Understanding Legal Agreements

The nature of agreements can often be difficult to identify. To determine the essence of the agreement, what it really is, it is important to look at the substance of the agreement, not its title. For example, it can be difficult to discern between a lease on equipment and a finance agreement. A lease is a contract in which the temporary right to use an asset is conveyed for a specified consideration. The key is that ownership is not conveyed; rather, only the right to use the asset for a specified period. At the end of the period, all rights return to the lessor.

A finance agreement is an installment payment agreement where title reverts to the lender if there is a default in the promise to pay. Title in the property is vested in the borrower, not in the lender. A security agreement gives the lender a lien on the equipment until the debit is paid. Accounting and tax rules require that in a lease, the asset must be implicitly identifiable and the consideration must be reasonably certain. In other words, it cannot be so contingent or variable that its value cannot be determined at any point in time.

To identify if an agreement is a lease, the substance of the agreement must be analyzed to determine:

  • whether the contract is only fulfilled if the specified asset is used by the lessee (or at least if the lessor agrees not to exercise use or control over it); or
  • whether the lessee controls the right to use the asset for the specified period of time; that is, to decide how it will be used and receiving the benefit of such use.

Another example is a trademark or patent license or an assignment. Similar to a lease, a license is the right to use the intellectual property rights for a specified period for a specified compensation rate. In an assignment, the key is that less than full, unconditional ownership is transferred. If the owner retains some right in the asset, however remote (for example, if the contract gives the owner-seller a right of reversion or cancellation), under any condition, full, unconditional rights are being conveyed. It may be a limited use of the asset in certain territories or industries. While the owner-licensor retains the right to use the asset in certain business fields or geographic areas, you must carefully look at a contingent “sale” where the transfer only occurs under certain conditions to determine whether it is truly an assignment or a license. This will be important to understanding what rights you have to convey, encumber and enforce the asset again potential infringers. An experience attorney is a valuable resource for explaining your rights in any agreement.

Property Sales with Underground Oil and Gas Tanks

When the sale of property involves an underground fuel tank, the buyer should consider having the tank tested to avoid unknowingly taking on an environmental hazard that may require costly remediation. Many lenders or insurers will not enter the transaction unless a passing test result is provided. Such underground tank tests are not generally part of an engineering inspection or home inspection and must be performed by a specialist. These may often be done by a local fuel company.

Failure to test at the time of purchase may transfer the cost when the buyer sells the property. Typical remediation costs may be $3000-$10,000, so liability could be significant.

Tests typically include a pressure test or a soil test. The least expensive test is generally a pressure test of the underground tank, although there are risks with pressure tests, as they may cause the tank to rupture. A cautious seller may not permit such testing procedure.  A soil test is more costly, but generally the more desirable procedure. The cost may be as much as $3,000. If a leak is found, it must be reported to the DEC or DEP.

The issue of underground tank testing is included at the time of contract, setting forth an appropriate contingency and who will pay for the test, and even the negotiated remedy if the tank fails the test.

A typical remediation is to abandon the tank, fill it in and install an above-ground tank. The seller may also consider agreeing to a price concession in lieu of testing or remediation.

An experienced attorney can guide a buyer or seller though this and other real estate issues, mitigating the client’s risk and maximizing the economic benefit of the transaction.