wants to move off the land, but it’s important to her to ensure that Zinnia Farm will continue to prosper in the hands of passionate and caring farmers, as her parents would have wanted. A co-op customer, Claire O’Conner, overhears this conversation and can’t believe her luck. She and her husband, Frank, had just decided the week prior to pursue their dream of starting a small produce farm and CSA and to begin the search for a suitable piece of land.
Penny and Claire start talking and immediately hit it off. Claire voices her only concern: She isn’t sure that she and Frank have good enough credit to obtain a mortgage from the bank to buy land. One of the other farmers tells Penny and Claire about an option that they had never heard of before: a land contract. The farmer describes the land contract, also known as a contract for deed, as a financing strategy similar to a mortgage, but leaving the bank out of it. It’s a way for a buyer to take the physical possession of the land while the seller retains the legal title. The buyer makes installment payments to the seller until the contract is fully paid—at that time legal title transfers to the buyer.
The concept of a land contract appeals to both Penny and Claire. Claire realizes that this is the best way for her and Frank to manifest their farming dreams, and Penny likes the idea of getting monthly income from the “rent” for her land while resting assured that the farm is in good hands. One potential downside for Penny is that some of her money would be locked up in the land as the O’Conners pay off the contract, but she and her husband are planning on moving in with their son and wouldn’t need the capital to purchase a new home. Penny and Claire exchange information and make a date for the O’Conners to come check out the property.
Negotiation of a Land Contract Deal
When Penny goes home she is excited to share the news with Mark, but he isn’t as enthusiastic as she is about the arrangement. He doesn’t know too much about the way land contracts work and is worried about the potential for the O’Conners to take advantage of the situation. He suggests they talk to an attorney to figure out the best way to move forward and set up the land contract.
By the time of the farm visit, both Penny and the O’Conners have done their research. After a successful farm tour that has Frank and Claire excited to move forward, they all sit down with a sample contract that Claire found online for them to use as their blueprint. The plan is for them to hash out the details and then have Penny’s attorney review their drafted contract.
Purchase price and repayment terms
Up first for discussion is the purchase price of the land. Penny suggests they use the fair market value of the land by looking at what comparable land has sold for in the area. Penny already had this information from a real estate agent. Claire and Frank agree to pay $100,000 for the land and home. They also agree to pay a 10% down payment of $10,000 to Penny when they sign the contract. This will be a stretch for them, but they’d like to pay as much upfront as possible because any down payment is deducted from the principal of the loan and means no interest will accrue on that amount. This means after their down payment, the loan will actually be for $90,000.
Next, discussion turns to how the loan will be paid back. From her research, Claire knows that there are at least three different options for paying back the loan: (1) monthly installments with interest, (2) monthly installments without interest, and a balloon payment. Penny is upfront about her desire to charge a 2% interest rate, which takes option two off the table. Of course, Frank and Claire would ideally like no interest charges, but they know they’ve lucked out with this arrangement and are willing to pay Penny what they consider to be a reasonable interest rate.
The balloon payment option makes Frank and Claire a bit nervous. A balloon payment means that Frank and Claire would make even monthly payments until the end of a set time period, such as five years, when they would then have to make a lump sum payment to Penny for the total amount due. Frank and Claire know that if they do this option, they would have to get a mortgage to pay the remainder of the loan. If they couldn’t get a loan for the lump sum (which is a concern because of their credit backgrounds), they could lose all interest in the land.
While option two clearly favors the purchasers and option three favors the seller, the group decides to choose option one, monthly payments with interest, which is the most equitable for both parties. Under this arrangement, Claire and Frank will pay back the loan with monthly installments that include the loan amount plus 2%. This payment type is almost identical to a mortgage.
Claire and Frank bring up the potential of prepayment on the remainder of the loan. There is a chance they’ll come into a large sum of money in the future from a possible inheritance, and they want to know if they’ll be able to prepay the loan without penalty and obtain the title to the land earlier. Penny is concerned about the tax consequences of receiving a large unexpected payment, but Frank suggests that although there will be a tax hit, potentially getting the entire sum at once and being done with the loan could be beneficial enough to outweigh that cost. Penny likes the idea of getting the money earlier and being able to help her son with the expenses that go along with having a child (as well as maybe surprising Mark with a romantic second honeymoon!). She decides she will talk to the attorney or her accountant about the tax implications from prepayment before they finalize the contract, but she is open to the idea of allowing prepayment whenever Claire and Frank are able to pay.
With these main details discussed, Penny is ready to bring the adapted sample contract to her attorney for review. Frank and Claire begin to plan for their dream farm, while Penny and Mark tell their son to expect them in Calisun in the coming months.
Checklist: Negotiate and Create a Land Contract
Using This Checklist
This checklist outlines issues that land owners and farmers should thoroughly and thoughtfully consider when entering a land contract. Going through this checklist and answering the tough questions will greatly benefit all parties involved. This brainstorming and negotiation process can help clarify how various scenarios will be handled, set shared expectations, and prevent confusion and disputes.
The next step is to get everything in writing in an official agreement. We’re using “land contract” here to generically refer to the agreement entered to govern the arrangement of a long-term land sale. However, this type of legal agreement goes by many names depending on the state, including contract for deed, installment land contract, installment sale contract, bond for deed, land sale contract, and so on. It’s best to use the name that is recognized in your state, so be sure to research what is custom and generally accepted there.
Farmers can certainly try drafting a land contract themselves; however, the drafting process can be challenging and may not be the best use of a farmer’s limited time. The other option is to bring your responses and thoughts to the issues and questions in this checklist to a qualified attorney. He or she should be able to assemble a terrific land contract that is consistent with the laws of your state with this information. By doing the legwork, you will make the process much more efficient for the attorney and less expensive for you.
This checklist is designed to be used with our other resources provided in this toolkit, including the Essentials of Land Contracts and the Sample Land Contract that dovetails with the story of the land contract deal between the O’Conners, the buyers, and the Gordons, the sellers.
If you choose to draft the contract yourself, the sample land contract following this section has sample provisions and various alternatives which can help guide you through this process. Keep in mind that land contracts are quite peculiar compared to other legal contracts. In particular, a court may actually interfere and interpret certain sections—particularly the forfeiture clause which designates what happens if the buyer fails to make an installment payment on time—differently than what is written in the contract. For more details on this oddity, review the special legal issue section at the end of this toolkit, “Why Are Land Contracts Treated
Differently by the Courts?”
- How much is the purchase price?
- Does the buyer have to pay any money upfront?
- How long does the land contract run?
- What are the terms of the payments?
- How often are payments made?
- Will interest be charged and, if so, how much?
- Will there be a balloon payment?
- Is prepayment allowed?
- How exactly must payments be made?
- What happens if the buyer fails to make payments on time?
- What happens to the improvements made by the buyer if the contract is terminated?
- Who pays the property taxes?
- Who pays for insurance?
- Who is responsible for damage to the property?
- What happens if someone is injured on the land or equipment is stolen?
- What happens if the land is condemned or the government takes the land?
- What happens if a party doesn’t pay the bills when they’re supposed to?
- Can the buyer sale or lease the land to someone else?
Checklist with Explanations
How much is the purchase price?
This is obviously a fundamental term that the parties will need to negotiate. How much will the farmland ultimately cost? Sellers face a level of risk in entering a land contract with a buyer who may not otherwise qualify for a traditional loan or mortgage, so they may insist on a higher purchase price than the going market rate. A higher price can be fair to some degree as the farmer benefits from the opportunity to secure permanent tenure on a piece of land even though she might not have good credit or a lot of money in the bank.
Nevertheless, farmers should do their homework and research prices of comparable land in the area. This gives the farmer-buyer some ammunition to negotiate a fairer price and prevent the seller from unduly taking advantage of a less-than-stellar financial situation. You can find this information by searching online listings such as Zillow or calling a local realtor who will have access to the purchase prices of similar land sold in your area within the last year or so.
Does the buyer have to pay any money upfront?
The benefit of making a down payment is that it immediately reduces the principal, the amount of the purchase price less any interest that accrues. So if the buyer puts $20,000 down on a $100,000 purchase price, she’ll only have to make the monthly installment payments on the remaining $80,000. If the seller requires an interest rate to be paid on that remaining balance over time, it can really add up. However, many farmers don’t have a lot of money up front, so a high down payment may not be an option. One advantage of a land contract is that oftentimes sellers do not require the buyer to pay any money up front. With that said, even if the farmer does have a lot of money and could make a substantial down payment, she may instead want to keep this cash on hand to pay for other capital expenditures such as equipment that will help grow the farm business. While farmers often want to minimize taking on debt, having some debt that can be stretched out over time can serve to free up cash flow early on. This is something both the farmer and the seller will have to consider and negotiate to come up with the best solution based on their situation.
How long does the land contract run?
The land contract could last for as long or as short as the parties agree to. Note that the longer the contract runs, the less each installment payment will be as it will be stretched out over time; however, the longer it runs, the more time it will take for the buyer to receive title and own the land outright and the more interest charges will accrue if applicable.
What are the terms of the payments?
How and when the payments are made are fundamental issues that need to be addressed. This includes several components, which the following questions outline:
How often are payments made?
The parties will need to decide how often payments are made—bi-monthly (i.e., every two weeks), monthly, quarterly, annually, or something else? Farm operations are inherently seasonal so cash flow will most likely vary in different parts of the year—typically more cash comes in through late summer and less comes in through late winter. Farmer-buyers should carefully consider their financial situation and ideally prepare a monthly cash flow analysis to be sure they will be able to make all monthly payments on time throughout various stages of the year. If it becomes apparent that making payments in a given month or time of year—such as December or January—will be an issue, the farmer-buyer can try to negotiate another arrangement such as quarterly or annual payments.
Will interest be charged and, if so, how much?
In addition, the parties will need to negotiate whether interest is charged and, if so, what the interest rate will be. Zero interest is definitely the best scenario for the farmer-buyer; however, it may be challenging to find a seller who is willing to agree to it. Keep in mind that any interest that is charged will increase the money owed throughout the term of the contract, which will exceed the purchase price. Let’s say the parties agree to a $100,000 purchase price that will be paid over a period of 10 years with monthly installment payments at 2% interest per year. Let’s also say that the farmer-buyer pays $10,000 as a down payment so the principal balance is $90,000. Ultimately, the farmer-buyer will pay a total of $109,908 through 120 monthly payments over the course of the contract. This is in addition to the $10,000 down. So while the purchase price is $100,000, the farmer will have to fork out $119,908!
One way of thinking about interest charges is that they are the cost for the opportunity to secure permanent tenure in land over a period of time. It’s really the same for a mortgage. So unless you can pay cash for the property up front, you’re pretty much in the same boat for both. Nevertheless, a keen farmer-buyer should pay attention to the going market interest rates, which are generally posted by all major banks in your area. It can be helpful to take these rates to the seller to negotiate a fairer rate. Also, interest rate calculators are available online which can help calculate what your monthly payments would be based on various interest rates, the principal amount, and the timeframe of the contract. Simply search “mortgage calculator” or “interest rate calculator.”
Will there be a balloon payment?
A large final payment is often referred to as a balloon payment. Under this scenario, the buyer makes even monthly payments for a period of time—say two, five, or ten years—and then the buyer is required to make a lump sum payment for the total amount due at the end of the contract term. Entering this kind of arrangement has its advantages, as depending on how it’s all set up, the installment payments could be smaller. For example, let’s say the the parties agree to a five-year contract with a $100,000 purchase price. The buyer agrees to make 59 monthly installment payments at $500 equating to $29,500. Then, the final payment is the balloon payment that must be made that 60th month. This balloon payment will cover the balance of $70,500. Without this balloon payment, the buyer would have to make 60 equal monthly installment payments which would be $1,667. This is quite a difference! Note that for simplicity sake, these calculations all assume there’s no interest charges. If an interest rate applies on the payments, it would be even more as explained above.
Farmer-buyers may be tempted to enter an arrangement that include a balloon payment to keep the initial payments low; however, be cautious when committing to make a huge balloon payment. Five or even ten years down the road may seem like a long time, but anything could happen. What if the farm operation isn’t as successful as you thought it would be and isn’t turning a profit and for whatever reason you can’t qualify for a loan?
If a balloon payment is required, the buyer will often need to secure funding to make the payment when due, which may include taking out a mortgage on the property if the state laws permit it or taking out personal loan. Note that some states allow buyers to take out a mortgage on land that is subject to a land contract and some don’t. Be sure to check your state’s laws before considering this option. In any case, if the farmer-buyer can’t come up with the balloon payment on her own, the buyer will be back to square one and have to “qualify” and abide by the terms of the mortgage or even a personal loan. Also, depending on the forfeiture clause in the land contract as well as state law protections, if the farmer-buyer is not able to come up with the lump sum or secure financing when the balloon payment comes due, the farmer-buyer may forfeit all of her rights to own the land and could lose all of the prior payments.
Is prepayment allowed?
Whether the buyer can prepay all or a portion of the purchase price before the amount is actually due is an important consideration. Remember, until or unless the buyer pays in full, the title to the land is in the hands of the seller. During this time, interest charges can tally up quickly. Imagine you inherit some money in year two and want to pay off the entire balance so you can own the land right away or pay off a large chunk so you can own the land earlier.
How exactly must payments be made?
The contract should clearly specify how payments are made and when they are due. Are they due on the first of the month? Does this mean in the seller’s hands by the first or can the payment be postmarked by this date? In what form must the payments be made—personal check, cash, cashiers check, or anything else? Where must the payments be sent—the seller’s mailing address, dropped off at a particular place, or handed to the seller in person? Payment is a vital aspect of the deal, and the clearer and more specific this is all set forth in the land contract, the better.
What happens if the buyer fails to make payments on time?
The land contract should clearly outline what happens if the buyer makes a late payment or otherwise fails to abide by the terms of the agreement such as maintaining insurance or not properly maintaining the land. In legal speak, this is called a “default.” As a caveat, provisions in land contracts that outline what happens if the buyer is in default may or may not be enforced by the courts in your state. This is because historically land contracts came with harsh consequences—if the buyer was in default, the seller could terminate the contract and retain possession of the land as well as all of the buyer’s prior payments. Basically, the buyer would forfeit everything! This explains why the provision in the land contract dealing with the buyer’s default is often referred to as a “forfeiture clause.”
Courts and state legislatures may step in and override forfeiture clauses
Recently courts and state legislatures have stepped in and, despite what the contract says, offer buyers using land contracts additional protection based on fairness and equity. Indeed, this can be a huge benefit to buyers who undertake a lot of risk when entering a land contract. Note that this is an area of very state-specific law, which is far too detailed and nuanced for this guide to cover state by state. However, in Overview of Land Contracts we outline some of the various ways courts deal with this issue. Be sure to review that section of this guide to fully grasp the specific risks and processes involved should the farmer-buyer miss a payment or otherwise breach a term of the land contract. To gain an even deeper understanding of the issue, be sure to read the special legal issue section at the end of this toolbox–Why Are Land Contracts Treated Differently by the Courts?
The basic takeaway is that the parties can certainly agree on how they prefer to handle the critical issue of the buyer’s potential default while knowing that the courts may or may not enforce their preference as written in the land contract. This may seem strange; however, going through the negotiation and drafting process itself can help clarify expectations. This ultimately helps prevent confusion, problems, and disputes down the road. With that said, if you want the most accurate picture and the most control over your situation now and into the future, speak with an attorney who is familiar with the laws in your state for details.
There are three main ways that courts deal with forfeiture clauses or how the land contract handles the buyer’s default. The first is that courts treat the land contract as a mortgage. This provide the buyer the most protection. The seller has to go through the long and costly process of foreclosure and the buyer is given the same rights as someone who buys land through a mortgage, including an opportunity to make the payment in full before a specified grace period to redeem or get the property back. This is called the equity of redemption in legal speak. The second way courts treat this issue is by just giving the buyer this equity of redemption without requiring the seller to go through the full process of foreclosure. The third is what’s called restitution to the buyer. This provides an opportunity for the buyer to get some of the prior installment payments back, but doesn’t allow the buyer to reclaim the property. Yet another option would be to have a traditional forfeiture clause, which says the buyer forfeits everything if she fails to make a payment on time or otherwise defaults on the contract. Farmer-buyers should NOT agree to this! It carries very harsh consequences—losing everything including all prior payments for a single late payment. Nevertheless, as just discussed, traditional forfeiture clauses are not enforced in most states, so the buyer will likely have some protection even if a forfeiture clause makes its way into the land contract.
While the best option is for parties to find out how their state handles this issue, the parties can choose whichever approach they prefer, or even negotiate their own term in the land contract. We’ve included a sample provision for each in the sample land contract that follows. You can choose any of these provisions, or something else that is more specific to your needs. Keep in mind that no matter what you choose a court could disregard it entirely and apply a different set of rules and remedies.
What happens to the improvements made by the buyer if the contract is terminated?
Improvements to the land include permanent changes such such as installing fences, renovating out buildings, or constructing a new packing shed. The parties should decide upfront whether such improvements are permitted and if so, how they are handled. Are they allowed outright, or must the buyer first get the seller’s permission? What happens if the contract is terminated or if the buyer defaults? Does the buyer get to take the improvements with her if they are moveable? If not, does the seller compensate her in some way for all or part of the cost in making the improvements? Farmers often want to make improvements to the land right away and not wait until they own the land, which could be 10 or 20 years down the road. Unless the land contract adequately addresses what happens to these improvements upon termination of the contract based on default or something else, the farmer-buyer risks losing all the costs incurred, including blood, sweat, and tears.
Who pays the property taxes?
Typically, in land contracts, the buyer must pay the property taxes and assessments on the land. However, this issue can certainly be negotiated between the parties. Either way, the land contract should specify who is responsible for covering this obligation. It can cause serious issues in the form of monetary penalties by the county if both parties assume the other is responsible and neither party pays. This is one condition that differentiates a land contract from a rent-to-own scenario. Typically, tenants do not pay property taxes while buyers under a land contract do. But again, these terms can be negotiated between the parties.
Who pays for insurance?
Just like property taxes and assessments, typically the buyer under a land contract is responsible for maintaining and paying for insurance throughout the duration of the contract. But who pays is not the only issue. Land contracts should clearly outline what the minimum coverage is and what types of policies are required—property, general liability, and so forth—in addition to what must be covered. For example, must the property insurance cover floods and earthquakes? Most contracts will require that you get insurance in the amount of the full replacement value of the land, including buildings, improvements, and fixtures.
Insurance under a land contract is a bit of a paradox. While the buyer pays for the insurance, the proceeds will generally go to the seller who is the legal owner of the land until the final payment is made and the title is officially transferred. The legal contract should therefore clearly outline what happens to any insurance proceeds if and when they are recovered. Does the buyer have some control over how they are spent, or can the seller run off to use them to fund a European vacation? The sample land contract provides a creative way to handle insurance proceeds for property damage. It basically allows the buyer to use the proceeds to make repairs if the seller approves. Otherwise, the funds must be applied toward the purchase price. Either way, it protects the buyer’s vested interest in the land. This is just one option that you can use to get your creative juices flowing. It’s up to the parties to negotiate and agree what is best for them.
Who is responsible for damage to the property?
What happens if someone is injured on the land or equipment is stolen?
What happens if someone, such as a visitor or an employee, is injured on the land? Or if farm equipment is stolen? Given the buyer is in possession of the land, she will most likely be deemed responsible for injuries, stolen property, or other unfortunate occurrences that occur on the land. This is the case even though the seller still holds title to the land. The land contract could be written in such a way where the buyer and seller share the risk and liability based on their own fault. So the buyer would be on the hook for injuries or damages that are a result of her actions and the the seller would be on the hook for injuries or damages that are a result of his actions. Check out the sample land contract for an example of how this could be done.
In addition, the seller may require the buyer to maintain liability insurance to protect against claims for bodily injury, death, and personal property damage (e.g., wallets, computers, certain equipment, etc.). This will actually benefit the buyer, as she will be able to file a claim with the insurance company should any injuries or damage arise and will be able to recover the proceeds.
What happens if the land is condemned or the government takes the land?
While it may seem far-fetched, the government could decide at some point to condemn the land (i.e., deem that you cannot live on it or use it because of some sort of hazard or contamination). The government could also decide to acquire the land through its power of eminent domain to build a highway, for example. The parties should think through this scenario and determine what should happen. In both condemnation and eminent domain situations, the landowner is typically afforded some compensation from the government. Oftentimes, land contracts will state that the compensation in such scenarios goes toward the purchase price and anything remaining goes to the seller. This is not ideal for the buyer, because not only do they now no longer get the land, they also lose out on all the prior installment payments. They basically get nothing. One way to address this inequity is to write the contract so that if there’s any amount leftover, it goes to the buyer. See the sample land contract for an example.
What happens if a party doesn’t pay the bills when they’re supposed to?
Both parties may have obligations to keep up on certain bills related to the property, such as taxes and insurance premiums as well as utilities and other services. Often land contracts include a protection of interest clause which protects both parties should one party fail to make a payment. It says that the other party can make the payment and then be compensated. Let’s say the buyer fails to make the property tax payment. The seller is still the legal owner and does not want to incur penalty fees in his name. So the seller is able to pay the bill and then require the buyer to reimburse him.
The same goes for any repairs on the property that the seller agrees to do. For example, if the seller never fixes the banister to the front door that he promised he would fix before the buyer signed the contract, then the buyer can pay the amount needed to fix the banister and deduct it from the total amount of the contract. How this is all handled should be set forth in the land contract.
Can the buyer sale or lease the land to someone else?
Just like a lease agreement, sellers often want to put restrictions on whether the buyer can lease or assign rights to the land to someone else. Every land contract should have a transferability provision which outlines any restrictions and processes that the buyer must follow if wanting to “transfer” her interest in the land. Oftentimes, this provision requires written permission by the seller. This makes sense since the seller still owns the land and he’ll likely want to have a say in who lives there to be sure they too will be good stewards. In addition, transferability provisions often have an acceleration clause. This means that if the buyer does not get written permission and leases the land to someone else, the seller can “accelerate” the contract by requiring that the buyer pay the full balance on the purchase price immediately or risk forfeiting her interest in the land.
This is a harsh consequence indeed. What if the farmer gets sick and needs to move to the city and needs to find someone to take care of the property? Farmer-buyers should be wary of acceleration clauses, or at least be sure they negotiate a reasonable approach for letting them sublease the land to someone else if an emergency or need arises.
Sample Land Contract with Annotations
This LAND CONTRACT (“Contract”) is made between Penny Gordon (“Seller,” whether one or more) and Claire and Frank O’Conner (“Buyer,” whether one or more) as of December 31, 2015 (“Contract date”).
Seller and Buyer agree to the following terms:
The Seller warrants that she is the legal owner of real property in Coral County, Sun State, described as:
Common address: 1234 Zinnia Land, Zinc, Sun State, 55555
Legal Description: Lot 6,7, and the South 1⁄2 of Lot 3, West 60 feet of South 1⁄2 of Lot 4, West 60 feet of Lot 5 and Lot 8, Block 20, OLD SURVEY, Zinc, Coral County, Sun State.2
The above referenced real property is hereinafter referred to as “the Land.”
Purchase Price and Terms of Payment
Seller agrees to sell the Land and Buyer agrees to purchase the Land upon the Buyer paying Seller the sum of One Hundred Thousand Dollars ($100,000) as follows:
a. Down Payment. Buyer shall pay Ten Thousand Dollars ($10,000)3 at the execution of the Contract.
b. Monthly Installments with Interest.4 The balance, together with interest on the whole sum at the rate of 2% per annum, shall be payable in 120 monthly installments.5 The monthly installments in the amount of $915.90 per month shall begin on January 1, 2016 and be due and payable on the first day of each month through December 2025 or until the full balance is paid, whichever is sooner. Interest shall be computed monthly and each payment shall be credited first to any late charge due, second to interest, and the remainder to principal.
Alternative 1: Monthly installments without interest.6 The balance shall be payable in 120 monthly installments in the amount of $ 750.00. The monthly installments shall begin on January 1, 2016, and be due and payable on the first day of each month through December 2025 or until the full balance is paid, whichever is sooner.7
Alternative 2: Balloon payment.8 The balance shall be payable, together with interest on the whole sum at the rate of 2% per annum in 60 monthly installments in the amount of $500.00. The monthly installments shall begin on January 1, 2015, and be due and payable on the first day of each month through December 2019. The remaining principal and interest, in the sum of $79,907.95, shall be paid in full on or before December 31, 2019. Interest shall be computed monthly and each payment shall be credited first to any late charge due, second to interest, and the remainder to principal.
Method of Payment
Unless otherwise provided in writing by Seller, all payments shall be delivered to Seller at 1830 N. Tulip Ave, Sunny, CA, 55555. All payments shall be made in the form of cash or check and be hand delivered or postmarked on or before the date the payment is due.9
a. No Penalty. Buyer retains the right to fully or partially prepay the balance owed on the Contract at any time without penalty.10
Alternative 1: Buyer retains the right to fully or partially prepay the Contract at any time after [December 31, 2017].11
Alternative 2: No prepayments are allowed under the Contract without written permission from the Seller.12
b. Effect of Partial Prepayment. Any partial prepayment will apply first to the amount then due, including unpaid accrued interest, and the balance shall then be applied to the principal portion of future monthly installments in the inverse order of their maturity.13 Partial prepayment shall not postpone the due date or amount of the installments to be paid pursuant to the Contract until the balance is paid in full.
Evidence of Title
Seller warrants that the title to the Land is only subject to the following:
a. applicable laws, ordinances, and regulations
b. the lien of real estate taxes and instruments of special assessments which are payable by Buyer pursuant to paragraph 7 (Real Estate Taxes and Assessments) of the Contract
c. covenants, conditions, restrictions, or declarations of record
d. reservation of mineral rights by the State
e. easements listed on the deed or recorded with the county14
Recording of Contract
Buyer shall, at Buyer’s expense, record the Contract in the Coral County Recorder’s Office within four (4) months after the Contract date.15 Buyer shall pay any penalty imposed under applicable state laws or regulations for failure to record the Contract.
Possession and Use
Buyer shall have the right to possession of the Land from and after the Contract date and be entitled to retain possession so long as there is no default on Buyer’s part in carrying out the terms and conditions of the Contract.16 Buyer agrees to: (a) use, maintain, and occupy the Land in accordance with any and all applicable building and use restrictions; (b) keep the Land in accordance with all police, sanitary, or other regulations imposed by any governmental authority, and (c) keep and maintain the Land and the buildings in as good condition as they are at the Contract date and not to commit waste, remove or demolish any improvements thereon, or otherwise diminish the value of Seller’s security in the land—without the written consent of Seller.17
Delivery of Deed and Deed Tax
Upon full performance of the Contract, Seller shall execute, acknowledge, and deliver to Buyer a General Warranty deed18 in fee simple,19 in recordable form, conveying to Buyer marketable title to the Land, free and clear of all liens and encumbrances, except those created by the act or default of the Buyer or acknowledged within the Contract. Upon transferring title to Buyer, Seller shall pay the deed tax.20
Real Estate Taxes and Assessments
a. Seller’s Warranty. Seller warrants that all real estate taxes and assessments which were due and payable before the Contract date are paid in full.
b. Buyer’s Obligations. Buyer shall pay all real estate taxes and assessments for the Land that are due and payable after the Contract date. Such payments shall be made before any penalties for not-payment are incurred. Buyer shall submit receipts to Seller upon request, as evidence of payment.21
Damage to Property and Property Insurance
a. Property Insurance. Buyer shall keep the Land and all buildings, improvements, and fixtures insured against loss by fire, lightning, and other hazards covered by standard extended insurance coverage, including but not limited to: vandalism, malicious mischief, burglary, and theft. Such insurance shall be in amounts reasonably satisfactory to Seller, which at a minimum is an amount equal to the full replacement value of the buildings, improvements, and fixtures on the Land without deduction for physical depreciation.22
b. Loss Payable Clause. The insurance policy shall contain a loss payable clause in favor of the Seller. Such clause shall provide that the Seller’s right to recover under the insurance shall not be impaired by any acts or omissions of Seller or Buyer, and that Seller shall otherwise be afforded all rights and privileges customarily provided to a mortgagee under a standard property insurance policy.23
c. Notice of Damage. In the event of damage to the Land, Buyer shall promptly give evidence and notice of damage to the insurance company and Seller.24
d. Application of Insurance Proceeds. If the Land is damaged by fire or other casualty, the insurance proceeds paid on account of such damage shall be applied to the amounts payable under the Contract, even if such amounts are not then due, unless Buyer elects to conduct Repairs as specified in the next paragraph. Insurance proceeds applied to the amounts payable under the Contract shall be applied pursuant to Section 3(b)–Prepayment. The balance of insurance proceeds, if any, shall be the property of Buyer.25
e. Buyer’s Election to Conduct Repairs. If Buyer is not in default under the Contract, or after curing any such default, Buyer may elect to have the amount of insurance proceeds necessary to repair, replace, or restore the damaged Land (the “Repairs”) deposited in escrow with a bank or title insurance company qualified to do business in the State of Sun State or any other party mutually agreeable to Seller and Buyer.26
i. Terms of escrow account. Buyer’s election to place insurance proceeds in escrow to conduct Repairs must be made to the Seller in writing within sixty (60) days after the damage occurs. Placing the insurance proceeds in escrow will only be permitted if Seller approves Buyer’s plans, specifications, and contracts for the Repairs; Seller shall not unreasonably withhold or delay approval. If such funds are insufficient, Buyer shall, before the commencement of the Repairs, deposit into escrow additional funds necessary to cover the full cost of the Repairs as well as any escrow account fees and costs. If such funds exceed the full cost of Repairs and escrow account fees and costs, the escrow account shall be closed and any remaining funds shall be applied to the amounts payable under the Contract. Such amounts shall be applied pursuant to paragraph 3 (prepayment) of the Contract. The balance of insurance proceeds, if any, shall be the property of Buyer. All escrowed funds shall be disbursed in accordance with generally accepted sound construction disbursement procedures.27
ii. Terms of repairs. Buyer shall complete the Repairs as soon as reasonably possible. Repairs should be completed in a good workmanlike manner in accordance with best practices in the industry. All Repairs shall be completed by Buyer within one (1) year after the damage occurs, unless Buyer and Seller otherwise agree in writing, or if completion within one year is commercially infeasible.28
Injury or Damage Occurring on the Land and Liability Insurance
a. Liability Insurance. Buyer shall, at Buyer’s own expense, procure and maintain liability insurance against claims for bodily injury, death, and personal property damage occurring on or about the Land in amounts reasonably satisfactory to Seller and naming Seller as an additional insured.29
b. Seller’s Liability. Seller shall be free from liability and claims for damages by reason of injuries occurring to any persons or property while on or about the Land after the Contract date. Buyer shall defend and indemnify Seller from all liability, loss, cost, and obligations, including reasonable attorneys’ fees, on account of or arising out of any such injuries.30
c. Buyer’s Liability. Buyer shall have no liability obligation to Seller for such injuries which are caused by the negligence or intentional wrongful acts or omissions of the Seller.31 Seller shall defend and indemnify Buyer from all liability, loss, cost, and obligations, including reasonable attorneys’ fees, on account of or arising out of any such injuries.
The insurance which Buyer is required to procure and maintain pursuant to Sections 9 and 10 of the Contract shall be issued by an insurance company or companies licensed to do business in the State of Sun State and acceptable to the Seller. The insurance shall be maintained by the Buyer at all times throughout the duration of the Contract. Buyer shall deliver to Seller a duplicate original or certificate of such insurance policy or policies. The insurance policies shall provide for at least ten (10) days written notice to Seller before cancellation, non-renewal, termination, or change in coverage. Buyer shall pay the insurance premiums when due and submit receipts to Seller upon request, as evidence of payment.32
Buyer may make improvements to the property only upon the prior written consent of the seller. The seller may require additional approval of specific designs and construction terms before any improvements are made. The term “improvements” as used herein means building or installing permanent structures, fixtures, or other elements of infrastructure on the land that cannot be removed without causing permanent damage to the Land. Unless otherwise agreed to in writing by the parties, buyer shall incur the full cost of improvements. If buyer removes any structure or item that buyer builds or installs that is not considered an “improvement,” buyer is responsible for repairing any and all damages incurred in its removal.33
Waste, Repair, and Liens
Buyer shall neither commit any affirmative or permissive waste34 or allow waste to be committed on the Land, nor remove or demolish any buildings, improvements, or fixtures now located on or a part of the Land, nor remove or demolish any improvements later located on or a part of the Land, nor create or permit to accrue liens or adverse claims against the Land which constitute a lien or claim against the Seller’s interest in the Land without the written consent of Seller.35 Buyer shall keep the Land in good tenantable condition and repair. Buyer shall pay to the Seller all amounts, costs, and expenses, including reasonable attorneys’ fees, incurred by the Seller to remove any such liens or adverse claims.
If all or any part of the Land is taken in condemnation proceedings instituted under the power of eminent domain or is conveyed in lieu thereof under threat of condemnation, the money paid pursuant to such condemnation or conveyance shall be applied to the amounts payable by the Buyer under the Contract, even if such amounts are not then due. Such amounts shall be applied pursuant to paragraph 3 (prepayment) of the Contract.36
a. Condemnation or Conveyance of Entire Land. If the Land in its entirety is condemned and the payment amount does not fully cover the remaining payments owed to the Seller, the Contract shall terminate, and the Buyer shall owe no future payments, after the date of condemnation. If the entire property is condemned and the payment amount fully covers the remaining payments owed to the Seller, any balance shall be the property of the Buyer.
b. Partial Condemnation or Conveyance. If part of the Land is condemned, such condemnation payments shall not postpone the due date of the installments to be paid pursuant to the Contract or change the amount of such installments. Any balance shall be the property of the Buyer.
Compliance with Laws
Except for matters which Seller has created, suffered, or permitted to exist prior to the date of the Contract, Buyer shall comply with all laws, ordinances, and regulations of any governmental authority which affect the Land or the manner of using or operating it, and with all restrictive covenants, if any, affecting title to the Land or the use thereof.
Protection of Interest
If Buyer fails to pay any sum of money or fails to perform any obligation required under the Contract, Seller may pay the cost of such performance, and the cost shall be payable at once by the Buyer to the Seller, with interest at rate stated in Section 2 (Purchase Price) of the Contract, as an additional amount due under the Contract. If Seller fails to pay any sum of money or fails to perform any obligation required under the Contract, Buyer may pay the cost of such performance, and if the Buyer is not in default of the Contract, the cost shall be deducted from future installments or payments, with interest at rate stated in Section 2, in inverse order of maturity. Neither shall postpone the due date of the installments to be paid pursuant to the Contract or change the amounts of such installments.37
Defaults and Remedies38
a. Time is of the essence. The time of performance by Buyer of the terms of the Contract is an essential term of this Contact.39
b. The parties stipulate that the Contract shall be treated as a mortgage under the laws of Sun State.40 Seller and Buyer agree that in the event of a default in the payment of principal or interest or default in performance of any other obligation of Buyer which continues for a period of thirty (30) days,41 Seller may only seek recourse through state mortgage and foreclosure laws. Seller hereby forfeits the right to strict foreclosure.
Alternative 1:42 Buyer agrees that in the event of a default in the payment of principal or interest which continues for a period of forty-five (45) days following the due date or a default in performance of any other obligation of Buyer which continues for a period of 12043 days following written notice thereof by Seller (delivered personally or mailed by certified mail), the entire outstanding balance under the Contract shall become immediately due and payable.44 Following any default in payment, interest shall accrue at the rate of five (5) per cent annum on the entire amount in default.
Alternative 2:45 Seller may elect to declare the Contract cancelled and terminated by notice to Buyer. If Seller elects to terminate the Contract, all right, title, and interest acquired under the Contract by Buyer shall then cease and terminate, and all improvements made upon the Land and payments made by Buyer pursuant to the Contract (including escrow payments, if any) shall belong to the Seller as liquidated damages for breach of the Contract. Any extension of time for payment shall not be valid unless in writing and signed by the Seller and Buyer.46 After service of notice of default and failure to cure such default Buyer shall surrender possession of the Land to Seller. Failure by the Seller to exercise one or more remedies47 available under this paragraph shall not constitute a waiver of the right to exercise such remedy or remedies thereafter.48
The terms of the Contract shall run with the land and bind the parties hereto and the successors in interest.49
Buyer may not transfer, assign, sell, or convey any legal or equitable interest in the property, including but not limited to a lease for a term greater than one year, without the prior written consent of Seller. Should any such transfer, assignment, sale, or conveyance occur without Seller’s written consent, the entire outstanding balance payable under the Contract shall become due immediately and payable in full at Seller’s option.50
If any one or more of the provisions contained in the Contract shall be held illegal or unenforceable by a court, no other provisions shall be affected by this holding. The parties intend that in the event one or more provisions of this agreement are declared invalid or unenforceable, the remaining provisions shall remain enforceable and this agreement shall be interpreted by a court in favor of survival of all remaining provisions.51
Headings of the paragraphs of the Contract are for convenience only and do not define, limit, or construe the contents of such paragraphs.52
The Contract constitutes the entire understanding between the parties with respect to the transactions contemplated herein. All prior or contemporaneous agreements, understandings, or representations, oral or written, are merged into the Contract.53
Special Legal Issue: Why are Land Contracts Treated Differently?
Land Contracts Are Unique in the Eyes of the Law
Land contracts are different from other contracts as well as other areas of law. The way they are treated varies from state to state. To understand why, it’s helpful to dive into a bit of legal background, including the basics of common law and principles of equity. This section is not for the faint of heart! But for those of you who are intrigued, keep reading.
Basics of common law
Common law—also known as case law or precedent—is developed by the courts, as opposed to statutes enacted by the legislature or regulations created by government agencies. If a statute or regulation applies to an issue in a case, the court must apply the statute or regulation as it overrides common law. However, if there are no statutes or regulations that apply to a distinct issue, courts turn to past decisions of cases with similar facts and circumstances. They then apply the prior case law or precedent to determine the outcome of the present case, making certain tweaks as needed to adapt to the distinct facts and circumstances of the present case. Indeed, no two cases before a court are exactly the same. This explains how common law morphs and evolves over time—as more and more cases are decided by the courts, more and more common law is created, refined, and even changed as social and cultural norms change. The court system in each state has its own common law that has developed over time, making common law—and the courts’ treatment of land contracts—vary quite a bit from state to state.
Issues of law and issues of equity related to land contracts
Common law is made up of two systems—law and equity. Issues of law are handled by applying the law as it’s written to the facts of the case—the law is precisely what the relevant statute, the regulation, or even the terms of the disputing parties’ contract says. So if a land contract has a forfeiture clause and the buyer defaults on the last installment of a 20-year contract, when deciding the issue of law, the court will say too bad, she loses everything because that’s what is written in the contract. In other words, when deciding issues of law, the court strictly enforces the law or the terms of a contract as written, with absolutely no exceptions.
Issues of equity typically refer to a set of remedies or procedures to ensure a fair outcome in the case. When faced with issues of equity, courts basically weigh the injustices of applying the law and the associated legal remedy, so to speak. Given a rare set of circumstances, the court will override the remedy that the law demands and create what’s called equitable relief to be applied in all similar circumstances. In this way, the courts have devised equitable doctrines to alleviate high-level social or economic inequities that arise when the law is strictly applied in certain situations. In the case of the land contract, some courts have stepped in and crafted a form of relief for the buyer that is more fair or equitable than completely forfeiting the land upon default even if that’s what the land contract expressly says.
Basically, some courts have said, well, in all fairness, if a buyer has built equity in the land for nearly 20 years, she should at least have an opportunity to make the final payment or at least get back the equity she’s invested just as a mortgagor does if she defaults on her home loan payment. Here, allowing the buyer to have another chance to avoid the harshness of a forfeiture clause is what’s considered equitable relief.
Originally, courts of law and courts of equity were actually separate. However, in the federal courts and in most states they have merged and a single court can decide both issues of law and issues of equity.
Why land contracts are treated differently in different states
The common law process of the court system and the distinction between issues of law and issues of equity explain why land contracts are treated differently state by state. Basically, state courts have struck a different balance in applying the strict law of forfeiture clauses and applying principles of equity or fairness when devising a remedy for when one party doesn’t hold up their end of the deal. Moreover, many state legislatures have also stepped into the mix because they have been unhappy with how their state courts have struck this balance. These state legislatures have enacted statutes to override the common law in their state on the issue of forfeiture clauses in land contracts. Again, common law of the court applies only when there’s no statute or regulation on point. Once a state legislature passes a statute governing the issue of forfeiture clauses in land contracts, the courts in that state have to disregard the common law precedent and strictly apply what the statute says to do from then on. Needless to say, it can get confusing!
Why land contracts are different from other contracts and areas of law
Land contracts are unique and different from other contracts and other areas of law precisely because of how the courts have applied the equitable conversion doctrine, as well as how the state legislatures have enacted specific statutes to deal with forfeiture clauses. Keep in mind, it’s only on a very rare occasion that courts will step in and override the terms of a contract based on an equitable doctrine. Courts are typically not as paternalistic and will completely defer to the free will of the parties to come up with their own terms under freedom to contract principles, and will apply those terms as written when deciding the outcome of a contract dispute. Moreover, farmers may get confused and think that perhaps they could get away with not abiding by employment laws or food safety laws on some kind of equitable grounds. Farmers might be thinking, why not just go to court and pull at the judge’s heart strings by arguing it’s too harsh and simply not fair to have to comply with these laws? But this won’t work. Employment laws and regulations at both the state and federal level override common law as these consist of statutes and regulations enacted by the state and federal legislatures or government agencies. Common law only applies when no statute or regulation is on point. So there’s no easy out when it comes to abiding by such laws and regulations.