Marketing Your Timber - The Timber Sales Agreement
For years, landowners and timber buyers bought and sold timber with a handshake. Just as the world has become more complex, so has buying and selling timber.
One of the most dangerous things you can do as a landowner is to sell your timber on a handshake basis, even to someone you have known and done business with for years. Many landowners, and for that matter, many timber buyers, have come out of a sales transaction that lacked a formal, written agreement unsatisfied because the parties had different expectations of what they wanted from the sale.
The best way to help prevent misunderstandings is to have good communication before the sale and then document that communication in a timber sales agreement so everyone knows his or her responsibilities and what is expected. A well-written contract will save the buyer and seller time and money by eliminating problems that can result in legal fights. It will also preserve goodwill between everyone.
The two most common timber sales agreements used in the South are the sales contract and the warranty timber deed. Usually the sales contract gives the buyer the right to cut standing timber. The actual title to the timber passes to the buyer when the timber is scaled. Where a timber deed is used, the title to the timber passes to the buyer when a properly executed deed is delivered and recorded.
A timber sale, regardless of type or size, should have a written, legally binding, and mutually agreed upon arrangement. This agreement, or contract, is to protect everyone involved in the transaction. The written timber sale agreement may be long and complex or short and simple but always expresses the expectations, wishes, and responsibilities of each person involved. It specifically states what each person can and cannot do and serves as a way to resolve any disputes.
Each timber sales agreement is different since each timber sale is different, but some common provisions should be included in every sales agreement. It is important when a sales agreement is developed that the landowner get professional help from a forester and an attorney.
The first item in a contract is the identification of everyone involved, including the complete name and address of each person involved in the agreement. “Parties involved” includes the buyer and all of the owners of the timber being bought and sold. Also included are the date the agreement was signed and the place, including the city, county, and state where it was executed.
How to Pay
The most important parts of a contract deal with payment for the timber sold. In most contracts, this is stated as “x amount of timber was bought and sold for ten dollars and other consideration.” This is used for various reasons, mainly to keep the exact purchase price confidential, since the document, once registered at the chancery clerk’s office, becomes public information.
One thing that often isn’t included but may be even more important than the exact amount paid, is the method and terms of payment. This may be less important in a “lump sum sale,” since the seller receives the entire amount paid at the time of the contract’s closing. In an installment sale or “pay-as-cut sale,” this could be most important to ensure the buyer pays in the way the seller desires.
For tax reasons, in an installment sale, it is important to include interest on an unpaid balance according to IRS regulations. Otherwise, the advantages from an installment sale may not be allowed by the Internal Revenue Service. For a pay-as-cut sale, it is important for the contract to give clear and concise instructions to the buyer as to how he/she is to pay and how he/she is to provide verification of the amount of timber cut and paid for.
Description of Timber Sold
This section gives a detailed, complete description of the timber to be sold. In many contracts, the timber to be sold is designated by a provision that states “all merchantable, standing timber on the area is to be cut.” This description could likely include all standing timber on the designated cutting area; it is a broad description of the timber to be sold and leaves a lot of room for misunderstandings.
Be specific with your description of the timber. The description should at least include an estimated volume by species of what is being sold, how it was measured, and for a partial sale, what products you are offering for sale.
Include how the trees to be cut are marked or designated and who will do the marking. If the contract extends over a period of several years, include a provision dealing with the trees that grow into a merchantable, harvestable size during the contract period and how payment for these trees shall be made.
In the description of the timber, include an exact location of the sales area and a legal description of the area. Outline in detail how the corners and boundaries of the property are marked or designated, or note who pays to locate the corners and boundary lines. If the boundaries of the cutting area differ from the property boundaries, describe exactly how they are marked. Also, have a clear description of the adjacent ownerships and any existing or potential problems or disputes with these ownerships.
Care of Property
This part addresses the care of the property and/or improvements. Detail and adequately describe each item of property or improvement that would be subject to damage, such as fences, roads, and bridges. Verify property conditions at the time of the sales agreement and designate what conditions these items are to be left in at the end of the sale. In the case of a selective harvest or thinning, state specifications or requirements for the amount of damages allowable to the residual timber stand. Make provisions for the assessment and evaluation of damages to improvements. You may also set forth provisions for the repair or payment for damage(s).
To go with the damage section, specify some method for settling disputes between the buyer and seller—disputes that cannot be settled by negotiation. One accepted method is to have arbitration between everyone involved. The provision can explain how to select an arbitration panel and outline its duties and authority.
Guarantee of Ownership
In this part, cover your rights as the owner selling the timber. In the past, there have been cases of people who visited their timberland and found it had been sold and cut by unknown persons. Sometimes a timber buyer has bought and paid for timber, cut it, and then was confronted by the actual timber owner. To prevent such happenings, most buyers require at least a title search and an abstract. In some situations, buyers may request that title insurance be purchased.
Right of Ingress and Egress
In this section, provide ingress and egress for the buyer—that is, the right to come and go to remove the timber. This clause will cover where and which entrances and exits the buyer and the logger can use, which roads are to be used and which are to be restricted, and who shall pay for any road construction and/or repair.
If rights-of-way across adjoining landowners are required, state who shall acquire and pay for them. Best management practices for rehabilitating roads and skid rails may be specified here.
Method of Harvest
This next part of your timber sales contract needs to determine how the logger will actually harvest the timber. It should define the planning and layout of logging decks, log roads, and the areas to be cut. You might want some restrictions on equipment use and logging during the wet seasons or hunting seasons. Have provisions for the buyer and the seller (and/or their representatives) to supervise the logging crew(s) and to have inspections before, during, and after the logging.
This clause also includes provisions for using Forestry Best Management Practices, which are required to prevent water pollution and site degradation. The landowner is responsible for requiring compliance with BMPs. The seller must reserve the right to go out and inspect the logging site. A seller who does not reserve this right may find that he/she has no rights to halt improper logging practices if they occur.
Penalties for Nonperformance
This section goes along with the clauses for arbitration and protection of the property. This clause details the penalties for not performing the terms of the contract (for example, cutting nondesignated timber on a selective cut or thinning and not cutting the designated timber on the same type operation). It also provides penalties for stand damage that happen in the harvesting operations when it exceeds allowable limits. It also outlines penalties for damages the logger causes to permanent improvements, such as roads, culverts, or bridges.
This clause also needs to provide for the payment of the penalties and outline the setting up of an escrow account or performance bond to enforce these provisions.
Length of Agreement
This clause of your agreement covers the duration of the agreement. It specifies the length of the agreement and the beginning and ending dates of the agreement. It may address the provisions for or against renewal of the contract in case it expires before the timber is harvested. You should also detail the steps the buyer must take to be released from the contract once harvesting is complete.
In case there are problems during the contract period, have provisions for extending or ending the agreement. In some cases, where weather or other factors prevent the buyer from cutting the timber, you may wish to extend the contract period. Situations may occur where either person may wish to terminate the agreement. Outline why and how the contract can be terminated and have provisions for damages and/or buyouts.
Assumption of Risk
Specify who will bear the loss in case the timber is destroyed or stolen during the contract period. This is not as important in a timber deed, where the buyer is actually paying for the standing timber. In a pay-as-cut sale, where the buyer usually only pays for timber delivered to the woodyard or mill, it could be crucial.
The last items in any contract are the signatures of everyone involved, the dates the contract was signed, a notarization of the agreement, and the registration of the agreement at the local chancery clerk’s office. Omitting any of these items may affect the validity of your agreement.
The above items address only clauses that are essential in a timber sales contract. A number of other points can be included in a contract. One is fire protection. Many older contracts included a clause that indicated who should bear the loss or who had the responsibility for preventing and controlling any wildfires that broke out in the timber stand during logging.
Another option provides for notifying the seller when cutting starts and stops, so that pre- and postharvesting inspections can be made. This clause can require a preharvest conference by everyone involved in the contract. In this meeting, include the logger and landowner so they can meet face-to-face. This provision is optional, but it can prevent misunderstandings, because it helps each person fully understand the contract and its requirements.
In Mississippi, it is an accepted practice for the buyer to pay state severance taxes. Make sure the assignment is spelled out in the agreement. This will protect the landowner in case a dispute arises about payment of these taxes.
A provision that can prevent a number of problems is one that provides for or against assigning the contract to a third person. In many cases, when an independent timber buyer purchases the timber, he/she resells the timber to a manufacturer. If the seller has no control on assignment or reassignment, the contract the buyer and mill enter into may be quite different from the agreement with the original buyer. You may find that, even though you were fully protected by the original agreement, you have little control over the sale.
In the case of a pay-as-cut sale, you may want to include a clause that details specifications and requirements for scaling and measuring the timber to be sold. This may include designating log rule, volume table, or weight conversion factors to be used, and where, when, and how the timber is scaled or weighed.
Another provision to consider is one that details provisions to regenerate the property being harvested and to keep it in production. Many companies have assistance programs available to landowners from whom they purchase timber. These programs may include site preparation, seeds or seedlings, and planting assistance. This is often done on a cost or fee basis by the buyer. If you include this clause, describe what each person is to do and who pays for it.
A well-written, thought-out timber sale agreement, while it may not cover every situation that can occur, serves as a vehicle to solve problems mutually. The suggestions in this publication do not cover all situations. Each timber sale agreement must be tailored to fit the needs of a particular set of circumstances.
Most buyers hesitate to sign a contract they feel is too restrictive. Yet, as professionals, buyers will readily agree to a contract that can help them supply timber to their mills efficiently with a minimum of problems. It is in the interest of everyone involved to develop and nurture a straightforward, friendly working relationship.
By using your marketing team of your forest consultant and attorney, you can have an arrangement that will be agreeable to and protect everyone involved. This is the key to a productive and profitable business relationship and ensures the landowner walks away from a timber sale satisfied.
Publication 1855 (POD-08-19)
Distributed by Brady Self, PhD, Associate Extension Professor, Forestry. Originally prepared by Winston Savelle, former area Extension forestry specialist, and William D. Eshee, PhD, Professor of Business Law/Forestry, Mississippi State University.
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