In a decision issued July 3, 2013, the Pennsylvania Superior Court invoked a 100-year old doctrine to hold that an unrecorded timbering contract was enforceable against a subsequent purchaser of the real estate that had no notice of the contract. Zitney v. Appalachian Timber Products, Inc. 2013 WL 3366740 (Pa. Super.).
Shortly after the Zitneys closed on the purchase of real estate in Pennsylvania, a timber company commenced timbering operations on the property. The Zitneys asked that the timbering cease, and the timber company produced a timbering contract signed by a prior owner in the title chain (the owner before the party that sold the property to the Zitneys), which permitted the timber company to begin harvesting timber within 24 months. The timber contract was never recorded, and the Zitneys had no notice of it.
The Zitneys filed suit to recover damages and claimed they could not be bound by an unrecorded timber contract to which they were not a party and of which they had no notice. The Superior Court disagreed, affirming the trial court’s decision that upheld the timber contract. The court reasoned that because the contract had a term of only 24 months, it was a contract for personal property (i.e., the to-be-severed timber), not a contract for real property. “The failure to record the contract does not exempt Appellants, even as bona fide subsequent purchasers, from the binding terms of the contract.”
Under long-standing Pennsylvania law, the issue of whether a timber contract constitutes a contract for realty or for personalty depends on “the nature of the contract and the intent of the parties.” The Zitney court applied century-old Pennsylvania case law to conclude that the length of time allotted for removal of the timber is the dispositive issue as it indicates the parties’ intent and the nature of the contract. The court contrasted an 1899 case holding that a six-to-seven-year window to remove timber constituted a sale of personal property (because the “shorter” time frame reflects that the timber will be severed imminently and is thus treated as goods) with an 1881 case holding that a nine-year period to remove timber constituted a contract for the sale of land (because the “longer” time frame makes the severance of timber more remote and indicates the contract involves the underlying real estate). While the court stopped short of adopting a bright-line rule, the cases imply that a timber contract for seven years or less will likely be viewed as involving personal property and a timber contract for nine years or more will likely be viewed as involving real property, suggesting that the litmus test may be whether the contract provides the timber company more or less than eight years to remove the timber.
The consequences of the Zitney case can be alarming for purchasers of Pennsylvania real estate that includes significant timber, because the buyer could purchase land with no knowledge of or ability to discover a timber contract, only to have the land subject to timbering operations years later with no financial benefit or recourse to the buyer. Because there is no requirement to record timber contracts that are for relatively short terms, as courts view these as contracts for the sale of personal property, it will be very difficult and perhaps impossible for the buyer to discover the existence of the timbering contact. The buyer has no assurance whether it will own the timber or not. Neither a warranty deed, nor a title insurance policy provides clear recourse for a buyer, as these avenues relate to losses on real property and offer no remedy for loss relating to personalty.
If the seller has owned the property for fewer than nine years, it is possible a prior owner in the chain sold the timbering rights without notice to the current seller. Another potential risk is that a purchaser without notice of a prior timbering contract may unintentionally sell the same timber rights a second time because it had no knowledge of the prior sale.
Buyers of real property can reduce (but not eliminate) their exposure to unrecorded timber agreements by including in purchase agreements a seller representation that it has not entered into any timber contracts other than those of record, and that to the seller’s knowledge, the land is not subject to any unrecorded timber contracts. Given the possibility that an unrecorded timber contract will be enforced seven years or more after it was executed, this representation would ideally survive the closing for 10 years.
While the court viewed itself as bound by precedent, the result in Zitney was unjust, as the buyer had no way to know of the existing, unrecorded timber contract. The General Assembly should alleviate this unfairness by passing legislation to clarify that standing timber will be treated as realty until it is either actually severed from the land when the trees are cut down or constructively severed when a timber contract is recorded in the county land records.