Paddle Trails: Legal Issues

1. Paddle Trails:Legal Issues Theodore A. Feitshans N.C. Cooperative Extension North Carolina State University Department of Agricultural & Resource Economics (919) 515-5195 ted_feitshans@ncsu.edu

2. Section I: Access • Navigable waters • Historical use • No restriction on access • No permission to cross private lands • Non-navigable waters • Property of the adjoining landowner • Adjoining landowners own to middle of main channel • Spoil islands

3. Section I: Access • Means of access • Fee simple • Lease • Conservation easement • License (written or oral)

4. Summary of leasing issues • Identify key parties and components • Length of Lease • Use of the property • Insurance coverage/liability and risk of loss • Responsibilities • Improvements to the property • Payments, taxes and charges • Disposition of the property at the end of the lease

5. What is rented • Land suitable for padle trails? • Other land---pasture / crop land? • Conservation rights? • Access to buildings? • Storage rights? On land? in buildings? Equipment? • Hunting/fishing/recreational rights

6. Lease terms to consider • Attorney fees clause • Environmental liability clause • Indemnification • Prohibited uses

7. Leasing land for paddle trails • All is negotiable. • Avoid forming an employment relationship • When and how should be avoided to extent possible. • Avoid forming a partnership. -Share agreements, family relationship, and excessive management might be viewed as a partnership. • Written lease, proper filed and carefully drafted by competent counsel

8. Legal issues • N.C. Statute of frauds – all leases not capable of completion within 3 years of making are void if not in righting • Recorded with the Office(s) of the Register of Deeds for the county(ies) where the property is located • Oral leases are not suitable for paddle trails due to the duration needed

9. Legal Issues • Year to year (or longer) oral and written leases are automatically renewed unless notice given 1 month before end of lease. • Renewal may be prohibited or modified by lease terms.

10. Due Diligence - Landowners • You are a creditor of the tenant • Credit check • Criminal background check • If tenant is a corporation/LLC/partnership obtain agreement to check owners/spouses • Owners/spouses should cosign lease

11. Due Diligence - operators • Check title/lien records • Check for hazardous waste • Check zoning/land use ordinances • Are there other users of the property? • Has landowner imposed a duty on them to protect the paddle trail operation?

12. Landowner security issues • UCC-1 – initial filing of financing statement - filed in the Office of the Register of Deeds in the county where the property is located (renew every 5 years) • Lease filed in the Office of the Register of Deeds in the county where the property is located • Other UCC liens (e.g., agricultural) filed with the Office of the Secretary of State • Lease should require grower cooperation in perfecting liens • Escrow for restoration of property

13. Security issues • UCC-1 – initial filing of financing statement - filed in the Office of the Register of Deeds in the county where the property is located (renew every 5 years) • Lease filed in the Office of the Register of Deeds in the county where the property is located • Improvements to property • Right to remove or be compensated – need to address in lease

14. Legal Issues • If life estate is involved, signature of remaindermen on lease highly desirable. • Restrictions on life tenant’s use of the property: • Waste.

15. Additional lease terms • Time is of the essence • Choice of law/forum (generally, but not always, where the real property is located) • Landowner’s right-of-entry to inspect • “as is” • Alternative dispute resolution clause • Mediation/arbitration • Force majeure clause

16. How are Payments made? • When are payments to be made? Annual, semi annual? • Late payment fees?

17. Legal Issue • Avoid bankruptcy • Do financial due diligence---credit check • Engage lawyer who understands bankruptcy to draft lease • Whether real or personal property involved likely to determine whether included in bankruptcy estate • Landlord should reserve right to tend manage paddle trail operation or find a substitute manager if tenant files for bankruptcy. • Anti-assignment clause and anti-sublet clauses

18. Government Program Payments • Who receives the benefits of governments programs should be negotiated. • EQUIP $$$ and tax implication • Right to government payments for disasters, conservation and program deficiencies should be negotiated.

19. Hunting Rights • Hunting rights • Who has rights? Landlord, Tenant • When do they have rights? (dates) • In short….spell out all issues that you care about. • If these rights are not included it should be explained as “no hunting rights are included.” • Right of operator to control pests

20. Heirs and successors • The terms of the lease are generally binding on the heirs, executors, administrators, and successors of the landlord and the tenant. • However, in the event of the death of the tenant, the successors may want to reserve the right to give written notice to terminate the lease at the end of the current year. • Divorce, foreclosure, sale, gifts • Assignment or sublet of lease

21. Uses of Property • Good Management practices • Maintenance of ditches, culverts, water and roads on property. • Establish hazardous substance protocol. • Allow customarily used chemicals only? • Controlled substance use • Non-monetary grounds for eviction

22. Insurance coverage/liability and risk of loss • Is the landowner or operator responsible for damages or injury to others occurring on the property? • Is the landowner or operator responsible for damages to or arising from storage of equipment or chemicals on the property?

23. Insurance coverage/liability and risk of loss • Will the operator hold the landowner harmless from liability for injuries and damages? • Will the landowner hold the operator harmless from liability for injuries and damages? • Will either party pay the costs of the other for defending a lawsuit? • Which party assumes responsibility for procuring liability insurance? Hazard insurance?

24. Insurance coverage/liability and risk of loss • How much insurance coverage is required? • Who will be responsibility for the cost of the insurance policies? • Are both the operator and landowner be named as the insured? • Duty of the operator provide the landowner a current certificate of insurance. • In N.C. the tenant bears the entire risk of loss unless the lease states otherwise

25. Responsibilities • Who is responsible for control of noxious weeds, non-native invasive species and pests? • What is the appropriate method of control of weeds and pest? Who determines? ---Lease may describe the weed control program. (spraying, clipping, bush hogging) • Who is responsible for preparation and implementation of an erosion and sediment control plan, if applicable?

26. Responsibilities • Who is responsible for preparation of a nutrient management plan, if applicable? • Who is responsible for maintenance of the property (for example, repairs)?

27. Responsibilities • Who is responsible for maintaining fences? • Who is responsible for liming and fertilization? • What standards are to be maintained and who enforces standards?

28. Payments, taxes and charges • Who is responsible for paying the real property taxes? • Are rental payments to be made to coincide with real estate taxes due? • Who assumes responsible to ensure the property qualifies for use value assessment for local real property taxes? • Does landowner risk loss of use value?

29. Disposition of the property at the end of the lease • Will the tenant be paid for remaining lime or other soil enriching measures that survive the end of the lease term? If so, how will the reimbursement be calculated?

30. Finding an attorney • Knowledge of paddle trails • Knowledge of long term leasing…not a house lease. • Written retainer agreement. • Availability by phone. • Compatibility. • Price structure for services.

31. Leasing: conclusions • Get it in writing • Consult with a qualified attorney • Do due diligence including a credit check • File UCC appropriately • File the lease • Ask a lot of questions of attorney • Make sure this is what you want to do. Does it meet your financial and personal goals and interest.

32. What is a conservation easement? • Purpose • Interest in real property • Duration • Term • Perpetual • Restrictions • Negative • Affirmative • Who may hold • Government • Land trust established under IRC §501(c)(3)

33. Law specific to conservation easements • Conservation and Historic Preservation Agreements Act • Avoids common law restrictions • Avoids Real Property Marketable Title Act • Complies with requirements of federal tax law

34. Formation: Landowner disclosure obligations • Known title defects • Existing security interests • Marital status • CERCLA hazardous waste • Underground storage tanks • Neighboring land uses - present/planned • Baseline study

35. Formation: Conservation agency obligations • Title search/records review • CERCLA • Due care (due diligence) • Indicia of ownership • PESA (?) • Full discussion of plans/objectives/goals • Discussion of plans for transferring rights • Baseline study

36. Preparation and recording of documents • Deeds • Agreements • Supplemental documents • Who pays?

37. Conservation easements created under other law • 1996 FAIR Act/2002 Farm Bill • Migratory Bird Hunting Stamp Act • Section 404 of the Clean Water Act - mitigation agreements • Different/no tax benefits

38. Scope of the easement • Physical • Boundaries • Restrictions • Negative • Affirmative • Access by conservation agency • Maintenance by landowner and/or agency

39. Scope of the easement (continued) • Activities outside the easement boundary • Changed circumstances • Neighboring property • Agricultural/Forestry technology • Loss of protected feature

40. Conservation easements: Tax Issues • Property tax • Federal income tax • N.C. income tax • Federal estate tax

41. Property Tax • Reduces FMV • N.C. law requires that county tax authorities to consider easement

42. Federal Income Tax • Charitable deduction • FMV before easement less FMV after easement • May spread over 5 years • avoid limitation on charitable deduction

43. N.C. Income Tax • Charitable deduction • Unaffected by use of conservation tax credit • Conservation tax credit

44. N.C. Conservation Tax Credit • Qualifying use • Beach access • Access to public waters • Access to public trails • Fish & wildlife conservation • Other land conservation purposes • 25% of FMV • $250,000/$500,000 annual limit

45. N.C. Conservation Tax Credit (continued) • Qualified recipient • Fee or conservation easement • No reversion • Certificate from DENR • Five year carry-forward

46. Federal Estate Tax • Charitable deduction (testamentary gifts) • 40% reduction in FMV of property subject to conservation easement • Subject to exclusion limitation • 2000 - $300,000 • 2001 - $400,000 • 2002 - $500,000

47. Example without Conservation Easement (for a death in the year 2000) • 100 acres @ $180,000/acre = $18,000,000 • $1,290,800 tax on first $3,000,000 • $8,250,000 tax @ 55% on remainder • $9,540,800 - 345,800 (unified credit - $1,000,000) = $9,195,000 tax due

48. Example with Conservation Easement (for a death in the year 2000) • $100,000 value with conservation easement • $17,900,000 charitable deduction • Reduce value of property in estate by 40% • Value of land in estate = $60,000 • $940,000 of unified credit remains to apply to other property

49. Compliance & transfers of rights • Who pays for enforcement? • Attorney fees • Monitoring

50. Compliance & transfers of rights (continued) • Actions of third parties • Trespassers • Tenants • Legal actions • Eminent domain • Non-governmental • Cartway proceeding