Horses and the Law: Buying and Selling Your Horses
This article was originally written for publication in the Aiken Horse Magazine in August 2020.
If there is any activity in the world of horses that demands the use of written agreements, this is it. A tremendous amount of frustration, litigation and heartache can be avoided if buyers and sellers take the time to consider the key points of a purchase agreement and put it in writing. Whether you are a buying or selling, working independently or with an agent, understanding the important legal implications of a sale is essential to getting a deal done right. In this series, I will introduce provide practical guidance and insights to help make your next transaction a success.
In this installment, we will explore the essential issues sellers should address when offering a horse for sale. These include the basic terms of a sales agreement, financing a purchase and creating effective loan agreements, working with a seller’s agent, and the remedies available when disputes arise. Similar issues from the buyer’s perspective will be addressed in the next issue.
Sellers are usually focused almost exclusively on getting the best price for their horse. While price is important, there are several other considerations that if not included in the sales agreement, can cause that “great deal” to fall apart after the sale. To prevent that from happening, let’s explore the key terms and issues from the seller’s perspective.
What’s the Deal? The seller customarily prepares the written sales agreement. Being the initial drafter of the contract is an important advantage and the seller should make good use of it. The principal terms of an agreement are the parties to the sale, the sales price, financing, a description of the horse, representations and warranties, risk of loss before the buyer takes possession of the horse, date of delivery, the remedies in the event of a dispute, and a Bill of Sale. The seller can set up the agreements to protect her interests and provide strong enforcement provisions to address a buyer’s breach of the contracts.
Representations and Warranties. A seller must make sure that the description of the horse, its background, capabilities, experience, temperament, medical history and soundness are accurate and not exaggerated. A buyer will remember what is said about these issues and should the horse fail to live up to any gilded representations, the seller should expect an angry call. Sellers can avoid this situation by disclosing medical histories, allowing the buyer to contact the horse’s veterinarian, offering a trial period and otherwise enabling the buyer to evaluate the horse’s condition. Sellers can also disclaim any warranty regarding the horse in the written agreement. By disclaiming warranties effectively, the buyer acknowledges he is purchasing the horse “as is” and cannot make a quality or value-based claim against the seller unless the seller misrepresented the horse’s condition in the agreement.
Payment and Financing. It goes without saying that a cash deal is the best deal. However, given the cost of good horses today and commercial lending limitations, some buyers need to make installment payment arrangements. As a seller, you need to determine if your installment buyer is reliable and whether you are willing to take the risk of not getting paid, pursuing collection and potentially having to recover the horse. To balance those risks, sellers should have the buyer execute a promissory note for the amount financed and require that the horse be insured during the financing period. If the buyer cannot afford the insurance, the seller can secure it and add that cost to the purchase price. The financing documents should establish strong remedies for a default, and include a “due on sale” clause in the event the buyer sells the horse before he finishes paying for it. The seller should also have the buyer execute a security agreement that essentially makes the horse the collateral for the financing and gives the seller the legal power to take the horse back if the buyer fails to make payments. There are specific laws in South Carolina that address these transactions. Article 9 of the Uniform Commercial Code provides the requirements and remedies to protect sellers who finance the purchase of property, including horses.
Allocating the Risk of Loss or Injury. This is one of the most challenging parts of a sales transaction. When there is a delay between the date the agreement is signed and when the buyer takes possession, there is always the risk that the horse could get sick, be injured or even die. To balance that risk, the sale agreement needs to consider the various stages of who has legal ownership and who has contractual control in the purchase process. For example, if a buyer takes the horse for a three-week trial, the agreement needs to put the risk and responsibility on the buyer during that time. The sales agreement should specify that the buyer is to hold the seller harmless and indemnify her from any claims or loss during the trial period. If the horse is being shipped to the buyer as part of the agreement, the party selecting the shipper usually bears the risk of loss in transit. The important takeaways are that the parties must think through the actual plan for completing the sale and delivery of the horse and then allocate the risk of loss to the party who has control of the animal in each circumstance. In the absence of a provision to address these situations, the seller assumes all risk of loss for the horse until the buyer pays the purchase price and receives a Bill of Sale.
Seller’s Limitation of Liability. A seller can limit her exposure to clams by the buyer after a sale by limiting recoverable damages to the purchase price of the horse. This provision must be in the agreement and signed by the buyer to be effective. In the absence of that language, a buyer’s claim is not limited by the value of the horse. He can seek additional compensation for losses, costs and damages that exceed the purchase price. Please note, a limitation of liability clause will not protect a seller if the allegations involve fraud or other serious misconduct.
Seller’s Remedies for Buyer’s Breach. In the event that the buyer breaches the agreement by not completing the purchase or failing to make installment payments as required by the sales agreement, the seller is in a difficult position. Is it better to recover the horse and try to resell it? What if the horse was not well cared for, is sick or injured? Is it smarter to allow the buyer to keep the horse and sue to collect\\ the outstanding amount due? These questions need to be answered on a case by case basis and involve thoughtful determinations regarding the value of the horse, the amount due, the probability of collecting from the buyer and the cost of taking legal action. Sellers need to include provisions in the sales agreement and all financing documents that enable them to pursue a variety of remedies and require the buyer to pay the seller’s legal fees and costs of collection. By addressing such contingencies in the agreement, the seller can select the best course of action against the buyer and avoid substantial legal expenses.
In addition to a buyer defaulting on payments, there are two other scenarios where the seller is at risk when financing the purchase of the horse. In the event the horse is sold by the buyer before the original purchase is paid off, the seller needs to have a “due on sale” provision in the loan agreements. That enables the seller to have the legal right to be paid as soon as the buyer sells the horse to the new purchaser. Similarly, should the horse die before the buyer completes payments, the loan agreements need to include an acceleration provision that requires immediate payment in full for the outstanding balance. A good way to assure that payment will be made is to require the purchase of equine mortality insurance in the financing agreements and naming the seller as the beneficiary.
Working with a Seller’s Agent. Many sales and leasing transactions involve third parties acting as a seller’s agent or buyer’s agent. The agents are usually trainers, brokers or commercial barn operators. Like real estate agents, they receive commissions on the completed sale. Unlike real estate agents, they are not licensed or regulated by state law. Therefore, it is vital that sellers who choose to work with an agent sign a written contract with the agent to establish the terms of the agreement. The main elements of a seller’s agency agreement include: identifying the horse and the dates of the agent’s services; establishing that the agent represents the interests of the seller only and that the agent does not have any conflicts of interest; spelling out the duties and expectations of the agent in the sales process; detailing the care for the horse while in the agent’s custody; the terms and conditions of the agent’s compensation; and, indemnifying the seller for any claims arising from the agent’s actions or the actions of the horse while in the agent’s custody and control.
Selling a horse is an important legal event and deserves significant attention to detail. By using smart planning and commonsense agreements sellers can achieve a smooth transition of ownership and have peace of mind that the sale will be successful long after the deal is done.