Land Contract1

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:

Land Description

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.”

1.) The land contract is also called a contract for deed, installment land contract, a long-term land contract, an installment sale contract, bond for deed, and a land sale contract. Check with your state to find the official term used. 2.) The legal description of the property can be found on the deed, which is filed in the county recorder’s office.

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)at the execution of the Contract.

b. Monthly Installments with Interest.The balance, together with interest on the whole sum at the rate of 2% per annum, shall be payable in 120 monthly installments.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.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.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.

3.) While it may be a challenge to come up with the money, a significant down payment can be advantageous for the buyer if interest is involved. This is because it immediately reduces the principal owed, which is the basis for calculating how much interest accrues. In our example, for Frank and Claire, $10,000 is a majority of their savings, but they are able to make the payment. 4.) Under the monthly payment option with interest, the buyer will make even monthly payments throughout the term of the contract, here 10 years. However, because interest accrues on the unpaid principal, the down payment plus the monthly payments all added together are significantly higher than the total purchase price. For example, here the purchase price is $100,000, but based on the 2% per year interest, the total amount of monthly payments will be $109,908. This is on top of the $10,000 down payment. The difference of $19,908 is the cost incurred for having the seller finance the land over time. This payment structure is comparable to a typical mortgage. Note that a higher down payment will lower the total amount paid over the course of the land contract, as the down payment directly reduces the principal on which the interest is calculated (see table below). 5.) The installment payments don’t have to be monthly. They could be made on whatever timeframe makes the most sense for the parties and the situation. For example, it may make more sense for a farmer to pay quarterly, semi-annual, or annual payments based on the cash flow of the farming season. It’s up to the parties to negotiate. 6.) Under the no interest monthly payment option, the buyer makes even monthly payments for the entire term of the loan. No interest is charged, and thus the down payment plus the monthly payments all added up will equate to the total purchase price, here $100,000. The no interest monthly payment option is by far the most advantageous option for the buyer, but it is incredibly rare to find a seller willing to sell land on these terms. 7.) The following table compares the monthly payments and the total amount paid over the term of the loan for payment options with and without interest. Each assumes a purchase price of $100,000. Interest calculators are available online, which can help you determine how much you’ll pay in each scenario—simply search “interest calculator.”

8.) Under the balloon payment option, the buyer makes even monthly payments similar to the first two options. However, at the end of a set time period—here five years, but it could be more or less—the buyer will be required to make a “balloon payment” or lump sum payment to the seller for the total amount due. The buyer will need to fund the balloon payment when it is due or will be deemed in default. If this is the case, depending on the state, the seller could declare that the buyer is in forfeiture of the land contract and the buyer could risk losing all prior payments. Farmers entering land contracts with a hefty balloon payment should be cautious. Read the Land Contract Overview to learn more about risks and options when going the balloon payment route.

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

Prepayment

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.

9.) This is a very key provision, as it specifies when the payments are due and how they must be made. Here, they must be postmarked on or before the first of each month. The more thorough these details are set forth in the land contract the better, as the parties won’t be in doubt or dispute how payments are in fact made. 10.) Whether the buyer can prepay all or a portion of the purchase price before it’s actually due is 11.) This can be an option to negotiate if the seller is concerned about the tax consequences of an unanticipated large prepayment. By allowing prepayment only after a certain date, a full prepayment will be a lesser amount and will most likely not substantially increase the seller’s tax basis. 12.) Farmers should be wary of sellers who prohibit prepayment. Again, read your land contract carefully and try to negotiate with your seller to allow prepayment, at least under certain conditions (such as Alternative 1). 13.) Applying prepayments to the monthly installments in inverse order of maturity—i.e., payments from year 10 to year one versus payments from year one to year 10—means that the prepayment will not change any upcoming payments for the buyer. It’s not as though you make a large prepayment and then don’t have to pay for a few years. Instead, you have to keep paying the monthly installments, but the large prepayment will allow you to be paid in full and own title to the land at an earlier date.

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

14.) The seller must disclose all interests in the title in the land contract. This is a very important provision to review carefully. It will tell you if the land is subject to any mortgages, or rights of way, or easements. Basically, does anyone else have another right or interest in the land that might override the buyer’s ownership interest? Even outside the land contract, the buyer should conduct due diligence—or research extensively—the status of the land. One way to do this is to look at the deed itself, which will list certain interests. You can also go down to the county’s recording office to look through all the public records that are connected to the land. It sounds like a lot of work, but it’s well worth it to rest assured that you will own the land outright without anyone saying otherwise. 15.) The recording office is a governmental office that maintains public records and documents related to real property (land) ownership. The office stores public records including deeds, mortgages, liens, releases, leases, and other documents connected to land. Anytime there is an update to any of these documents, they need to be recorded so that the government and potential buyers can maintain a clear picture of who owns the land and who has various rights or interests in using the land. By recording the land contract at the county recorder’s office, the buyer is letting everyone know that she is buying the land. She will then be first in line so to speak to anyone who subsequently records an interest in the land. Let’s say that the seller enters a land contract with another buyer two years down the road behind the back of the initial buyer. In some states, if the second buyer records the agreement first, then the initial buyer is out of luck. So be sure to record! 16.) Right to possession is legalspeak for just that—the right to possess or physically access the land. Right to possession is different than ownership, which for the most part comes with the right to do whatever the owner wants within the confines of the law. In a land contract, the seller retains ownership until the buyer makes the final installment payment or pays the full purchase price. However, the buyer has the right to possess the land throughout the duration of the contract. Think of it like a tenancy situation during the phase of the contract when the buyer is making the installment payments—the buyer is more like a tenant. Once the final payment is made, the seller transfers title to the land and then the buyer is officially the owner. 17.) Along with the right to possession comes certain obligations that the buyer must abide by. Possessing the land is like borrowing it for the time being. If the buyer fails to make a payment or otherwise breaches the land contract, the seller will ultimately remain the owner of the land. These obligations are the legal standard for ensuring that the person who has the right to possess the land takes care of it as if it were her own—or leaves it in as good or better condition than she found it. This protects the seller should the land remain his.

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

18.) In a general warranty deed, the seller promises that he has legal right to convey the land, that the property is free of liens or encumbrances (other than explicitly listed in the land contract), that the title is not defective, and that he will deliver any document necessary to make the title good. These are all important legal claims that protect the buyer should something go wrong. Note that a farmer purchasing land should be sure to only purchase land that comes with a general warranty deed. There are two other types of deeds—a special warranty and quitclaim deed—both of which can go for a lot less money. With a quitclaim deed, no promise whatsoever is made—not even that the seller has the right to sell the land. With a special warranty deed, the seller only promises that he has not had problems with the title while owning the property—the state of the title that he purchased is not guaranteed. While tempting given the lesser purchase price, farmers should be very cautious of purchasing land under a quitclaim or special warranty deed, as they provide a lot less protection. For example, with both a special warranty and a quitclaim deed, the buyer will most likely not be able to mortgage the property in the future because the banks won’t trust the deed. Even if you don’t intend to mortgage the property yourself, this limitation will make selling the property more difficult down the road. Additionally, the buyer may have difficulty obtaining property insurance for the land. Insurance providers may not want to take the risk that someone else will show up with proper title to the land. It may seem strange and somewhat out of the pioneer days, but these things still do happen! 19.) Fee simple is a legal term that means absolute title to the land, meaning the owner gets indefinite rights to land. The owner has the right to use the land to the full extent of the law, exclusively possess the land, and the land remains with the owner until he or she sells or transfers it by deed or will. 20.) The deed tax—also known as the transfer tax—is a tax required by the county when property is transferred. It is generally paid by the seller. 21.) Typically, in land contracts, the buyer must pay the property taxes and assessments on the land. However, this term can certainly be negotiated between the parties. Either way, the land contract should specify who is responsible for covering this obligation, as 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.

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

22.) Just like property taxes and assessments, typically the buyer under a land contract is responsible for maintaining and paying for property insurance throughout the duration of the contract. This provision specifies the minimum requirements of the property insurance policy in terms of amount and types of coverage, which can all be negotiated. The parties should strive to strike the right balance for the particular piece of land and circumstance. Depending on the situation, other items to specify insurance coverage include: • Flood coverage. If any of the buildings, improvements, or fixtures are located in a federally designated flood prone area, and if flood insurance is available for that area, the seller may require the buyer to maintain flood insurance. • Earthquake coverage. If any of the buildings, improvements, or fixtures are located in a seismic design category C, D, or E according to FEMA, and if earthquake insurance is available for that area, the seller may require the buyer to maintain earthquake insurance. 23.) This clause protects the seller’s interest in the land and her ability to recover on the insurance policy should damage to the land occur. Remember, the seller still owns title to the land until the buyer makes the final installment payment or pays the purchase price in full. However, the insurance policy is in the name of the buyer. This clause may be better understood through an example. Let’s say a fire burns three acres of Claire and Frank’s apple orchard at year three of the land contract. At this point, the loss payable clause will kick in to determine how the insurance process and proceeds are handled between the seller and the buyer. Basically, the seller—here, Penny—will be afforded the same rights as an institutional bank in a mortgage situation. So, for example, if the buyer—here, the O’Conners—fails to inform the insurance company that the damage occurred, Penny could step in and take care of it to protect her interest. The following provisions include more specifics on how this all would play out. This is just one example of how insurance could be handled in a land contract. It’s really up to the parties to determine what is best for their specific situation. 24.) This “notice” provision makes sure that the buyer is in close communication with both the insurance company and the seller if and when damage to the land occurs and an insurance claim is filed. The buyer must notify the insurance agency to receive insurance proceeds on a claim, as it’s required by the policy. In addition, given the seller still technically owns the land, she’ll likely want to know what’s happening and do what she can to protect her interest in the land should the land contract ultimately fall through. 25.) This provision ensures that the insurance proceeds related to property damage actually go back to the land. Either the funds are applied to the purchase price or the buyer can choose to apply the funds toward the costs for repairing the damage so long as the seller approves of how the funds are spent. Using our example, let’s say that Claire and Frank receive $6,000 from the insurance company to cover the cost of the fire damage to the three acres of apple orchard. If Claire and Frank opt not to repair the damage, the $6,000 in insurance proceeds will go to cover the purchase price. The proceeds will be applied to the last installment payments first, which means that Claire and Frank still have to pay the monthly installments on schedule. However, they will be paid in full and receive title to the land sooner as the $6,000 is applied to the backend. Also, if Claire and Frank only have $5,000 left to pay off on the purchase price, they will get to pocket the remaining $1,000. 26.) If Claire and Frank opt to replant the orchard and conduct repairs from the fire, the $6,000 in insurance proceeds must be placed in a shared escrow account. This protects Penny, the seller, by giving her visibility and some level of control to prevent the funds from being swindled away. Keeping it in an escrow account ensures that Penny has full transparency to see what is happening to the money and that it is in fact being used to replant apple trees, repair the irrigation system, rebuild fences, and so forth. 27.) This provision explains how the escrow account must be managed. As it is written, the buyer has to get the seller’s approval on all the plans for repair before making the repairs. This way the seller has a say in the quality of the work and can provide input into what is actually done; after all, it is the seller’s land until the purchase price is paid in full. For example, Claire and Frank can’t use the money to build a pond if Penny insists that the damaged area remain an orchard. This provision also specifies who’s responsible if the insurance proceeds do not cover the full cost of the repairs, or conversely, if they exceed the cost of the repairs. Here, the buyer is responsible for covering the difference if the insurance proceeds are short. If they are in excess, the difference is applied to the purchase price. These are all essential points of consideration for the parties to negotiate should this scenario arise: Is insurance required? Who pays for insurance? What happens if the land is damaged? Who pays for any costs that aren’t covered by insurance? Who gets to decide whether and how repairs are made? The way all these issues are handled in this land contract is just one example. It’s up to the parties to negotiate what’s best in their situation. 28.) This provision specifies the terms of how the repairs will be conducted. It requires that any repairs are done in a professional manner, in accordance with best practices. This ensures that the buyer won’t make band-aid fixes and then run off as the situation implodes in the hands of the seller, given that the seller officially owns the land.

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.

29.) Liability insurance is different than property insurance; it covers injuries to people and damage or loss of personal property such as wallets, tools, and certain equipment. Land contracts typically require the buyer to maintain sufficient liability insurance should such a situation arise. However, these terms can be negotiated between the parties. 30.) This provision means that after the contract date, the seller is not on the hook for injuries that occur on the property to third parties—such as a visitor or employee, or the health insurance company of a visitor or employee. This provision also includes an indemnification clause, which is simply a promise by another party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, the indemnification provision means that if someone sues the seller for an injury that occurred on the property after the contract date, the buyer has to step in and help defend the lawsuit and pay for any costs or damages as a result—unless the injury is somehow tied to the fault of the seller, which the next provision addresses. 31.) Similar to the previous provision, this provision means that the seller acknowledges that the buyer is not on the hook for any damages or costs associated with an injury of a third party that is somehow linked to the fault of the seller. This provision also includes an indemnification clause. This time, if someone sues the buyer for some injury that occurred on the property that was caused by the negligence or wrongful act of the seller, the seller must cover the costs. Basically, each party pays for the faults of their own actions.

Insurance Generally

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

Improvements

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

32.) This simply reiterates that the buyer must maintain insurance by a legitimate insurance provider and must stay up-to-date on the payments. 33.) This clause sets forth the arrangement for making improvements or permanent changes to the land. Often farmers want to make substantial improvements to the land right away. However, with a land contract, they need to be careful as they don’t actually own the land until the last payment is made and therefore risk losing everything. This clause defines improvements in a way that allows the farmer to take anything so long as it does not cause permanent damage to the land. Any improvements require prior written consent of the seller. This protects the seller’s interest; after all, she still owns the land. So, if the farmer decides to build a moveable greenhouse or grow tunnel, then that’s fair game. However, if the farmer builds something more elaborate that is attached in a way that would damage the land upon removal, then that will stay with the land and the farmer would lose all the costs incurred in making the improvement. This is definitely one of the drawbacks of a land contract. The parties can certainly try to negotiate an arrangement where they split the difference or come up with another way to allocate the costs. Here, this would be on a case-by-case basis, as unless otherwise agreed in writing, the farmer bears the cost of the improvements

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.

Condemnation

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.

34.) Waste refers to harm to the property. Affirmative waste refers to willful destruction of the property that lowers its value, including depleting natural resources available on the property. Basically, Claire and Frank cannot mine all the coal on the land, burn down an orchard, or destroy a house on the land. Permissive waste refers to negligence or neglect that allows the land to fall into disrepair. Negligence is the failure to do or not to do something that a reasonable person would do in similar circumstances. For example, a reasonable person would perform ordinary repairs and maintenance to the irrigation system. If Claire and Frank fail to do so and the irrigation system breaks, they have breached this provision of the contract because they have committed permissive waste. If they deliberately burn down the orchard, they have breached this provision by committing affirmative waste. Provisions prohibiting the person who is in possession of land to commit affirmative and permissive waste are standard in all land contracts as well as leases. 35.) This means that the buyer cannot encumber or give legal rights to anyone else in the land without the prior consent of the seller. This could include granting someone an easement or right of way or taking out an equipment loan using the property as security. Note that some states allow the buyer to obtain a mortgage on a land contract, for example to pay a balloon payment. If your state allows for it, the contract may stipulate that the buyer may obtain a mortgage on the land. It will also need to specify whether the bank or the seller will be the senior creditor in such a situation. Oftentimes, institutional lenders will insist on being first in line, yet the seller will likely not agree to being a junior creditor. This is best explained with an example. Let’s say that Claire and Frank decide to mortgage the property to help with their monthly installment payments. However, in many states, the land contract is treated as a mortgage. If this is the case, the seller, here, Penny, would be considered first in line as in effect she is financing the purchase price through the land contract. So either Penny would have to agree to be second in line or the institutional bank would have to agree to take a second lien on the property and be second in line to Penny. This illustrates how challenging it can be to take out a mortgage on a property subject to a land contract! 36.) This provision kicks in if the government comes in and condemns the land for whatever reason or decides to use eminent domain rights to purchase the land to, for example, build a highway. This is another important consideration, as imagine if this were to happen at some point through the course of the land contract: who gets what or who loses what? It’s important to lay out the terms clearly at the outset. The way it’s written here is just one example to fairly strike the potential risk of loss between the parties.

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

37.) This provision protects both parties should one or the other fail to make payments, such as taxes or insurance premiums or other obligations. If this happens, the other party can make the payment and effectively be reimbursed for it. This helps to prevent penalty fees from piling up. However, covering these payments does not alter when the installment payments are due. 38.) While it’s not titled as such, this is what’s known as the forfeiture clause. It basically lays out what happens if the buyer fails to make an installment payment or balloon payment when due or otherwise fails to abide by the terms of the agreement such as maintaining insurance or not properly maintaining the land. The buyer could then be deemed in “default,” and this “default and remedies” provision—i.e., forfeiture clause—will kick in. Forfeiture clauses in a land contract can be rather paradoxical. That’s because no matter what the parties agree to in the contract, a court may in fact apply a different set of rules based on fairness and equity. 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, the Overview of Land Contracts section outlines some of the various ways courts deal with forfeiture clauses. Be sure to review that section if you want to more fully grasp the specific risks and processes involved should you happen to miss a payment or otherwise default on the land contract. 39.) This “time is of the essence” provision is a legal clause that reiterates the importance of making payments on or before the due date—not a day late! 40.) Forcing the seller to act through state foreclosure laws—essentially treating the land contract as a typical mortgage—affords the buyer the most protection. Many states are moving in the direction of treating land contracts as mortgages, regardless of what the contract says. But if your state allows the seller to use stricter remedies, putting this clause in your contract affords the buyer the utmost protection in the event of default. This is because it forces the seller to go through lengthy and costly foreclosure proceedings in order to maintain her rights in the land should a buyer be deemed in default. A lot of sellers would prefer not to go through this process and may prefer to negotiate another strategy, such as lengthening the grace period to be sure the contract does not ultimately fall through. Several states default to this option, including: Indiana, Kentucky Maryland, and Oklahoma. Additionally, courts in Ohio, Nebraska, New York, Florida, and California are moving in the direction of treating land contracts as mortgages. 41.) This is a grace period, which typically will last between 30 and 90 days. 42.) This option grants the buyer slight protection. In the event that the buyer fails to make a late payment within the allotted grace period of 30 days, the buyer must pay the full balance of the contract, or face foreclosure. However, if the buyer makes the late payment within the grace period, the land contract continues as if there was no problem. Note that while this option affords the buyer some protection, in the event of a breach, the buyer essentially must make a balloon payment—or a payment in full by the specified time. Several states will default to this provision, including California, Florida, Hawaii, Missouri, Montana, South Dakota, Arizona, Iowa, Minnesota, North Dakota, Oregon, Texas, and Washington. 43.) Generally, the second period covers any failures or breaches under the contract other than making the installment payments on time, such as failure to maintain real estate taxes, proper upkeep, etc. The way this is written allows for a longer grace period given the breach is less serious and may take longer to fix. This longer grace period for non-payment-related issues could be incorporated in the Treating as Mortgage option as well. It’s up to the parties to negotiate what grace periods apply for what, these are just examples. 44.) In the event that the breach is not cured within the stated number of days and the buyer fails to make the balloon payment, the seller will generally have a number of potential options depending on state law, including initiating strict foreclosure (which basically means the buyer loses all interest in the land, as well as all prior payments), filing a lawsuit for the unpaid purchase price, having the buyer ejected from the land, and so forth. 45.) Blanket Forfeiture Clause. Farm Commons strongly advises farmers not to enter into a land contract with a provision similar to this option. This option is only provided here as an example of a very seller-friendly provision that should be seen as a red flag to potential buyers. It allows the seller to immediately retake the land and keep all prior payments upon failure to make ANY payment or failure to perform ANY duty. This is a very harsh and unfair consequence, so be wary. 46.) Of note, even if the seller tells the buyer in a conversation that it’s okay to miss a month or to pay two months at once, unless such an arrangement is in writing, the seller can decide at any time NOT to allow this and instead declare that the buyer is in default. In other words, get it in writing. Even if it’s not required in the contract, it is best practice to get an agreement for delayed payment in writing, as it helps provide evidence of your agreement should an issue arise. 47.) Also of note, even if the seller has allowed the buyer to make late payments in the past, unless the arrangement is in writing, the seller is not required to continue to allow late payments in the future and can say it’s a default. In other words, just because the seller is nice and forgiving once doesn’t mean she’ll always be. 48.) Again, this is a very harsh forfeiture clause and farmers are advised to stay far away from land contracts with similar provisions. Needless to say, this provision is not legally enforceable in many states.

Binding Effect

The terms of the Contract shall run with the land and bind the parties hereto and the successors in interest.49

Transferability

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

Severability

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

Headings of the paragraphs of the Contract are for convenience only and do not define, limit, or construe the contents of such paragraphs.52

Entire Agreement.

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

52.) This is another legal clause found in most contracts. It means that if and when a court interprets the contract, the headings aren’t determinative of what the provisions themselves actually mean. 53.) This means that this contract overrides any preliminary agreements or arrangements that the parties may have entered into or discussed before they signed this contract.