Vacant Land Purchase Agreement: What is it?
A vacant land purchase agreement is a contract binding together the seller of an undeveloped piece of land with the buyer, and lays out the basic terms of the sale. While a purchase agreement for developed real estate contains a number of specific provisions that are pertinent because of the structures on the property, an agreement for transferring vacant land is much simpler, and does not put as much priority on certain items that may be crucial to a sale.
The most basic function of an agreement for the sale of land is to provide some clarity in the transaction, for both the buyer and the seller. The requirements for disclosure related to development issues are different from typical disclosure requirements in areas where developed real estate sales take place, such as the housing market . For instance, the disclosure regarding lead-based paint does not apply in the same way to an undeveloped property. By specifying these details in the purchase agreement, the buyer and the seller can avoid confusion.
When negotiating an agreement for the sale of a vacant piece of land, or an undeveloped piece of real estate, it’s a good idea to consult with an experienced real estate attorney. Often, sellers of land will take on a buyer with little to no formal oversight in the process. This can lead to complications during the transfer of the land or after the property is sold. Enlisting the help of an attorney minimizes the number of surprises and can prevent any litigation issues from coming up in the future.
Key Features of a Vacant Land Purchase Agreement
A buying and selling of Raw land is usually a very simple transaction that involves the agreement of a seller to sell vacant land for a certain sum of money to a purchaser who arranges financing for the purchase and pays the seller the money upon closing.
The subject vacant land is usually unimproved, vacant, and lacking any certificate of occupancy. To go through the basics, when buying and selling raw land, most contracts contain the buyer information, seller information, description of what land is being sold, purchase price and payment terms, contingencies, and closing terms.
Some of the other items that would be found in a vacant land sales contract or agreement are the title commitment, survey, land use restrictions, zoning restrictions, easements and building setbacks, and access issues. You would also know if any costs are going to be shared with the adjoining neighbors such as private roads and storm water management, and then there can also be issues with clearing vegetations, removal of structures, and environmental issues.
When you read about a vacant land real estate purchase agreement, there is a lot of information involved, but shortly summed up, it is a listing of the buyer and seller, the legal description, and price and terms.
Importance of Due Diligence Before Signing
Any freehold purchase constitutes a serious financial commitment, and vacant land is no different, notwithstanding the fact that the costs of vacant land can be considerably less than what developed property would be. Given the importance of this type of investment, doing a proper due diligence before signing a vacant land purchase agreement becomes extremely important. Due diligence can be a fairly broad term. It can refer to merely asking general questions of the vendor or their agents or it can refer to more extensive actions including insights into zoning and any possible legal prohibitions regarding the construction of use of any building on the land. It can also relate to legal title and, with the help of qualified professionals, environmental issues specific to the region where the property is located. It can involve any number of inquiries depending on the complexity of the transaction at hand. Zoning is rather straight forward in Ontario. It is regulated by the municipalities whose land you are buying so look to their planning department and website to understand how the area is currently zoned. Zoning is not static and may change over time so it is also prudent to look back on prior zoning by-laws to see if changes have been made. There are also possibilities for zoning exemptions and legal non-conforming rights which may require a further level of inquiry as to past and current uses. Zoning applications can be submitted to the appropriate authority where someone wishes to have the zoning exemptions granted but the process can take considerable time. Thus, for those who are looking for a pure vacant lot without the headache of zoning issues when trying to commence construction of a new building, it may be wise to conduct the appropriate due diligence prior to making the investment. In other words, ensure that the municipality allows what you want to build on the property before you buy it! Keep in mind that each community will be different in terms of how fast they act on such applications and you will want to start the process well in advance of any deadlines. The same can be said for environmental issues as well. There is even a presumption that when you buy the land, you are responsible for any pollution and think "brownfield" here. If there are, for example, any industrial uses in the area, you will want to properly investigate whether any contaminants existed on the property that you may one day purchase. Again, the length of time it takes to get information in terms of what was once on the property can be lengthy. Environmental assessments (Phase I and Phase II) may be warranted as well as other forms of reporting including a ‘Certificate of Property Use’ from the Ministry of Environment. The help of professionals can be very useful here in assisting you to investigate these issues for your land purchases. In addition to these types of inquires, you should also conduct your own internal due diligence to ensure that you do the following: Doing all of the above will go a long way to helping you make an informed decision.
Purchase Agreement Contingencies – Key Insights
Contingencies on the part of the purchaser or seller are common in land purchase agreements. The role of a contingency is to protect the purchaser in certain situations if there is uncertainty regarding whether the purchaser can complete the transaction. For example, a purchaser may not be able to obtain financing for the purchase. A contingency clause in an agreement allows the purchaser to get out of the agreement without facing potential legal liability.
It also protects the seller by holding them accountable for a condition that they were unaware of. For example, a seller may be selling a parcel of land that the purchaser intends to build on. The purchaser, as part of the conditional period, will want to condition the sale on the ability to get a permit to build from the local municipality. If the municipality denies the permit, then the purchaser can walk away from the deal, but the seller would not then have to market the land again.
There are a number of standard contingencies, such as obtaining financing, obtaining permits, review of and satisfaction with agreements related to the sale, and the purchasers ability to investigate the land during the conditional period. If any of the contingencies are not satisfied, then the agreement can be terminated without further obligations or liability.
Negotiation of Vacant Land Purchase Agreements – What You May Include
Negotiating the sale price: The most significant aspect of any purchase agreement is the sale price, and there are options for setting the price. You have the option of purchasing the property with cash (whereby you pay the full purchase price directly to the seller) or with seller financing (where you’ll pay the seller back in installments). If you’re going to go with seller financing, ensure that the interest rate the seller agrees to isn’t of an usurious nature. If the rate is higher than what multi-state usury limits allow, the seller may be required to write off some of the interest.
Negotiating deposits: As part of the negotiation, you should also discuss the amount of the deposit that you will be offering to purchase the property . Be sure not to offer a deposit that is too high, as attractive as that may seem to the other party. Your deposit should cover all your costs and avoid putting you in a position where the seller could keep your deposit if you walk away from the deal. Keep in mind that you have up until the closing date to do your due diligence on the property and cancel the transaction if you find something unfavorable.
Negotiating timeframes: Timeframe negotiations are important, as you won’t want to lose time unnecessarily during the purchase process. Ensure that the seller provides a specific date for the property closing to take place (typically somewhere between 30 and 90 days after the seller and buyer have signed the contract). Be prepared to negotiate on the date if the seller has plans to use the property until the end of a particular season.
Legal Considerations and Professional Advice Needed
In addition to all of the potential benefits that can be had through the use of vacant land purchase agreements, there are also a good many risks that a seller and/or a buyer of real estate would wish to avoid. Of course it is always preferable to avoid these types of risks in the first place. However, in the event that a risk does become a reality, the same must know how to be dealt with or remediated as expeditiously and economically as possible.
Specifically, both the seller and purchaser should at least be aware of all of the potential issues that might arise in the context of a commercial real estate transaction. These issues include: adverse possession rights, unrecorded easements, real estate tax provisions, boundary line issues and mineral rights.
Fortunately, many of these issues can be addressed by means of an experienced and specialized attorney and real estate agent. In fact, while many people do think that real estate agents are integral to the process of buying and selling any type of property, few buyers and sellers appreciate the fact that an attorney is equally important throughout the entire process, before, during and after closing.
Closing: What To Look For
Once all of the terms and conditions are met, it is time for closing. At this point, the seller will want to have its attorney prepare a special warranty deed. This deed should clearly state that in exchange for the payment of purchase price, the seller is conveying its interest in the vacant piece of land.
At the closing, both parties must sign any necessary documents and exchange money or notes, as per the purchase agreement. The closing usually occurs in the county where the vacant land is located. The closing date is typically determined at the end of the due diligence period. Once the transfer of the title is complete, the buyer is the lawful owner of the vacant land .
Sometimes, the closing takes place months or even years after the purchase agreement is signed. In this situation, the seller may not have to hand over the key or possession of the vacant land until the buyer has a project ready to be built.
In some cases, the timing of construction could also dictate the closing date for the vacant land. There are times when the construction of homes or commercial buildings on the land must be started within a certain number of days after closing. In this case, the seller will need to provide for an extension of the closing date. In other instances, the seller may want to establish a timeline for clearing the land at closing.