Introduction

Owners Play Crucial Funding Role

A land trust cannot meet its obligation to monitor land under conservation easement and uphold an easement’s conservation objectives and restrictive covenants without adequate funding. Obtaining funds that can support the land trust in carrying out its duties in perpetuity presents a major challenge. Funding commitments from easement-granting landowners—typically a conservation project’s strongest supporters—play a critical role in meeting the land trust’s funding need.

When seeking these commitments, land trusts employ various strategies to balance the need for sufficient funds to support the land trust’s long-term costs with the need for the amount requested of landowners to be affordable and acceptable. The WeConservePA guide Stewardship Funding Arrangements: Options for Financing the Obligations of Conservation Easement Holders reviews these strategies.

Extending Obligation to Future Owners

A compelling strategy with a winning track record involves obtaining a financial commitment from the landowner that binds not only them, but future owners as well. (In other words, the burden of the commitment is spread over many generations of owners rather than only the owner who grants the easement.) This type of promise is commonly referred to as a “running covenant”–a covenant that runs with the land, obligating each successive owner by virtue of their ownership. For this type of forward-looking commitment, careful drafting is essential to ensure adherence to the promise. Issues of enforceability of running covenants are addressed in the WeConservePA guide Legal Considerations for Stewardship Funding Arrangements.

Freestanding Document vs. in the Grant

A threshold requirement to establish a running covenant is ensuring that every future owner will be on legal notice that the covenant exists. This is accomplished by ensuring the commitment appears in the public record. In the context of binding future owners to a funding commitment made by the present landowner for easement stewardship, two primary approaches are available:

1. Document the commitment in a free-standing, purpose-built recorded document; or
2. Include the funding covenant in the document that grants the conservation easement.

There are substantial reasons favoring the former. Most notably, a free-standing covenant may be used to grant to the easement holder a security interest (mortgage) in the conserved property, which reduces the risk of non-payment by landowners. The guide Stewardship Funding Arrangements reviews the advantages of the free-standing document; for those using this approach, WeConservePA provides the Model Stewardship Funding Covenant.

Despite the compelling reasons to use a separate instrument, there are arguments for implementing a covenant for funding easement stewardship within the grant of easement itself. Most notably, this approach seems more acceptable or easier to implement for both landowners and land trust staff. Again, see Stewardship Funding Arrangements for discussion.

Much of the content of the Model Stewardship Funding Covenant can be adapted for use in drafting a funding covenant to be placed in the easement instrument. This guide supplements this material with specific guidance for placing the covenant in the easement instrument.

Best Practices

Make It Conspicuous

Barring extraordinary error, a stewardship funding covenant recorded in the public records as its own distinct document will be noted as a discrete line item on a buyer’s title report. A funding covenant placed within the grant of easement stands a much greater chance of being missed in the title work.

If the parties fail to identify the payment obligation prior to the sale transaction, the right of the easement holder to collect is not waived, but the best opportunity to receive payment will be missed. When the obligation is recognized and considered prior to closing, the required amount may be listed as a line item on the settlement statement and paid out of funds collected from the parties at the closing table. If that opportunity is missed, collecting the payment can become arduous.

Drafters should presume that no future party will read past the first page of the grant of easement. As such, conspicuous notice should be included on the first page, stating for example:

NOTICE: FUNDS DUE UPON TRANSFER OF PROPERTY. Section 8.14 of this Grant requires payment to Holder upon each Transfer.

The ideal place for this notice is typically above the document title, but below the space reserved for the recording caption. Consider using a bolded font, text size larger than the body text of the document, or other techniques that help the text draw a reader’s eye. Include a clear reference to the article or section where the covenant is located in the document.

Drafters may go further, summarizing the substance of the commitment. For example, in the case of a transfer payment based upon a fraction of the sale price of the property:

NOTICE: A payment equal to one percent of the Fair Value of the Transfer is due upon each Transfer of the Property. See article 8 of this Grant.

Prominent notice also serves to draw the attention of a casual reviewer of the easement to the existence of the obligation.

Place the Covenant to Avoid Disruption

A grant of conservation easement serves the fundamental purpose of empowering the holder to block land uses inconsistent with the conservation objectives. Affirmative obligations, including stewardship funding covenants, constitute a peripheral matter—functionally distinct from the servitude established by the grant. While choice of location of a funding covenant within the document is unlikely to impact the covenant’s legal effect, placing the covenant with other miscellaneous provisions is sensible and avoids disrupting the logical ordering of provisions and flow of text focused on the grant’s primary function. For example, when using WeConservePA’s Model Grant of Conservation Easement and Declaration of Covenants, the covenant could be placed in article 8 “Miscellaneous” (with notice of the covenant placed on the first page of the document).

Draft Carefully

As described in Legal Considerations for Stewardship Funding Arrangements, a stewardship funding covenant enforceable over multiple ownerships must meet the legal requirements of a running covenant. It must state the intention of the parties to establish a running covenant, describe the method by which payments will be calculated, and articulate the purpose of the covenant. Drafters of stewardship funding provisions in grants of conservation easement may adapt one or more of the covenant provisions found in the Model Stewardship Funding Covenant, with careful attention paid to defined terms and internal references.

Language to establish a running covenant

By its nature and language, a conservation easement “runs with the land” meaning it binds all future owners of the property without the need to obtain their individual, specific assent. A stewardship funding covenant, when placed within the grant, should include a preamble with legally operative language to ensure its enforceability against future owners of the property. For example:

The undersigned Owner or Owners, on behalf of themselves and all future Owners, covenant to Holder, as a covenant running with the land, to make payments to Holder as follows . . .”

Calculation and Purpose of Contribution

The method of calculating the contribution and the purpose of the payment are two sides of the same coin. They must have a rational relationship. To review a variety of examples, consult article 2 of the Model Stewardship Funding Covenant, which contains sample provisions for a range of covenant types. One or more of these provisions may be adapted for use within a grant of conservation easement.

For example, the following provision establishes a percentage-based payment due upon transfer, with a statement explaining its purpose:

A payment equal to __% of the Fair Value of the Transfer is due upon each Transfer of the Property. “Fair Value of the Transfer” means the greater of (a) the actual sale price (if applicable); or (b) the computed value of the property as calculated for transfer tax purposes (county-assessed value multiplied by the common level ratio factor for the county in which the Property is located). This arrangement is made in recognition of Holder’s perpetual obligation to uphold the Conservation Easement, to otherwise advance the Conservation Objectives of the Conservation Easement, and—together with Holder's other arrangements—to ensure Holder’s continuing and durable capacity to carry out its charitable mission to protect and care for land, including the Property.

Clarifying Matters

Finally, the funding commitment should include any applicable provisions limiting, clarifying or qualifying the particular covenant. For example, see the content of article 3 of the Model Stewardship Funding Covenant.

Sample Covenant for Transfer Fee

The following sample stewardship funding covenant, designed for placement in a grant of conservation easement based on the Model Grant of Conservation Easement and Declaration of Covenants, implements percentage-based payments due upon each transfer of ownership of an eased property: (As previously discussed, it needs to be coupled with a notice placed on the first page of the grant.)

8.14    Stewardship Funding Covenant

The undersigned Owner or Owners, on behalf of themselves and all future Owners, covenant to Holder, as a covenant running with the land, to make payments to Holder as follows:

1. Payments Due Upon Transfer. A payment equal to __% of the Fair Value of the Transfer is due upon each Transfer of the Property. This arrangement is made in recognition of Holder’s perpetual obligation to uphold the Conservation Easement, to otherwise advance the Conservation Objectives of the Conservation Easement, and—together with Holder's other arrangements—to ensure Holder’s continuing and durable capacity to carry out its charitable mission to protect and care for land, including the Property.
2. Definitions. As used in this section:

1. “Transfer” means the direct or indirect sale, assignment, transfer, devise, or conveyance of the Property or any portion of the Property, whether it is voluntary, involuntary, by operation of law, or otherwise. It includes a change in the ownership interests, however effected, if the change of itself, or together with prior changes, has the effect of transferring, directly or indirectly, sixty percent or more total ownership interests in the ownership of the Property within a period of ten years.
2. “Fair Value of the Transfer” means the greater of (a) the actual sale price; or (b) the computed value of the property as calculated for transfer tax purposes (county-assessed value multiplied by the common level ratio factor for the county in which the Property is located).
3. “Exceptional Transfer” means a Transfer to a spouse or lineal descendant of one or more of the undersigned Owner or Owners, or Transfers to a trust for the benefit of such spouse or lineal descendant.

3. Limited Waiver for Exceptional Transfers. Whenever a payment becomes due by reason of the occurrence of a Transfer, Holder agrees to waive its right to Payment if the Transfer is an Exceptional Transfer, provided that Holder is notified at least 30 days in advance of the Exceptional Transfer; and, at the time of the Exceptional Transfer:

1. No default in Payments has occurred and is continuing uncured;
2. The Owners following the Exceptional Transfer assume the obligation to make Payments coming due during their period of ownership including any Payments that arose prior to, and remain unpaid as of the date of, the Exceptional Transfer; and
3. Accrued but unpaid interest through the date of the Exceptional Transfer is paid in full.

4. Default Interest. Payments not paid as and when due bear interest at an annual rate, compounded annually, equal to two (2%) percent above the “prime rate” announced from time to time in The Wall Street Journal. Interest continues to accrue at the applicable rate until paid in full, including any judgment obtained on account of non-payment.
5. Condition of Holder's Obligations. Notwithstanding anything to the contrary contained in this Grant, if any Payment is not paid as and when due, Holder reserves the right to withhold issuance or delivery of any approval, inspection report, or other document requested or required under the terms of this Grant until such time as past-due obligations are satisfied.
6. Notice and Opportunity to Cure. Holder will use commercially reasonable efforts to notify Owners if a payment has not been made as and when due in accordance with applicable terms for giving of notice under this Grant. If not cured within the applicable time period set forth in Holder's notice, or if no time period is given, ten days following the date of Holder's notice, Holder may take any action permitted to Holder under Applicable Law or this Grant. Holder’s failure to provide notice under this subparagraph does not affect the accrual of default interest as described under subparagraph (c) and shall not be interpreted as a waiver of any right under this section.
7.  Liability. All payments required by this covenant are the joint and several liability of the Owner at the time such payments first become due, successive Owners of the Property, and their respective heirs and successors. If a payment becomes due by reason of a Transfer, the transferor and transferee are joint and severally liable for payment at the time of, or prior to, the Transfer.

Administration

Clear Recordkeeping

Use of stewardship funding covenants necessitates an adjustment to recordkeeping practices. A formal schedule that lists each existing funding covenant along with relevant events (transfers, payments, assumptions, interest charges, etc.), together with procedures for maintaining the schedule, will enable the organization to monitor and enforce the funding obligations with precision and authority.

Form of Assumption

Express assumption of stewardship funding obligations by a successor landowner is a condition for waiving payments otherwise due with an “Exceptional Transfer.” Assumption can be accomplished with a simple writing that evidences the landowner’s intent to be legally bound by the promise. For example:

 _________(“Successor Owner”) [intends to acquire/has acquired] the interest of _________(“Prior Owner”) in the property known as _______ (the “Property”), which is burdened by that certain [Grant of Conservation Easement/Stewardship Funding Covenant]  in favor of ______ [easement holder] dated as of _______, which includes, in article 8, a stewardship funding covenant (the “Covenant”). Intending to be legally bound, Successor Owner hereby expressly assumes Prior Owner’s obligations under the Covenant including the obligation to make payments under the Covenant coming due during Successor Owner’s period of ownership.

If the funding arrangement involves one or more payments that came due under the prior owner, but is not in default at the time of transfer, the following text can be added to the end of the preceding provision:

. . . and any payments that arose prior to, and remain unpaid as of the date of, the acquisition of Successor Owner’s interest in the Property.