Garfield & Hecht

V. Due Diligence Review.

During the due diligence period, you will want to examine the following aspects of the Property:

A. Title.

You want to have clear and marketable title to the property. The seller will provide a title insurance commitment listing all recorded documents affecting the property. You should obtain copies of all of these documents and have your attorney review them for potential problems such as (i) easements burdening the property, (ii) restrictive covenants limiting use of the property, (iii) lack of access to the property, (iv) severed mineral rights, (v) current leases, (vi) existing debt and (vii) special improvement districts affecting the property.

B. Water Rights.

Water rights are not always associated or conveyed with the land. Therefore, it is important to determine whether the property has a legal and physical supply of water sufficient for your anticipated uses. It is also important to ensure that any water rights associated with the property are validly conveyed with the land. The property may receive domestic water from one of the following sources: (i) local government water supplier, such as a municipality or special district; (ii) water system owned and operated by a homeowners association; (iii) water system shared with other property(ies); or (iv) private water rights and/or a well associated with the property. If the property is served by a local government water supplier, the water rights are owned by the water supplier and will not be conveyed with the land. It is not always necessary to have an attorney evaluate the legal sufficiency of such water rights, but you should review any rules and regulations affecting the use of water provided by a local government supplier. If you are purchasing property served by private water rights – whether owned by a homeowners association, shared with neighbors, or independently associated with the property – you should engage an attorney to evaluate such water rights for your intended uses. You should also test the quality and quantity of the domestic water supply during your inspection of the property. If the property is vacant land, it may have no existing water rights or supply. If you are buying land that is not served by an existing well or water rights, you should engage an attorney specializing in water law to investigate the ability to obtain a legal and physical supply of water for the property.

C. Mineral Reservations.

Colorado has a mineral-rich history that may impact the purchase of your mountain property. The Colorado Territory was originally created near the end of the Pike’s Peak Gold Rush of 1858-1861, during which mining towns such as Denver City and Boulder City were built by immigrants searching for gold. Colorado experienced a second great mineral boom twenty years later, when silver was discovered in Leadville in 1879. Today, Colorado is in the midst of an oil and gas boom, with active wells in two-thirds of Colorado counties totaling more than 25,000 active wells in the state. This makes it important to know who owns the minerals underlying an available property. Under Colorado law, the surface estate and mineral estate can be "severed" into separate estates, creating two distinct bundles of rights. Often, different parties own the surface and the subsurface, commonly referred to as split estates. The different ownership may have been created through the reservation of the minerals to the government when the lands were originally patented, or may result from a decision by a previous landowner to separately sell or lease the subsurface mineral interest. For example, major portions of Colorado were settled under the Stock Raising Homestead Act of 1916, which allowed homesteaders to use the land for grazing instead of traditional farming but also reserved all minerals to the United States. These federally-owned minerals are subject to exploration and development under public mining claims and/or oil and gas leases. The State of Colorado owns the minerals under several sections of land that were vested in the State upon statehood in 1876 for the benefit of public schools. While the State has sold some of the surface estate over the years, it has retained title to all of the minerals, which it leases in order to raise funds for schools. Finally, private landowners who obtained both mineral and surface title may have sold or traded surface estates and reserved severed minerals as a speculative stake in the future. The owner of a mineral estate generally has the right to access and use the surface estate to the extent necessary to develop the mineral estate, even without the surface owner's permission, and is only liable for surface damages under certain circumstances. Colorado law requires title insurance companies to provide written notice in the title commitment if it determines that the mineral estate has been severed from the surface estate. If the mineral rights have been severed from your property, you should consider obtaining an endorsement to your title insurance policy protecting against certain damages caused by the development of severed mineral interests. You may also wish to investigate whether there are any current mineral leases or mining claims on your property and/or consult an attorney about options for purchasing or limiting development of the mineral estate.

D. Physical Issues.

You should engage an independent, professional inspector to examine the physical aspects of the property. Generally, an inspector checks the (i) electrical system, (ii) plumbing and waste disposal systems, (iii) water heater, (iv) insulation and ventilation, (v) heating and air conditioning systems, (vi) water source and quality, (vii) potential for pests, and (viii) foundation, doors, windows, ceilings, walls, floors and roofs. You should also have the home inspected for radon gas, asbestos, mold, lead or any other biological contaminant that might be found in older homes, which has not undergone a recent inspection. An inspection clause in the sales contract should give you the opportunity to back out of the contract if the inspection discloses serious problems and specify that the seller either fix certain problems or make monetary concessions for any problems before you will purchase the property.

E. Environmental Hazards.

As a result of Colorado's mining heritage, many of our resort towns are built on or near old mines, and the old mine tailings can contain hazardous materials. Property previously used for agriculture may have contained fuel storage tanks, and some fuel may have leaked into the ground. In addition, radon gas levels can be fairly high in many areas of Colorado. Consequently, before you buy property, you should examine the history of its use and have radon gas levels tested in the dwellings on the property. If the property's history indicates mining activity, the presence of storage tanks or neighboring properties with environmental issues, you should consider having a Phase I environmental assessment performed on the property to ascertain the presence of environmental problems.

F. Land Use Approvals.

You will want to determine that the property has all the necessary governmental approvals for its current use. Try to obtain a copy of the original building permit and certificate of occupancy for improvements built on the property. In addition, if you are planning to build on or renovate the property, your attorney should determine that the necessary approvals have been or will be received. Some of the mountain resort communities have unique land use controls relating to growth management, employee/affordable housing, preservation of historic structures and special districts which may limit the development or renovation of your property.

G. Survey.

If a survey is obtained for the property, it should be examined for (i) any encroachments of improvements onto, or from neighboring properties, (ii) access to a public road, (iii) the location of easements affecting the property, (iv) whether applicable setback requirements are satisfied and (v) whether the legal description matches the legal description contained in the contract, title commitment and deed.

H. Utilities.

If you buy an existing structure, investigate the cost for utilities in the past 12 months. Electricity, gas and water in some areas can be quite expensive. If you buy vacant land, you should investigate the availability and proximity of utility connections.