Transparency it isn’t
How can a deal be a deal if you don’t know the deal? Honest and clear communication by all parties for the sale under a contract for an asset, business or property are essential to a fair business deal. Yet with all our ‘modern ethics’ and reputed straightforward business practices — it ain’t so. If contract negotiations are to eliminate fraud and misrepresentation, the parties must provide transparency and fulsome disclosure of the facts of the deal. I was taught all this some time ago. But alas, nondisclosure, misrepresentation and fraud in contracts remain with us. At a minimum a party to contract negotiations should prepare a list of essential facts needed for a solid deal and then require a detailed disclosure of those facts in writing from the party across the table.
I will use a hypothetical real estate sale contract by way of illustration. The issue arises in commercial, natural resource and real estate contracts in which I have been a party. Current South Dakota law does not require that sellers disclose information regarding mineral rights ownership or water rights. Some disclosure issues are: Is there a state water permit? Has there ever been a state water permit? What is the history of any water or other wells on the property?
In addition, mineral rights can be severed from surface property ownership on the same piece of property. Severed rights do not automatically pass with title to the land in a sale. A third party can own the mineral rights to land. Full, transparent disclosure prevents the unpleasant surprise of a buyer buying property thinking that they owned the rights to minerals only to find that a third party would appear and start digging on the property. Such disclosures have already been codified into some states, including Wyoming.
Certain jurisdictions require a seller to disclose if a property is at risk of flooding or wildfire based on past events. South Dakota does not. Yes, South Dakota has a minimum disclosure form for use in residential real estate contracts. It offers little comfort to the buyer.
Just securing standard title insurance is not enough in a real estate sale. Under state law, standard title insurance insures against “loss by encumbrance, defective titles, and invalid or adverse claim to title.” Standard title insurance has significant limitations. Title insurance covers only whether the owner has good ‘legal title’ to the land. Title insurance will not cover the physical state or condition of the land. Mineral interests and ownership, environmental contamination, zoning restrictions, and covenants are not covered by title insurance. There is a significant difference between having a good legal title — and the physical condition of the land itself. One can obtain perfectly good insured legal title to valueless property.
Amid contract negotiations, do not provide the other side of the table with skewed information and then expect transparency from them. As I have said before, provide transparency: disclose, disclose, disclose. Forthrightl disclosure puts the other side in a vulnerable position if he is playing games in the negotiations. A failure to disclose material facts by the other side of the deal gives him the appearance, if not the actual conduct, of acting in bad faith should a legal conflict arise from the negotiations.
