Contents of Main Description

Introduction
         Stewardship Fees Help Meet Stewardship Obligations
         Future Payment to Cover Contingency
         Approaches to Stewardship Fees
Covenants Running with the Land
         Cautionary Note
         An Extraordinary Result
         Recording Alone Does Not Qualify a Running Covenant
         Requirements of Running Covenants
         Direct Relationship to Use and Enjoyment of Property?
            Guidance from French and Pickering Case
            Guidance from Homeowners' Association Cases
         Enforcing a Stewardship Fee Designed as a Running Covenant
            All Assets Exposed to Collection
            Priority of Judgment Lien
         Running Covenant or Not? Enforceable or Not?
            Resource Management
            Reimbursement of Costs of Review
            Reimbursement of Costs of Violation
            Annual Stewardship Fee
            Accrued but Unpaid Balance due on Transfer
            Annual Fee subject to Increase for Conservation Defense Insurance
            Fee on Transfer based on Typical Costs
            Annual Fee for Benefit of Contiguous Preserve
            Private Transfer Fee: Funding for Community Services
            Private Transfer Fee: Revenue to Non-Profit Land Trust
         Legislative Actions Regarding Private Transfer Fees
            State Regulation of Private Transfer Fees
         Opposition to Private Transfer Fees
         Conservation Easements Statute as State Authorization?
            Validates Affirmative Covenants
            Benefit vs. Burden of Covenant
Strategies Not Solely Dependent on Enforceability of Running Covenants
         Requiring Payment as a Condition of Approval
            Satisfactory Arrangements for Deferred Payment
               Mortgage
               Assumption of Liability
            Remedies for Non-Payment
         Requiring Payment as a Condition for Certificate of Compliance
         Requiring Assumption of Liability
            Rationale for Assumption
               Customary in Lease Transactions
               Application to Conservation Easements
               Documentation of Assumption
            Strategies to Obtain Assumption of Liability
               Assumption in Lieu of Immediate Payment
               Assumption in Lieu of Greater Payment
               Release of Transferring Owner
Open-End Mortgage: Reliably Securing Payment of the Stewardship Fee
            Benefits
            The Tool for Deferred Payment
            Recourse to Property
            Challenges and Solutions to Using Open-End Mortgages
               Mortgages Existing at the Outset
               Future Mortgages and Liens
            Priority Issues; Independent Document
Notes on Tax Deductibility
      Original Donor
      Future Owner
Pennsylvania Context
Related Tools
Disclaimer

Introduction

Stewardship Fees Help Meet Stewardship Obligations

The stewardship fee is a fee collected periodically or upon certain triggering events by the holder of a conservation easement from the owner of the conserved property.  In many cases, the stated purpose of the fee is to provide support for the stewardship of the conservation easements held by the conservation organization. Land trusts across the country are considering a variety of stewardship fees as part of their conservation easement transactions. One of the most discussed forms of stewardship fee is the private transfer fee, calculated as a percentage of value of the conserved property and paid to the holder upon the transfer of conserved property.

Stewardship fees offer a fresh approach to raising funds for conservation easement stewardship. In the short-term, a conservation organization may be able to adequately monitor and manage its conservation easement holdings without much in the way of dedicated stewardship money, thanks to highly committed volunteers.  However, conservation is all about the long-term, and in the long-term, a conservation organization cannot reasonably expect to live up to its obligations without substantial stewardship funding. Stewardship fees provide a mechanism that, when used with other funding approaches, can help ensure that a conservation organization can meet its conservation obligations.

Stewardship fees can be designed to cover a conservation organization’s recurring and ongoing costs associated with monitoring and administration of a conservation easement. Stewardship fees can also be designed to address one-time costs, payment being triggered by a particular event.

Future Payment to Cover Contingency

As a condition of acceptance of a conservation easement, a conservation organization may request a stewardship contribution from the landowner to cover recurring and ongoing stewardship costs that will occur as well as costs that may occur if certain changes permitted in the conservation easement occur.  Of course, those changes also may not occur and, on that basis, the landowner who has no present intention to exercise a reserved right may object to a stewardship contribution that includes funding to cover a contingency that may never occur.  For example, if the conservation easement allows subdivision, the holder will anticipate substantial additional expenses and liabilities to enforce conservation restrictions against multiple lots and to maintain landowner relationships for multiple properties if the subdivision occurs; if the subdivision never happens, neither do the additional costs.

One way to accommodate the concerns of both landowner and conservation organization is to exclude, from the stewardship contribution at closing, the anticipated costs associated with the contingent triggering event (the occurrence of a subdivision in the above example).  In return, the landowner enters into, at or prior to closing, a legally binding obligation for payment to the conservation organization of the excluded amount (adjusted for currency value) if and when the triggering event ever occurs.  See discussion below for strategies to obtain payment from future owners.

Approaches to Stewardship Fees

The following sections explore different approaches (not mutually exclusive) for structuring stewardship fees:

• Covenants Running with the Land
• Requiring Payment as a Condition of Approval
• Requiring Payment as a Condition for Certificate of Compliance
• Requiring Assumption of Liability
• Open-End Mortgage

In many if not most cases, it is highly desirable to use multiple approaches to better ensure that a stewardship fee will be enforceable over time.

Covenants Running with the Land

One approach to implementing a stewardship fee is to structure it as a covenant running with the land. Since conservation organizations are familiar with the restrictive covenants found in conservation easements, a type of covenant running with the land, it is natural that they gravitate towards this approach, especially since the stewardship fee is often embedded in the conservation easement itself.

Cautionary Note

This approach may seem straightforward, but given the legal obstacles and uncertainties as explained in this section, conservation organizations must be careful in using this approach especially if they rely solely or predominantly on collection of stewardship fees from future owners to meet their stewardship funding needs.

An Extraordinary Result

A covenant running with the land -- sometimes called “a running covenant” or “real covenant” -- is a promise that is enforceable against future owners of the land even if the future owners did not make the promise, adopt the promise or agree to honor the promise.  That is an extraordinary result under the law so it is only applied when the covenant meets certain requirements discussed in more detail below and is found to be fair under the circumstances in the court's equitable jurisdiction.   The law of running covenants developed over centuries as a means to balance the rights and remedies among holders of differing interests in real property in a fair but utilitarian way. (A detailed history of the development of equitable principles can be found in a Boston College Law Review article by David E. Cole.)

Recording Alone Does Not Qualify a Running Covenant

A restrictive covenant is a type of covenant running with the land.  There is a common misunderstanding that, because restrictive covenants set forth in recorded documents (e.g., conservation easements) can be binding upon future owners, any covenant included in a recorded document automatically becomes the legally binding obligation of future owners. The rationale is that the landowner voluntarily accepted ownership with knowledge of the covenant; therefore, the covenant is legally binding upon the landowner. This understanding is not supported by legal principles established over many centuries to identify the kind of covenants that, in fairness, after balancing the equities, ought to be binding upon future landowners. Accepting ownership under and subject to a covenant requiring certain payments does not, by itself, imply an agreement to be personally liable for those payments.

Requirements of Running Covenants

As summarized in the following chart, the traditional requirements to be met for a covenant to run with the land are almost always met when using the model Pennsylvania Conservation Easement and most other easement forms. As to covenants for payment of stewardship fees, the problematic issue is the last requirement -- whether the covenant “touches and concerns” the land -- which is discussed in greater detail below.

Running Covenant Requirement	Satisfied in Conservation Easement?
Writing sufficient to satisfy Statute of Frauds	Satisfied by easement being in writing and signed by landowners
Intention for subsequent owners to be bound	Provided in Article VII of Pennsylvania Conservation Easement
Notice to subsequent owners	Satisfied by recording in public records of county in which property is located
Subsequent owner holds same ownership interest in property as donors (called vertical privity)	Always satisfied
Donors shared interest in the property with conservation organization at time running covenant created (called horizontal privity)	Satisfied by grant of enforcement rights to conservation organization under Article V of Pennsylvania Conservation Easement
Covenant must touch and concern the land	The restrictive covenants in Articles II, III and IV of the Pennsylvania Conservation Easement satisfy this requirement. As to funding commitments made in a conservation easement, it depends on whether there is a connection between the funding and some benefit to the landowner directly related to the use and enjoyment of the property.

 

Direct Relationship to Use and Enjoyment of Property?

To meet the “touches and concerns” requirement, a promise to pay a sum of money must be directly related to landowner's use and enjoyment of the property.  As discussed below, existing case law provides little guidance directly on point.  Thus, it is difficult to confidently predict whether a court will find that a particular stewardship fee satisfies the "touches and concerns" requirement.

Guidance from French and Pickering Case

Pennsylvania courts and federal courts applying Pennsylvania law have held, in several of the cases arising from the French and Pickering v Natale matter, that the breaching landowner is personally liable for compensatory damages arising from a breach of a restrictive covenant in a conservation easement. There are no other reported cases in which enforcement of a promise to pay in a conservation easement has been sought in any Pennsylvania court of appeals. 

Guidance from Homeowners' Association Cases

Pennsylvania courts have supported the principle that landowners are personally liable for payment to a homeowners’ association of charges reasonably related to services provided by the association to common areas. A number of appellate decisions have upheld the right of a homeowners' association to collect, as a personal liability of the beneficial users of the common areas of the development, a proportionate share of the cost of repair, maintenance and upkeep of the common areas whether or not specifically provided for in the deed or other documentation of the association.  The Treasure Lake Homeowners' Association case decided by the Pennsylvania Superior Court in 2003 upholds the principle that there is a duty on the part of the landowner to share in the costs of services that benefit his ownership in land.  The Treasure Lake case also confirms that the remedies available to the beneficiary of a covenant running with the land are not limited to remedies against the land (such as an injunction or foreclosure of a lien against the land) but include the right to obtain a judgment against the owner collectible from the owner's assets including but not limited to the land.

Applying the rule of law derived from homeowners' association cases to a stewardship fee provision in a conservation easement is challenging.  On the one hand, the principle is straightforward -- what benefits has the landowner obtained in his use and enjoyment of the property that makes enforcement of the funding commitment equitable?  On the other hand, there is no clear guidance on how direct the connection (sometimes referred to as a “nexus”) must be between the required payment and the benefits received to support a finding of liability on the part of future owners as a covenant running with the land.

Enforcing a Stewardship Fee Designed as a Running Covenant

If an obligation to pay a stewardship fee is found to be a running covenant, the then-current landowners are personally liable for payment even though they did not make the promise or adopt the prior owner's promise as their own.

All Assets Exposed to Collection

The term "personal liability" means that, if a conservation organization commences a civil action against the landowners for non-payment of the obligation, the judgment obtained in that lawsuit can be collected from any of their assets -- bank accounts and the like -- not just from the conserved property.  The lien of the judgment automatically attaches to all of the real estate interests held by them in the county in which the judgment is obtained.  Other assets can be garnished or levied upon and sold at public sale.

Priority of Judgment Lien

As to the conserved property or other real estate owned by the defaulting landowners, the lien of the judgment will take priority over other liens and mortgages recorded after the date of the lien but will not relate back to the date of recordation of the conservation easement.  The French and Pickering v. Natale case, applying Pennsylvania law, held that a conservation easement does not function as a lien or a mortgage for purposes of establishing priority over intervening liens.  The judgment lien obtained by the land trust in a civil action against landowner to collect over $100,000 in costs and expenses incurred in enforcing conservation easement did not take priority over several other mortgages recorded after the conservation easement.  The result was that the land trust's lien was treated as if unsecured; i.e. the land trust was not entitled to share in any proceeds of the bankruptcy sale of the conserved property.

Running Covenant or Not? Enforceable or Not?

The examples listed below range from describing a direct, visible, on-site connection between stewardship fee and landowner benefit to little connection at all.  Since there is little or no case law on point, the estimations of enforceability are best guesses based upon an examination of a variety of sources including the Pennsylvania decisions discussed above: cases discussing the history of the “touches and concerns“ requirement; cases differentiating personal covenants from lease covenants that run with the land; examples included in the Restatement of the Law of Servitudes (3rd) (the "Restatement"); and cases discussing the  “nexus”  requirement for enforceability of impact fees.

The prospects of enforceability are addressed in these examples in terms of stewardship fees that are constructed with sole reliance on the premise that they meet the requirements of a running covenant. Use of strategies described in later sections may substantially boost the prospects of enforceability.

Resource Management

• Example:  Conservation easement provides that conservation organization is to furnish on-site resource management activities to high-value habitat within the conserved property in accordance with standards set forth in the conservation easement. Landowner is to reimburse reasonable cost of providing these services on a quarterly or other periodic basis.
• Enforceability:  Reasonable costs of maintenance are highly likely to be collectible from landowner as a running covenant.  Conservation organization is providing a direct benefit to the land by keeping it in compliance with the standards of the conservation easement and, consequently, it will incur costs that would otherwise have been borne by landowner.

Reimbursement of Costs of Review

• Example:   Conservation easement includes a requirement to reimburse the costs and expenses reasonably incurred in connection with review of an action (e.g., subdivision, timber harvest plan) proposed by the landowner that is permitted by the easement subject to the review of the conservation organization.
• Enforceability:  Highly likely to be collectible as a running covenant because the services furnished in connection with the review are directly related to either the intensity of use or development of the property and were prompted by a request from landowner.

Reimbursement of Costs of Violation

• Example:   Conservation easement includes a requirement to reimburse the costs and expenses incurred in investigating a possible violation and exercising enforcement rights under the conservation easement.\
• Enforceability:  If the costs arise from landowner's acts or omissions with respect to the use of the property, then there is a direct connection between the use (or misuse) of the property and the investment of time and money on the part of conservation organization.  The costs are collectible as a personal liability of the defaulting landowner.

Annual Stewardship Fee

• Example:  The conservation easement includes a promise to pay an annual fee of $500 (subject to adjustment over time to maintain currency value) to fund costs of annual monitoring and availability for consultations with landowner on issues pertaining to conservation of property.
• Enforceability.  Likely enforceable as a running covenant although the court may use its discretion to adjust amount so as to be reasonably related to the benefit conferred. The benefit would be assurance to the landowner that changes (if any) from prior monitoring conform to the standards set forth in the conservation easement.  Availability for consultation on resource management issues pertaining to the property is a benefit whether or not landowner chooses to utilize the benefit.

Accrued but Unpaid Balance due on Transfer

·      Example:  Same as above, but with the addition that, if not paid as and when due, the obligation bears interest at a stipulated fixed rate, compounded annually, and is due and payable in full by the owner (if not earlier paid) at the time of, and as a condition of, transfer.

·      Enforceability.  Likely enforceable as a personal liability of landowner but unlikely that court would issue an order restraining transfer unless conservation organization was paid.  A court may decline to enforce a running covenant that unreasonably restrains alienation (free transferability). Other alternatives to induce compliance are discussed below such as conditioning delivery of a certification of pre-transfer inspection upon payment in full of all of the accrued but unpaid obligations of the transferring landowner.

Annual Fee subject to Increase for Conservation Defense Insurance

• Example:  The $500 annual fee described above is subject to increase to cover the allocated cost of the premium for conservation defense insurance applicable to the property (and the number of lots within the property) should that become available to conservation organization.
• Enforceability.   More likely than not to be enforceable as a personal liability of the landowner although the court will have the power to weigh in on the reasonableness of the amount.  Having funds available to enforce the conservation easement is a significant public benefit and requiring uniform standards to fund enforcement from all landowners of conserved property spreads the burden in an equitable manner.

Fee on Transfer based on Typical Costs

• Example:  The conservation easement imposes a fee of $2500 (subject to adjustment over time to maintain currency value) upon transfer of each conserved property.  The amount is calculated to include the time typically spent with brokers and prospective purchasers or lenders explaining and interpreting the conservation easement as well as the time spent on a pre-transfer inspection and issuance of certification of violations (if any) prior to closing of the transfer.
• Enforceability:  Likely enforceable as a running covenant but with a possible risk that a court could exercise its discretion to limit the charge to the costs and time actually incurred by the conservation organization in connection with the transfer.  Landowner benefits when the conservation organization makes itself available to work with prospective purchasers and others to increase their comfort level when purchasing a property subject to a conservation easement.

Annual Fee for Benefit of Contiguous Preserve

• Example:  The conservation easements on buffer properties surrounding a preserve contain a provision charging a fee of $1000 per year to fund preserve maintenance because that investment significantly enhances the value of the conserved property.
• Enforceability:  Likely enforceable as a running covenant but enforceability would be enhanced if benefit to landowners had a more direct connection to costs of maintaining the preserve; for example, opportunities for access to the preserve not generally available to the public.

Private Transfer Fee: Funding for Community Services

• Example:  The declaration for Sand Acres, a common-interest community developed in an ecologically sensitive area, requires payment of a transfer fee of one percent on the sale of each lot to the Sand Acres Foundation, a conservation organization that holds a conservation servitude restricting development of most of the commonly-held land owned by the Sand Acres Community Association.  The Foundation manages the property subject to the conservation servitude and carries out environmental education programs.
• Enforceability: A transfer fee that has a direct benefit to an identifiable community is likely to be found enforceable by a court because it has a rational justification.  In this example, taken from the Restatement (§3.5 Comment c.), the revenues support land management and educational programs for the common interest community rather than a particular lot; nevertheless, the benefit is to common areas held for the benefit of all lot owners.  This example from the Restatement is similar to the Spring Island development arrangement cited in Chapter 9 of A Field Guide to Conservation Finance.
• Variation.  The Prairie Crossing example also cited in Chapter 9 of A Field Guide is a variation on the pattern that takes it a step away from the likely enforceability of the Restatement example and the Spring Island arrangement.  Although the conservation organization receiving the fees is said to undertake major restoration and conservation projects in and around the development, the transfer fees do not appear to be dedicated to that cause but are granted to other local nonprofits (unclear what, if any, relationship to benefits to the Prairie Crossing development) and subsidize 30% of the operating budget of the conservancy.

Private Transfer Fee: Revenue to Non-Profit Land Trust

• Example: The conservation easement imposes a fee of one (1%) percent of the value of the conserved property upon transfer of the conserved property. There is no obligation to dedicate the fee to stewardship services benefitting the property. There is no correlation between the fee and stewardship services rendered by the conservation organization for the property.  Nor is there correlation between stewardship services rendered across the conservation organization’s portfolio of easement holdings and amounts collected in connection with that portfolio.
• Enforceability:  Enforcement as a personal liability based upon a running covenant is problematic without some connection to benefits conferred on the landowner's use and enjoyment of the property such as those described in the preceding examples. There are a number of legal theories that a court might find persuasive to invalidate a covenant that does not, on its face, evidence any connection between the revenues collected and some benefit to the landowner.  Besides the "touches and concerns" element, the covenant may be found to be an indirect restraint on alienation, contrary to public policy, or unconscionable. The reasoning that underlies all of these equitable defenses is that the legal system should not be used to enforce an arrangement that lacks a rational justification against an unwilling participant.

Legislative Actions Regarding Private Transfer Fees

Community Tax for Acquisition of Open Space

The Martha's Vineyard Land Bank has conserved 3000 acres of the island by collection of a 2% transfer fee on most transactions.   Although administered by a private conservancy, the fee is not a private transfer tax imposed by covenant but was, instead, created by enabling legislation and is enforced by detailed regulations governing the administration of the fee.  The fee is dedicated to acquisition of publicly accessible open space, which is not only of great value to residents and visitors but increases the market value of real estate generally on the island.  It appears to have a high a degree of acceptance in the Martha's Vineyard community.

State Regulation of Private Transfer Fees

Texas has banned certain private transfer fees.  Legislation is being or has been considered in several states, including Florida, Kansas and Ohio, to ban private transfer fees.  California has enacted legislation mandating disclosures of private transfer fees including the purpose for such fees.  States that have enacted or are considering enacting regulation of private transfer fees often exempt homeowners associations and 501(c)(3) organizations from the regulatory scheme; however, that exemption from regulation should not be taken to imply legislative authorization of private transfer fees.  It only leaves the question of validity and enforceability to otherwise applicable law. 

Opposition to Private Transfer Fees

Private transfer fees (sometimes referred to as private transfer taxes by those opposed to them) have had a mixed reception due in part or largely to the same concerns evidenced in the previous section:  Is there a rational relationship between the collection of funds and some clear benefit to the landowner or the landowner's community by expenditure of those funds?

Private transfer fees have been characterized by some seeking to prohibit or regulate them as scams, pyramid schemes, and pay-offs to environmental organizations to refrain from contesting proposed development.  In the examples cited in various online articles opposed to the device, the fee is characterized as unearned revenue extracted from an unknowing and unwilling landowner in exchange for no benefit whatsoever. 

Conservation Easements Statute as State Authorization?

The Conservation and Preservation Easements Act adopted in Pennsylvania in 2001 (the “Act”) provides in §6 that a “conservation easement is valid even though...

(5) it imposes affirmative obligations upon the owner of an interest in the burdened property or upon the holder; and

(6) the benefit does not touch or concern real property....” 

Validates Affirmative Covenants

While these sections may be helpful to cite as support for a finding that a particular promise to pay included in a conservation easement is enforceable, §6 of the Act is directed towards affirming the validity of a conservation easement as a whole even if certain of its provisions fall afoul of ancient rules of the law of servitudes; for example, the rule that only negative covenants (i.e., restrictive covenants) could run with the land; or the rule that both the benefit and the burden of the covenant had to run with the land (i.e., the only persons who could enforce the covenant were the owners of an adjoining parcel).

Benefit vs. Burden of Covenant

The Act addresses whether the benefit of a covenant must touch or concern real property; it changes nothing about whether the burden of a covenant (i.e., the payment of money) must touch or concern real property.  While the law of servitudes may be shifting away from traditional requirements for running covenants, and Pennsylvania was one of the first states to eliminate the "touch and concern" requirement as applied to the benefit of the covenant, it is doubtful that a court, exercising equitable discretion, would enforce against future landowners a fee burden wholly unconnected with their beneficial use and enjoyment of the property based solely on the authority of §6(5) of the Act.

Strategies Not Solely Dependent on Enforceability of Running Covenants

Requiring Payment as a Condition of Approval

If a stewardship fee payment is associated with a change that increases the stewardship responsibilities of the conservation organization, make the change subject to review and approval rather than permitted as a matter of right. Then include, as an additional condition of approval in the approval process, receipt by the conservation organization of the agreed-upon amount (adjusted for changes in currency value) to fund the anticipated increase in stewardship responsibilities as a result of the change. For example, an easement could contain the following language:

“Subject to Review [as defined in the Pennsylvania Conservation Easement], the property may be subdivided into not more than five lots.  Owners agree to contribute to the conservation organization the sum of $10,000 per lot (the “Contribution”) for each lot shown on a proposed plan of subdivision submitted to conservation organization. Conservation organization may withhold issuance of its approval after Review pending receipt of the Contribution or satisfactory arrangements for payment of the Contribution.”

Satisfactory Arrangements for Deferred Payment

Mortgage

The “satisfactory arrangements for payment” described in the above example may include a mortgage recorded against the lots to secure the Contribution as discussed below.   Frequently, the landowner intends to fund the Contribution out of proceeds of sales of lots, but sales may not occur for some time after subdivision.  When the Contribution secured by a mortgage becomes due and payable in full upon transfer, the lot purchaser will not close without assurance that the lot is conveyed free and clear of the mortgage.  When the conservation easement holder is notified that settlement is imminent, it will sign and deliver a release of the lot to the settlement agent for recordation upon payment of the Contribution to the conservation organization.

Assumption of Liability

In addition to the mortgage, the "satisfactory arrangements for payment" might include delivery of an assumption of the obligation to make future payment of the Contribution signed by the new owner of the lots.  For example, the lots may be transferred to a related entity without any cash payment.  If the conservation organization is otherwise willing to wait for a resale to a third party purchaser, it would want the related entity to adopt as its own the original promise to make the Contribution.

Remedies for Non-Payment

If payment of the Contribution is identified as a pre-condition of recording a subdivision plan or commencing construction of an additional dwelling, the mechanism for enforcement would be to seek an injunction of the action pending satisfaction of this pre-condition.  In addition to this equitable relief, the conservation organization could commence a civil action to collect the Contribution.  If the Contribution is secured by a mortgage, the conservation organization could also commence foreclosure proceedings against the land. 

Requiring Payment as a Condition for Certificate of Compliance

Conservation easements rarely include a prohibition upon transfer without the approval of the conservation organization and, if they did, it would be difficult to enforce unless it was crafted so as not to be an unreasonable restraint on alienation.  The Pennsylvania Conservation Easement provides, in §6.10, an incentive for landowners to obtain a certificate of compliance prior to transfer.  This section has been, or will be modified, in the 2010 edition, to add, as an additional condition of issuance, satisfactory arrangements for payment in full of all accrued but unpaid obligations under the conservation easement and any other payments required prior to transfer as described in the conservation easement.

Past experience suggests that the promise of an issuance of a certificate of compliance is an insufficient inducement for many landowners to take a desired action (e.g., informing an easement holder of a property transfer). Consequently, more so than any of the other approaches, this approach should only be used in conjunction with other approaches.

Requiring Assumption of Liability

Rationale for Assumption

A promise to pay can be collected from the person who made the promise and others who adopt the promise as their own.  This is called an “assumption of liability” and it is frequently used in real estate transactions when the parties do not want to rely solely on the covenants qualifying as running covenants. Without an assumption of liability, the successor owner has no personal liability for payment of a prior owner's debt unless the promise to pay qualifies as a running covenant.  For example, in Pennsylvania, if land is transferred subject to a mortgage, the land can be sold to repay the debt secured by the mortgage but the transferee has no personal liability to repay the debt. 

If the ruling in the French and Pickering case discussed above is applied, the holder does not have any recourse against the land either because a recorded conservation easement does not operate as a lien or mortgage.  If there is no recourse against either the owner or the land, then the holder may be left without a remedy to collect a payment owing to it.  That is why assumption of liability is critical whenever there is any question as to whether the payment obligation qualifies as a running covenant.

Customary in Lease Transactions

A prospective tenant who wants to take the place of an existing tenant under an existing lease is typically required to assume personal liability for compliance with obligations arising under the lease from and after the date the lease is assigned.  The obligation to pay rent in return for possession has long been held a running covenant but other affirmative obligations in the lease may not be so clear.  Rather than argue later about which covenants are or are not binding on the transferee, the landlord usually demands, as a condition of permitting transfer, that the transferee adopt all of the covenants as the transferee's own.

Application to Conservation Easements

In summary, if the conservation organization wants to be able to collect, by civil action if necessary, funding commitments made by the previous owner, particularly when there may be doubt whether the payment obligation is a running covenant, the conservation organization must preserve its right to obtain payment by obtaining an assumption of liability from the prospective transferee.

Documentation of Assumption

The agreement to assume personal liability for future payment obligations does not have to be in a separate document or a recorded document to be effective under Pennsylvania law. 

Example: The transfer certification issued by the conservation organization might include a required signature of the transferees adopting the promises made by the persons signing the conservation easement as their own.

Example: Another device to bind the subsequent transferee under Pennsylvania mortgage law is the inclusion of the phrase “which grantee assumes and agrees to pay” in the deed of transfer. A provision in the deed of transfer such as the following may operate to bind the transferee to fulfill payment obligations in a conservation easement; however, that result is uncertain because, as discussed above, courts may or may not apply to a conservation easement rules applicable to mortgages.

"Under and Subject to a Conservation Easement dated ____ and recorded ____ , which includes certain payment obligations that, by acceptance of this Deed, Grantees, intending to be legally bound hereby, assume and agree to pay."

To enhance enforceability, the deed should provide for joinder by Grantees to acknowledge acceptance of the provision.

Strategies to Obtain Assumption of Liability

Conservation organizations cannot usually prohibit transfer pending delivery of an assumption of liability from the prospective transferee but other strategies may be available to achieve that end.

Assumption in Lieu of Immediate Payment

One strategy is to craft the funding commitment in the conservation easement so as to be due and payable in full upon transfer whether or not the triggering event has then occurred.   If a substantial sum of money becomes due and payable in full upon transfer unless the transferring owner obtains an assumption of liability for future payment from the transferee, there is an increased likelihood that the transferor will be sure to make delivery of that document a part of the transaction.

Example:  The example of payment due on subdivision of lots given above could be modified so that the entire Contribution of $50,000 is due and payable in full upon transfer; however, conservation organization waives payment in full if, prior to the transfer, landowner delivers an assumption of liability agreement satisfactory to conservation organization from the prospective transferee.  The right to payment in full remains in effect as to subsequent transfers unless, in each case, a satisfactory assumption of liability is delivered.

Assumption in Lieu of Greater Payment

A variation on the strategy described above is to create an incentive to obtain the assumption of liability by decreasing the payment obligation upon its delivery.

Example:  A conservation easement contains a covenant to pay a transfer fee in the amount of 1% of the value of the conserved property.  The covenant might be written so as to impose a 2% fee upon the transfer, which is reduced to 1% if the transferring owner obtains an assumption of liability for payment of the fee upon a subsequent transfer.

Release of Transferring Owner

Another strategy, which may be used in combination with the preceding suggestions, is to clarify in the conservation easement that the landowners signing the conservation easement are not released from their promise to make future payments even if they no longer own the property unless they deliver to conservation organization an assumption of liability from the succeeding landowner.  Upon delivery of the assumption of liability, they are released from further liability following the date of transfer.

Open-End Mortgage: Reliably Securing Payment of the Stewardship Fee

A strategy that will assure payment of the stewardship fee is to secure the obligation with an open-end mortgage on the conserved property.  An open-end mortgage can secure payment of an obligation that has not come into existence yet; for example, an obligation to provide additional funds for stewardship upon certain changes in the conserved property.

Benefits

Conservation organizations should seriously consider the benefits of using an open-end mortgage to secure commitments to provide future funding either periodically or upon the occurrence of certain triggering events:

• Collection will not be dependent upon a finding that the promise to pay is a running covenant.
• Collection will not be dependent upon a finding that the then-current landowner is personally liable for payment.
• If the property has been mortgaged to secure landowners' other debts, the conservation organization can still collect on its prior lien established as of the easement date.

The Tool for Deferred Payment

Conservation organizations have every right to demand security via a recorded mortgage when a triggering event has occurred and landowner requests payment to be deferred until the occurrence of a cash-flow event.  This is especially true when the cash-flow event is a sale of all or a portion of the conserved property.  See, for example, the discussion above in which the Contribution due on subdivision of the property is deferred until sale of lots occurs.   A mortgage is the appropriate tool to secure future payment of indebtedness.  If a landowner cannot or will not contribute the entirety of the sum required as a condition of acceptance of the conservation easement, the promise to pay the balance at some later date or upon some triggering event, such as transfer, should be secured by a mortgage.

Recourse to Property

The mortgage allows the conservation organization the right to collect from the value of the property amounts owed for payment obligations under the mortgage.  Even if the then-current landowners are not personally liable for the payment obligation, they are more likely to honor the funding commitment if their ownership interest is at risk for non-payment.  Under Pennsylvania law, the lien of a judgment obtained upon an obligation secured by a mortgage relates back to the recording date of the mortgage and, thus, will be superior in priority to after recorded mortgages and liens. (Central Pa. Sav. Ass’n v. Carpenters of Pa., Inc., 502 Pa. 17, 22, 463 A.2d 414, 417 (1983)).  As discussed above, the federal appeals court for Eastern Pennsylvania held, in the French and Pickering v. Natale bankruptcy case, that the judgment lien obtained by the land trust in a civil action against landowner for breach of the conservation easement did not relate back to the recording date of the easement.  While this federal court decision is not binding precedent under Pennsylvania law, the advisable course of action is to use a mortgage, not a conservation easement, to secure landowner payment obligations.

Challenges and Solutions to Using Open-End Mortgages

The main challenge to using an open-end mortgage for securing stewardship fee payment obligations is lender resistance to subordination of their financial interests.

Mortgages Existing at the Outset

It is difficult enough to obtain subordination of existing liens to accommodate a conservation easement.  Requesting subordination to both a conservation easement and an open-end mortgage can be expected to result in even greater lender resistance.  The conservation easement must remain superior to all mortgages if a federal tax deduction is involved as well as in most other cases.  The open-end mortgage securing future payment obligations arising under the conservation easement could be recorded in a subordinate position; i.e., conservation easement in first position, mortgage to third party lender in second position, open-end mortgage in favor of holder in third position.

Future Mortgages and Liens

A landowner willing, in concept, to record an open-end mortgage to secure a stewardship fee obligation may demand from conservation easement holder an agreement to subordinate the open-end mortgage to future liens at the request of the landowner.  The conservation organization may accommodate landowner's financing concerns by agreeing at the outset to subordinate so long as the future liens that will have priority over the mortgage do not exceed some percentage of the value of the conserved land. 

Priority Issues; Independent Document

The open-end mortgage must be subordinate to the conservation easement but it remains prior to other liens on the property recorded afterward even though there is nothing owing until such time (if ever) as the triggering change occurs.   It is conceivable that a document entitled “Conservation Easement and Open-End Mortgage” could be recorded and serve the purpose if it otherwise met the requirements of the Open-End Mortgage Act.  There are several good reasons, however, for recording a mortgage separate from the conservation easement.  One reason is the subordination issue described above; the mortgage in favor of the conservation organization must be subordinate to the conservation easement.  Another reason is that, upon payment in full of the obligation, the landowner will want the mortgage to be satisfied and the law requires that as well.  A separate mortgage can be marked satisfied on the public record without jeopardizing the continuing validity and enforceability of the conservation easement.

Notes on Tax Deductibility

A charitable contribution must be voluntary in order to be deductible for federal tax purposes.

Original Donor

As discussed in Pledges and Donation Agreements, payments made by the original donor in satisfaction of a funding commitment to a conservation organization may be, but not necessarily are, deductible as charitable contributions for federal tax purposes.

Future Owner

Payments made by landowners to a conservation organization in satisfaction of a funding commitment included in an existing conservation easement, already in place when they acquired the conserved property, are not deductible as charitable contributions.  Taxpayers can only deduct contributions made as a result of their own voluntary promises to donate (not someone else’s promise).

Pennsylvania Context

While Pennsylvania law is the context for this exploration of the stewardship fee, much of the content and analysis presented has relevance nationwide.

Related Tools

• Model Conservation Easement
• Pledges and Donation Agreements

Disclaimer

Nothing contained in this document is intended to be relied upon as legal advice. Pregmon Law Offices disclaims any attorney client relationship with anyone to whom this document is furnished. Nothing contained in this document is intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to any person any transaction or matter addressed in this document.

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