A buyer and seller agree on a sales price of $500,000 for a 100-acre parcel, and they agree that the price will be subject to adjustment by the survey. The buyer is putting down $100,000 (Paragraph 3A) and financing the remaining $400,000 (Paragraph 3B). The basis is $5,000 per acre ($500,000 divided by 100 acres).
The survey comes back and shows that the parcel of land is actually 112 acres. This means that the sales price increases by $60,000 ($5,000 per acre multiplied by 12 acres).
That additional $60,000 adds 12% to the sales price. Because the sales price increased by more than 10%, either party could terminate within the time period specified in the paragraph. However, for purposes of this example, both parties want to continue with the transaction.
If the box next to “proportionately to 3A and 3B” is checked off in the contract: The $100,000 in Paragraph 3A is 20% of the sales price, and the $400,000 in 3B is 80% of the sales price. Therefore, $12,000 (20% of $60,000) is added to Paragraph 3A, and $48,000 (80% of $60,000) is added to Paragraph 3B. If the parties had instead checked the box for 3A or the box for 3B, the full $60,000 adjustment would have been added to the cash portion (3A) or the financed portion (3B) of the purchase price.
Paragraph 3D in the Farm and Ranch Contract (TXR 1701) allows for an adjustment of the sales price when certain criteria are met. The parties can indicate in this paragraph whether the sales price will be adjusted based on the required property survey, detailed in Paragraph 6C.
Will There Be an Adjustment?
“The Sales Price ____ will ____ will not be adjusted based on the survey required by Paragraph 6C.”
If the parties check the box next to will not, there is no adjustment, and Paragraph 6C does not affect the sales price. However, if the parties check the box next to will, then there may be an adjustment based on the survey.
What is the Basis?
“If the Sales Price is adjusted, the Sales Price will be calculated on the basis of $_____ per acre.”
That blank should be filled in using the existing sales price, in Paragraph 3C, divided by the number of acres noted in the property listing. This number shows what the buyer is agreeing to pay per acre.
What if the Sales Price Changes Significantly?
If the sales price is adjusted by more than 10%, either party may terminate the contract. That termination must be in writing and within the specified number of days after the terminating party receives the survey.
NOTE: To terminate, a buyer should use Notice of Buyer’s Termination of Contract (TXR 1902), and a seller should use Notice of Seller’s Termination of Contract (TXR 1950). In either case, the terminating party should reference Paragraph 3D.
Where is the Adjustment Made?
If the price adjustment is 10% or less or the parties choose not to terminate, Paragraph 3D provides options as to where the adjustment will be applied: the cash paid at closing by the buyer, the buyer’s financing, or proportionately between the two.