Tuesday, May 30, 2023

Conservation Easements – Buyer Beware

Think twice before entering into a conservation easement or buying property subject to one.

It is a noble premise for an individual property owner to consider restrictions upon the development of their land in perpetuity. Conservation easements are a method of doing this in which government (federal and state) facilitates such restrictions with tax incentives. Many landowners are encouraged by tax advisors to do this to offset income from other sources. And why not? If the landowner does not intend to develop their property and can benefit today financially from the restrictions, this guidance seems prudent. Land subject to such restrictions is theoretically less valuable than land without such restrictions and, if such restrictions are truly factored into the sales price, means that purchasers of such land can get much more for less.

BUT…… the reality is that these instruments are complicated and may contain pitfalls.

Once a conservation easement is placed on a property, depending on who the holder of the conservation easement is, either a not-for-profit organization or a governmental entity will generally have periodic (annual is the norm) inspection rights to ensure compliance with the terms of the conservation easement. This means that periodically an inspector will appear, walk over your property and file a report with the easement holder subjectively determining in their opinion whether or not you are in compliance with the easement.

Additionally, most conservation easements have restrictions on improvements or uses a property owner can undertake on their property. Interpretation of these easements is very subjective and complicated and when a subsequent owner is involved there can be a significant disconnect between what is in the document and what that subsequent owner believes they can do and what permission is required and from whom to do so. Many conservation easements imply a reasonable process whereby the conservation easement holder has the discretion to approve improvements or uses, but in reality, that discretion defaults to being severely restrictive. Moreover, friendly lower-level employees of the conservation easement holder may imply approval, but higher-level review (if actually requested) will disapprove a use or improvement.

In Wetlands America Trust, Inc. v. White Cloud Nine Ventures, L.P., No. 78462 (20th Jud. Cir. Va. June 19, 2014), aff’d 782 S.E.2d 131 (Va. Feb. 12, 2016), this firm successfully defended a claim by a conservation easement holder against a property owner for violation of the easement wherein the trial court and the Virginia Supreme Court confirmed that conservation easements are restrictions against the free use of property and as such are narrowly interpreted and any ambiguity should be construed in favor of the free use of land. This was a major blow to the conservation easement holders who then subsequently lobbied the Virginia legislature and in 2021 were able to get Va. Code Section 10.1-1016.1 enacted, in an attempt to reverse the effect of the Wetlands America Trust decision. No case since has interpreted the applicability of this new code section, but serious questions of its effect exist. These include whether or not the section is applicable retroactively to easements that existed prior to enactment and what exactly is the conservation value that the court should favor. As an example, many of the easements purport to be in support of agricultural activities and list farming as a conservation value. However, farming comes with changes to the land and improvements to the property which most conservation easement holders resist.

If there is a dispute over interpretation, the cards are stacked against the property owner as most easements have a one-way fee-shifting provision in favor of the conservation easement holder. This provision is taken advantage of to exert maximum leverage against any property owner who dares challenge the holder’s interpretation. In our experience in these disputes, we have seen conservation easement holders hire large law firms who immediately incur hundreds of thousands of dollars of fees which then become scare tactics and actual charges in the resolution of the dispute.

When you see the slick marketing materials about the advantages of a conservation easement, you don’t see the negatives. When real estate agents play down the disadvantages of properties subject to a conservation easement (you can even see real estate listings spinning a conservation easement as a benefit), buyers need to be careful and know that the property should be selling at substantially less value than similarly situated property without such restrictions (not more).

If you are considering subjecting your property to a conservation easement or considering buying property subject to a conservation easement, it is important to hire a competent professional (one who is not part of the industry promoting them) to advise you of the impact on your future use or value of your property.