Horses and the Law: Buying and Selling Your Horse Part Two
This article is the second of a two-part series on the legal aspects of buying and selling horses that was published in the October/November 2020 Issue of the Aiken Horse Magazine.
Very early on a cold Christmas morning when I was eight years old, I awoke excitedly and yelled to my little sister “get up!” We both bounded down the stairs to see what treasures we might find under the tree. Hanging on a low branch was a soot smudged card that read: “Jimmy, go look in the field. Love, Santa.” I grabbed my boots, ran out the back door and tore off for the barn. There in the snowy pasture was my first pony, a Breyers®-worthy POA in a red blanket. It was magical and I appreciate it all the more now that I know what my parents (and Santa) had to deal with to get that pony to our farm that Christmas.
This month we explore legal issues and recommended practices when purchasing a horse at Christmas or any other time. I will stay away – for the most part – from how to select the horse or pony that is right for you. There is already a ton of advice online, in books and articles, and wherever two or more horse folks are gathered, about how to evaluate and find your next horse. As an equine attorney who works with buyers and sellers in putting deals together and resolving disputes, I have only two cardinal points on the subject: 1) if you are a rookie buyer, find a trusted horseman or professional to guide you and be realistic about your skills, goals and budget; and, 2) all buyers should avoid the impulsive, emotionally-driven purchase.
Buying a horse is a deceptively complex transaction. On the surface, it is pretty straightforward. You select the horse, agree on a price and payment terms, and take the horse home. In reality, to have successful outcomes buyers need to address several important issues to protect their legal interests and their wallet. Remember, when purchasing a horse, it is a “buyer beware” situation. Unless you put terms in a written purchase agreement that protect you, the law provides very few remedies for problems that arise after a sale.
Let’s look at the best practices and key considerations that buyers need to tackle when purchasing a horse.
Require a Written Agreement and Bill of Sale. The best way a buyer can shape the transaction to meet her needs is to prepare a clear and detailed purchase agreement. The essential terms for an enforceable agreement include the parties to the sale, the sales price, financing, a description of the horse, health disclosures, representations 2 and warranties, risk of loss before the deal closes, date of delivery, remedies in the event of a dispute, and a Bill of Sale.
A prudent buyer should also require a trial period before finalizing the purchase. It seems obvious, but during the trial period, have the horse perform its intended job. If you are going to hunt with the horse, take him out on a hunt. The same goes for barrel racers, trail horses, and show ponies. I am often surprised by buyers who put a trial period in their agreement, but fail to have the horse actually perform its discipline. It is hard to unwind a transaction on the basis that the horse is not fit for its intended purpose, if the buyer did not test its suitability when she had the opportunity.
A buyer should also insist on a separate Bill of Sale when purchasing the horse. The Bill of Sale will recite the essential terms of the transaction, but it should also include provisions that the seller owns the horse “free and clear” of any liens, claims or other encumbrances. That will help protect a buyer from claims by a seller’s creditors should a dispute arise.
Disclosures, Representations and Warranties. Purchasers should include terms that compel a seller to disclose the full medical history of the horse and enable the buyer to contact the treating vet to secure all records. If a seller is unwilling to provide that information, it is a red flag that something is not right.
The seller’s representations should include the horse’s age, capabilities, experience, breeding (if relevant), temperament and soundness. These attributes are central considerations to any purchase and the buyer should require these points in the written agreement.
Warranties in a sales agreement are important and can be a point of conflict. A seller will likely seek to disclaim any warranty and have the buyer purchase the horse “as is.” Under those terms, a buyer accepts the horse with all faults. Unless there is evidence of fraud or misrepresentation, a post-sale claim against the seller based on inadequate quality or value will not be successful. Therefore, a buyer should insist on warranty language that establishes that the horse is able to perform its intended job at the owner’s required level and other reasonable standards.
Pre-purchase Exam. The agreement should include a provision that the purchase is conditioned on the horse undergoing a pre-purchase exam by a vet of the buyer’s choice. The scope of the exam should be commensurate with the investment being made by the buyer, the age and background of the horse, and its intended use. If the buyer is not satisfied with the results of the exam, the seller should return the buyer’s down payment and release the her from the contract.
Payment and Financing. As a buyer, it is important that you control the payment terms as money flow is greatest power in a transaction. If you plan to pay in full at the time of purchase, you should still consider splitting the payments. I recommend a refundable down payment of approximately 10% of the purchase price to be paid when 3 the trial period begins and paying the balance when all of the terms of the agreement are met.
If you plan on financing part of the purchase, then the agreement should set out those terms clearly. You will be expected to sign a promissory note for the amount financed with strict payment terms, lien rights and other legal remedies. If you do not understand the terms, get good legal advice before signing the agreements. Financing contracts carry serious legal duties and responsibilities. The seller may also require you to purchase mortality insurance on the horse for at least the amount being financed. Even if the seller does not require insurance, it is a good practice to purchase the coverage to limit your risk in the event something tragic occurs.
Insurance and the Risk of Loss or Injury. In addition to the financing situation discussed above, insurance and risk of loss issues are important considerations for buyers in other aspects of the purchase process. The purchase agreement should clearly state who is responsible for the risk of loss during each stage of the transaction. For example, if there is a delay between signing the contract and delivering the horse to the buyer, the seller should be responsible for any injury or loss. Likewise, when the buyer has the horse for trial, she will bear the risk of loss and financial responsibility during that period. If the horse is being shipped to the buyer or back to the seller as part of the agreement, the party selecting the shipper usually bears the risk of loss in transit.
Even though a buyer may not yet own a horse under contract, she can purchase insurance on the horse during a trial and for the period of time she is making installment payments to purchase the horse. The mortality insurance policy will name the seller as the beneficiary until the sale is complete. When the deal is concluded, the buyer will send the insurance company a copy of the Bill of Sale and the insurance company will remove the seller as the beneficiary and insert the buyer.
Using an Agent in the Transaction. Many buyers, especially inexperienced purchasers, look to a trainer or other equine professional for assistance in these matters. This can be an excellent way to avoid costly mistakes and find the right fit for owner and rider. However, problems can arise if the terms of the representation are not clearly spelled out or the arrangement lacks transparency. When you hire a person to find a horse and negotiate its purchase, you usually pay them a commission based on the purchase price. Because commissioned agents are not licensed or regulated by state law, buyers should require the agent to sign a written contract. The contract’s terms and conditions should specify that the agent represents the interests of the buyer only and the agent does not have any conflict of interest; describe the commission and expenses the buyer is expected to pay; whether the buyer is obligated to use the agent exclusively or may work with other agents concurrently; the terms to terminate the agreement; and, the process to resolve any disputes that may arise.
Public and Private Sales. Most transactions are between a private seller and private buyer. The contract is between the parties directly involved and any disputes that arise are between the buyer and seller. There is a growing trend, however, for purchases to 4 be made through online auctions. This is a very different process and the risks for buyers can be higher. The information provided by a seller is limited and there is little availability, if any, for medical reviews, much less a trial period. In a public auction, the buyer enters into a contract with the auction company not the seller. Those agreements are designed to protect the auction house from claims by unhappy buyers and generally leave buyers with little or no remedy for a problematic purchase. Before you make a purchase through a public auction, you should have a competent attorney review the documents so that you know what your rights and obligations are before moving forward.
Multiple Owners. Co-ownership of horses has been common in racing for decades and it is increasing common in high-end sport horses. There are a variety of legal structures used in putting those deals together. The type of agreement and the relative rights and duties of each owner depends on a number of factors. If two people are actively going to support the horse and enjoy riding and working with the horse, then a simple partnership agreement and joint purchase agreement can be used. However, if the horse is involved in breeding, racing or competitions and there are multiple owners, a limited liability company with syndication and management agreements are required generally. Some of these arrangements involve significant tax and investment issues. Buyers looking to purchase horses in these situations should confer with their attorney and tax professional.
Purchasing a horse is a challenging legal event and deserves significant attention to detail. By using practical and well-prepared agreements, buyers can protect their interests effectively and then confidently turn their attention to the extraordinary relationships and joys that come with owning a horse.