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Marketing Your Timber
The Timber Sales Agreement

For years landowners and timber buyers bought and sold timber on a handshake basis. Just as the world has become more complex, so has the transaction of buying and selling timber. One of the most dangerous things a landowner can do is to sell his timber on a handshake basis, even to individuals he has 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 all persons know their responsibilities and what is expected. A well-written contract will save the purchaser and seller time and money by eliminating problems that can result in litigation. It will also preserve goodwill between the parties.

The two most common timber sales agreements used in the South are the sales contract and the warranty timber deed. Most often the sales contract conveys to the buyer the right to cut standing timber. The actual title to the timber passes to the buyer when the timber is severed from the stump. 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 arrangement. This agreement, or contract, is to protect all parties involved in the transaction. The written timber sale agreement may be lengthy and complex or short and simple, but always expresses the expectations, the wishes, and the responsibilities of each party involved. It specifically states what each party can and cannot do and serves as a mechanism to resolve any disputes.

Each timber sales agreement is different, since each and every timber sale is different. However, there are a number of common provisions that should be included in every sales agreement. It is important at the time a sales agreement is developed that the landowner get professional assistance from a forester and an attorney in developing any sale agreement. The following sections in this publication identify and discuss certain information you need to include in any timber sales contract.


Identification of Parties

The first item in a contract is the identification of each of the parties involved, including the complete name and address of each person involved in the agreement. "Parties involved" include the buyer and all of the owners of the timber that is being bought and sold. Also included is the date the agreement was signed and the place where the agreement was executed (to include the city, county, and state).

Method of Payment

The most important segments of a contract are those dealing with consideration or payment for the timber sold. In most contracts, this is delineated as "x amount of timber was bought and sold for ten dollars and other consideration." This device is used for various reasons, primarily to keep the exact purchase price confidential, since the document, once registered at the chancery clerk's office, becomes public information. However, something often not included, which 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-you-cut sale," this section could be most important to insure that the buyer pays in the method and under the terms the seller desires. For tax reasons, in an installment sale it is important you adhere to the Internal Revenue Code and IRS regulations. Otherwise, the advantages gained from an installment sale may be disallowed by the Internal Revenue Service. For a pay-as-you-cut sale, it is important the seller feel confident the contract gives clear and concise instructions to the buyer regarding how he is to pay and how he 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. At a minimum, in the description include an estimated volume by species of what is being sold and describe how it was measured and what products the landowner is offering for sale. Also include how the trees to be cut are marked or designated and who is to 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, and if not, note who pays to locate the corners and boundary lines. In the event the boundaries of the cutting area differ from the property boundaries, include an exact description of how they are marked. In addition, clarify the description of the adjacent ownerships, and any existing or potential problems or disputes with these ownerships should be detailed.


Care of Property

This contract clause 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, bridges, etc. 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-cut or thinning, state specifications or requirements regarding 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).

Arbitration

To accompany the above damage clause, specify some method or provision for settling disputes between the buyer and seller...disputes that cannot be resolved by negotiation. One accepted method is to make provisions for arbitration between the parties involved. This provision can provide for the method of selection of an arbitration panel and can outline its duties and authority.

Guarantee of Ownership

In the next clause, cover your rights as the owner actually to sell the timber. In years past, there have been cases of people who visited their timberland and found it had been sold and cut by unknown parties. Also occurring is where a timber buyer bought and paid for timber, went to cut it, and the actual owner showed up. To prevent such happenings, most buyers require, at a minimum, 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 his 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, stipulate who shall acquire and pay for them.

Method of Harvest

This next part of your timber sales contract needs to determine what method the logger shall use actually to harvest the timber. The language 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, perhaps, 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. Also in this clause, include provisions for the use of Forestry Best Management Practices, which are required to prevent water pollution and site degradation. The landowner is responsible for requiring compliance with BMP's. Note: The seller must reserve the right to go out and inspect the logging site. Otherwise, he may find that, while he can go out and look at the logging job, he may not have any rights to halt improper logging practices.

Penalties for Nonperformance

This section goes along with the clauses for arbitration and protection of the property. This clause details the penalties for nonperformance of the terms of the contract. Penalties would be invoked when the logger does acts such as cutting nondesignated timber on a selective-cut or thinning or when the logger does not cut the designated timber on the same type operation. It also provides penalties for stand damage incurred during the harvesting operations when it exceeds allowable limits; too, it outlines those penalties for damages to permanent improvements (such as roads, culverts, or bridges) by the logger.

This clause also needs to make provision 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. In addition, this clause may address the provisions for or against the 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.

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-you-cut sale, where the buyer usually only pays for timber delivered to the woodyard or mill, it could be crucial.

The Bottom Line

The last item in any contract is the bottom line. This includes the signatures of all parties, the dates the contract was signed, a notarization of the agreement, and the registration of the agreement at the local chancery clerk's office. The omission of any of these items may affect the validity of your agreement.

Optional Clauses

The above items address only those essential clauses that should be in a timber sales contract. There are a number of points that can be included in a contract. One consideration is fire protection. Many older contracts included a clause that indicated who should bear the loss, or who bore the responsibility for the prevention and control of any wildfires that broke out in the timber stand during logging operations.

Another item may be one that provides for notification of the seller when cutting starts and stops, so that pre- and post-harvesting inspections can be performed. In addition, this clause can require a pre-harvest conference by all parties involved in the contract. In this meeting, include the logger and landowner so they can meet face-to-face. While optional, this provision can prevent misunderstandings, because it helps each party fully understand the contract and its requirements.

Also, define the ownership of by-products such as tops, limbs, uncut timber, etc. This is especially important in large timber where the tops and limbs could contain a significant volume of pulpwood. Is the buyer just buying the sawtimber portion of the tree or the whole tree? The landowner may wish to market his top wood separately.

In Mississippi it is an accepted practice for the buyer to pay state severance taxes. If there is a question about who is to pay, clarify it 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 the assignment of the contract to a third party. In many cases, when an independent timber buyer purchases the timber, he 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, while you were fully protected by the original agreement, you have little control over the sale.

In case there are problems during the contract period, have provisions for the extension or termination of the agreement. In some cases, where weather or other factors prevent the buyer from cutting the timber, the landowner may wish to grant an extension to the contract period. Situations may occur where either party may wish to terminate the agreement. Outline why and how the contract can be terminated and have provisions for damages and/or buyouts.

In the case of a pay-as-you-cut sale, you may want to include a clause that details specifications and requirements for the scaling and measurements of the timber to be sold. This may include designation of log rule, volume table, or weight conversion factors that are to be utilized...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 included, this clause should describe what each party is to do and who pays for it.


Summary

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 list of suggestions provided herein does not cover all situations. Each timber sale agreement must be tailored to fit the needs of a particular set of circumstances.

Most buyers are hesitant to sign a contract they feel is too restrictive. Yet, as a professional, a buyer will readily agree to a contract that can help him supply timber to his mill efficiently...with a minimum of problems. It is in the interest of all parties 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 all parties involved. This is the keystone of a productive and profitable business relationship and ensures that the landowner walks away from a timber sale with a sense of satisfaction.


By Winston Savelle, Area Extension Forestry Specialist, and Dr. William D. (Denny) Eshee, Professor of Business Law/Forestry, Mississippi State University

Publication 1855
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in furtherance of Acts of Congress, May 8 and June 30, 1914. Ronald A. Brown, Director


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