Contract Must Haves
by Gabriella Cellarosi Daniel, Esq.
A client recently came to me after leasing an Appendix Quarter Horse for her daughter and asked me to draft a “lease-to-buy” equine agreement. She was not in a position financially to buy the horse outright and she had some hesitation about the “inflexibility” component of horse ownership – i.e. knowing that it sometimes can be easier to lease than to buy (less commitment), and, of course, the difficulty of selling a horse when the time comes.
She was about to enter into another lease agreement for the upcoming year, and after two years of successful leases, she decided she really liked the horse and potentially wanted to buy the animal. Now that she thought there was a substantial likelihood that she would buy the horse eventually, she wanted her monthly lease payments to go toward the final purchase price of the horse.
Before you decide to enter into such an agreement, consider the benefits and what can go wrong.
Generally, the parties will enter into a standard lease agreement that specifies a monthly payment for use of the horse. Time frames can vary from months to years. The parties will also have an agreed upon purchase price for the horse which if/when the time comes, the buyer will pay for the horse. To purchase the horse, the buyer will pay the full purchase price during the lease term.
During this time, the buyer will continue making lease payments per the parties’ agreement, which will potentially go toward the total purchase price of horse. If/when the buyer wants to purchase the horse, the buyer will pay the purchase price reduced by the amount of lease payments to date. If the buyer decides not to purchase the horse, all of the lease payments made will remain with the seller.
The benefits to the seller include that they are receiving monthly payments for the horse and essentially having a locked in sales price on the horse.
The benefits to the buyer include that if they do not have the full amount ready for purchase of the horse, a lease-to-buy set up accelerates the path to ownership of the horse. It also provides the buyer with an extended trial period on the horse, giving the buyer a higher level of security when the horse is purchased because it has been through its paces over a period of time. The buyer likely will have had the opportunity to assess the horse over a period of time, including seeing the horse’s temperament in a variety of situations, as well as soundness and health issues. Finally, it gives the buyer flexibility. Perhaps the buyer would be leasing regardless and this route provides a sensible option if the horse is indeed “the horse” so the money goes toward something.
Before entering into this type of agreement here are six points you should take into consideration.
1.Do not Forget the Purchase Price
Fees and payment obligations are of critical importance in equine sales agreements. Make sure that you agree upon and put in the lease-to-buy agreement the exact purchase price of the horse. A lot can happen over a lease period, including the unknown, as often does with horses.
In my client’s case, during the prior years of lease, the horse received a lot of training and increased its mileage in the show ring, mostly attributable to lessee. As a result, the horse’s value increased over time in large part due to lessee’s hard work. Not by coincidence, the sales price also increased. In short, the buyer does not want to be in a situation mid-lease or after-the-fact, asking about the purchase price.
2.Recognize that the Seller will likely have a security interest in the horse.
An equine purchase agreement with installment payments or lease-to-buy agreement may contain a clause that the buyer grants a security interest in the horse to secure payment of purchase price. The seller would take a security interest to enforce its rights against collateral (the horse) in case the debtor defaults on the obligation. For example, such a clause will act to protect the seller if the buyer stopped making a payment, the seller needed to repossess the horse, or the horse became injured, ill, or dies before the buyer made a final payment. The agreement itself may constitute the security agreement and then a filing may be necessary in accordance with Uniform Commercial Code and jurisdictional requirements.
3.“Risk of Loss”
The risk of loss section must be carefully analyzed. Consider what happens if during the lease-to-buy agreement or the installment payment equine purchase agreement, the horse becomes ill, injured, or worse yet, dies. Any agreement should include some language that addresses the possibility of injury or death of the horse, and potentially that the buyer is responsible if among other things, the horse gets injured or dies while the horse is in potential buyer’s custody, care, and control. This provision should indicate that it is effective from the moment the horse leaves the seller’s property and continues until the horse’s return. Depending on whether you require the potential buyer to obtain insurance, consider adding language that the potential buyer assumes all expenses that are not covered by Seller’s Mortality, Major Medical and Loss of Use Insurance, related to any accident, illness, or other peril that may occur including death or permanent disability of horse. Further, that rider/lessor/buyer is responsible for any fees/costs stemming from its negligence.
4.Assumption of Risk, Indemnity, and Release of Liability
You also may want to include language the seller is not responsible for any injuries to the potential buyer, i.e. a liability release. Review your jurisdiction’s specific requirements as far as EALAs (Equine Activity Liability Acts)—e.g. Buyer assumes the risks of equine activities pursuant to [x state] law. Further, some potentially some indemnification language—e.g. buyer agrees to indemnify and hold seller harmless from any claims, demand, liability, judgment, or actions, etc. arising from buyer’s or any other person’s use or handling of the horse.
5. Seller’s Warranties and Representations
Consider language that reflects what, if any, types of warranties and representations are being made in connection with the agreement. For example, whether the seller represents that the horse is in good condition, buyer has been provided with all health and vaccination records, that once purchase price is received in full a bill of sale will be provided to buyer, and whether the horse is being sold “as is” with no warranties, express or implied. Be aware of when these warranties go in effect, e.g. on the effective date of the agreement and transfer of possession of the horse.
6.What to do about the PPE?
In most cases, pre-purchase exams (PPEs) are performed after a buyer has a signed sales contract in hand—otherwise, the seller could change their mind about selling the horse or sell the horse to another buyer after buyer has invested time, money, and energy into the PPE.
Further, there is usually a time period during which buyer has to complete the PPE and to complete a comprehensive veterinary work-up. How does this play out in a lease-to-buy or installment payment equine sales agreement? A few options: (a) waiver of the PPE; (b) performance of the PPE prior to the effective date or transfer of possession; or (c) at a later date as specified in the contract. Remember, as a buyer, you want to be informed about any problems so that you can make an educated decision whether to buy the horse.
While the above is not an all-inclusive list of what should be in a lease-to-buy or installment payment equine sales contract, it includes some of the issues that can crop up if buyer/seller decide to enter into such an agreement. A lease-to-buy or installment equine sales agreement may be a “win-win” situation for both buyer and seller, but be mindful of the pitfalls that can arise.