Legal Aspects of Conservation Easements: A Primer for Transportation Agencies (2013)

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36 nority approaches, since these decisions are based pre- dominantly on case-specific facts and governing law. One approach taken by courts has been to “attempt[] to discern the parties’ intent at the time the parties entered into the agreement.”197 For example, in a case in Massachusetts, a court held that a swimming pool did not qualify as a permitted “structure” under the conservation easement, even though the town’s zoning code treated swimming pools as a type of structure.198 The appeals court upheld the lower court’s decision, which had been based on the zoning code’s definition, but focused on “[t]he grantor’s stated purpose…to re- strict the use of (the property) and retain it predomi- nantly in its natural, scenic and open condition.”199 Another approach—the plain meaning approach— focuses less on the parties’ intent and more on a strict analysis of the conservation easement’s language. For example, in a case involving scenic conservation ease- ments held by the U.S. Forest Service, the court held that ranching structures such as barns and corrals were authorized even though the conservation easement permitted only “one residence and one tenant dwell- ing.”200 This result was reached because the conserva- tion easement, in addition to the limitations on resi- dences and dwellings, referenced a federal regulation, which expressly authorized dude ranching uses and structures.201 As a result, based on “the plain meaning of the language used in the easement,” the court held that ranching structures in addition to residences and dwellings are authorized.202 In reaching this decision, the appeals court noted with approval the following language from the district court’s decision: It would have been easy for the Government's drafter to place language in the deed prohibiting all dude ranching buildings otherwise permitted by the regulation….But the Government did not do so. Because of this drafting failure, the Government is now essentially asking this Court to re-write the deed….But the Court does not have the power to re-write the deed.203 These examples demonstrate some of the ways courts handle ambiguities in enforcement actions. As demonstrated by the two cases presented, it can be hard 197 Melissa K. Thompson & Jessica E. Jay, An Examination of Court Opinions on the Enforcement and Defense of Conservation Easements and Other Conservation and Preservation Tools: Themes and Approaches to Date, 78 DENV. U. L. REV. 373, 382 (analyzing 19 published opinions involving conservation easement enforcement), hereinafter cited as “Thompson & Jay.” 198 See Goldmuntz v. Chilmark, 38 Mass. App. Ct. 696, 651, N.E.2d 864 (1995). 199 Id. at 865. 200 See Racine v. United States, 858 F.2d 506, 508 (9th Cir. 1988). 201 Id. at 508–509 (citing 36 C.F.R. 292.16(g)(1), which permits ranching structures not impairing “scenic, natural, historic, pastoral, and fish and wildlife values”). 202 Id. at 509. 203 Id. to predict how courts will analyze these issues. There- fore, as previously mentioned, conservation easements should be drafted to meet the needs of all parties and to avoid foreseeable conflicts to the extent possible based on the laws of the state in which they are operating. For example, if in the Goldmuntz case, given the character of the protected property and its current use, a swim- ming pool was a foreseeable addition, the conservation easement could have specifically addressed whether or not swimming pools were allowable. A second lesson from the Goldmuntz case is the importance of a clear and detailed purpose statement within the agreement. In that case, the purpose statement provided the back- stop for the court’s analysis. The Racine case illustrates the need for conservation easements to be internally consistent. This means avoiding unintentional ambiguities within the four cor- ners of the easement itself. Inconsistencies provide an opening for parties to assert their own interpretation and challenge the restrictions or reserved rights. In Racine, the court rejected the government’s argument that the scenic conservation easement prohibited ranch- ing structures due to inconsistent provisions, namely the reference to (and apparent incorporation of) the federal regulation that expanded the class of authorized uses. Had the government sought to prohibit ranching structures, the reference to the federal language could have been qualified as to permit certain uses, but not to expand upon the ultimate number of structures permit- ted. The above cases are illustrative examples of both the process of litigating conservation easements and the importance of planning and drafting the initial agree- ments. It should be noted that in most cases of litiga- tion, the parties involved, especially with regard to the property owner, are not the original parties to the agreement.204 VII. AMENDING AND TERMINATING A CONSERVATION EASEMENT As stated in the introduction to this digest, transpor- tation agencies are likely to encounter conservation easements in one of two ways—either out of a need to establish an easement or a need to enter upon a prop- erty where one has been established. In the latter in- stance, an understanding of how the easement may be amended or terminated will be useful. This holds true whether a conservation easement used for wetlands mitigation needs to be modified to accommodate changed conditions or property subject to conservation easement needs to be acquired for transportation infra- structure expansion. This section examines some of the major legal and practical issues surrounding amend- ment and some other means by which conservation easements may be terminated other than eminent do- main. 204 Thompson & Jay, supra note 197.

37 A. Amendment by Agreement Under the UCEA, “a conservation easement may be created, conveyed, recorded, assigned, released, modi- fied, terminated, or otherwise altered or affected in the same manner as other easements.”205 This language is significant because under the common law, since “[c]onservation easements do not fit easily into any pre- viously existing category of property interests,” courts tended to employ various, and at times conflicting, legal principles to address amendments.206 Today, however, “given the existence of statutory provisions for conser- vation easements in virtually all 50 states, conservation easements are creatures of statute and their attributes, limitations, and applications are all governed by the statutes that authorize them.”207 As a result, both stat- utes and the common law of property208 provide the ba- sis for discussing the amendment of conservation ease- ments. The UCEA provides generally that conservation easements may be amended “in accordance with the principles of law and equity.”209 As a result, under the common law, like other nonpossessory interests in real property, easements may be amended by agreement, subject to the governing procedures and express limita- tions contained in the conservation easement itself.210 As a practical matter, it is again the conservation agreement itself that should provide the greatest clarity as to how it may be amended.211 Conservation ease- ments frequently allow for limited amendments in order for the transaction to retain its original purpose and to comply with federal tax regulations (for donated ease- ments) or other legal requirements (i.e., wetlands miti- gation and scenic preservation), or due to the insistence of one or more of the parties.212 Indeed, it may be this 205 UCEA § 2(a). 206 Jeffrey A. Blackie, Conservation Easements and the Doctrine of Changed Conditions, 40 HASTINGS L.J. 1187, 1190 (1989) (noting the common law differences regarding amendment of restrictive covenants and equitable servitudes). “The statutory conservation easement prevalent today arguably is an entirely new type of property interest that does not fit into the traditional categories of easement, real covenant, and equitable servitude.” Id. at 1194. 207 Lindstrom, supra note 152, at 25, 35. 208 Not all states’ conservation easement enabling legislation is based on the UCEA and in some states the term “easement” is not used when referring to what in essence is a conservation easement under the UCEA. Nevertheless, “while there has been, and will continue to be, much academic analysis of the nature and origin of conservation easements under the common law, for all practical intents and purpose today, they can be considered ‘easements.’” Lindstrom, supra note 152, at 25, 38. 209 UCEA § 3(b). 210 ELY & BRUCE, supra note 124, at 10:41 (listing a variety of ways in which easements may be amended or terminated under the common law). 211 A discussion of drafting amendment provisions is included in Section VI.D. 212 See Lindstrom, supra note 152, at 25, 45. type of flexibility that solidifies agreement between the parties. In any event, in accordance with the principles of law and equity, situations may arise where amending the conservation easement is necessary and appropri- ate. Both the prohibitions against amendment and situations where amendments are made are discussed below. It is unlikely that parties will be successful in amending the duration or type of holder of a conserva- tion easement that was put in place for the purposes of obtaining a tax benefit. The federal tax law states that the conservation easement will be “in perpetuity.”213 As a result, even if state property law allows for term con- servation easements, federal tax laws may prevent a donated conservation easement from being amended to a shorter duration. If the subject conservation easement was amended such that its conservation purpose no longer existed or the term was expressly shortened by the amendment, then the original donor may be in vio- lation of the subject tax regulations. Tax regulations also state that the holder of the con- servation easement will be a qualified organization and any future transfer will be to another qualified organi- zation that agrees, in writing, to carry out the ease- ment’s conservation purposes.214 Since qualified organi- zations must “have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions,”215 this require- ment often results in yet another limitation on amend- ment in that the conservation easement will be drafted to prevent amendments that would authorize uses in- compatible with conservation values. Finally, since pri- vate entities authorized to hold conservation easements for tax purposes must qualify as IRC Section 501(c)(3) organizations, the law governing public charities pro- vides additional limitations on the ability to freely amend conservation easements.216 Any changes to the conservation easement not in accordance with these laws may invalidate the agreement and jeopardize the legal status of the holder organizations. It is not un- common for land trusts, as a matter of institutional policy, to accept only those conservation easements that meet the substantive requirements of federal tax law, even when they are not being donated. As discussed previously, conservation easements that are the result of a compensatory mitigation project or other regulatory program usually have a number of state and federal agencies with oversight authority. As 213 Treas. Reg. § 1.170A-14(g)(6)(2); 26 C.F.R. § 1.170A- 14(g)(6)(2) . 214 Treas. Reg. § 1.170A-14(c)(1)(2); 26 C.F.R. § 1.170A- 14(c)(1)(2). 215 Treas. Reg. § 1.170A-14(c)(1); 26 C.F.R. § 1.170A- 14(c)(1). 216 See Lindstrom, supra note 152, at 46–49 (discussing Form 990’s monitoring and reporting requirements governing § 501(c)(3) organizations that hold conservation easements and other requirements necessary to maintain § 501(c)(3) status and the ability to continue holding conservation easements).

38 a practical matter, any amendment to these easements will require significant notice and negotiation. It is unlikely that any amendment seeking to decrease the term of the easement or the amount of area protected will be acceptable. In some situations, the grantor may insist on strict amendment limitations even when not required to do so by law. This may occur, for example, when the property holds special familial or environmental significance to the grantor and these features were significant motivat- ing factors for creating the conservation easement. Transportation agencies should be aware of the impe- tus for a conservation easement before attempting to amend the easement for a particular purpose. The ef- fects of an amendment on the landowner and the holder should be carefully considered and accommodated when possible. B. Implications of Charitable Trust Law Because of the expressed public value of the types of resources protected by conservation easements and the intended public benefit, a number of legal authorities view conservation easements as charitable trusts,217 and should a court accept this view,218 it holds signifi- cant ramifications regarding whether and how amend- ments may occur. Specifically, “the entity holding a conservation easement, in its capacity as trustee, can be prohibited from agreeing to terminate the easement (or modify it in contravention of its purpose) without first obtaining court approval in a cy pres proceeding.”219 In 217 UNIFORM TRUST CODE § 4 (“Even though not accompanied by the usual trappings of a trust, the creation and transfer of an easement for conservation or preservation will frequently create a charitable trust.”); RESTATEMENT (THIRD) OF PROPERTY § 7.11 (2000) (recommending that a form of cy pres be applied to conservation easements); UCEA § 3, comment (2007): …because conservation easements are conveyed to govern- mental bodies and charitable organizations to be held and en- forced for a specific public or charitable purpose—i.e., the pro- tection of the land encumbered by the easement for one or more conservation or preservation purposes—the existing case and state law of adopting states as it relates to the enforcement of charitable trust should apply to conservation easements. C.f. Lindstrom, supra note 152, at 25, 56-69 (presenting arguments against the view that conservation easements should be treated as charitable trusts). 218 There are only a few reported appellate decisions dealing with the application of charitable trust principles to conservation easements. For example, In Hicks v. Dowd, 2007 WY 74, 157 P.3d 914 (2007), the court recognized this principle, holding that the attorney general—not a member of the general public—had standing to challenge amendments to a conservation easement. Several lower court decisions have taken a similar approach as well. See, e.g,. In re Preservation Alliance for Greater Philadelphia, O.C. No. 759 (Ct. Com. Pl. of Philadelphia County, Pa., June 28, 1999) (applying cy pres to allow changes to a conservation easement on a historic building’s facade). 219 Nancy A. McLaughlin & Benjamin Machlis, Amending and Terminating Perpetual Conservation Easements, 23 PROBATE & PROPERTY 52–53 (July/August 2009), hereinafter such a proceeding, a court may allow amendment of the conservation easement if: 1, Property is given in trust for a particular charita- ble purpose; 2. It is, or becomes, impossible, impracticable, or ille- gal to carry out such purpose; and 3. The settlor manifested a more general intention to devote the property to [a] charitable purpose.220 It is likely that cy pres ordinarily would only be re- quired for outright termination or substantial amend- ments that are contrary to the purposes of the conser- vation easements.221 For minor and administrative amendments, the amendment provision contained in the conservation easement typically applies.222 While cy pres proceedings are common when a private party seeks to terminate or significantly modify a con- servation easement (often as an alternative to the use of eminent domain), charitable trust principles also may be relevant. Consider a situation where property bur- dened by a conservation easement has been targeted for acquisition to accommodate a new highway. Even if the conservation easement was donated for tax purposes and included the previously discussed amendment limi- tations, charitable trust principles may nevertheless provide a means of amending or terminating the con- servation easement as a result of changed conditions. Take for example, the conservation easement drafted to protect an endangered species, which now has been de- listed and enjoys relative abundance. Charitable trust principles would allow a party with standing, which could be the original grantor of the easement, holder, or even the state attorney general,223 to petition the court to amend or terminate the conservation easement. However, charitable trust principles may prevent a ma- terial amendment desired by the transportation agency if a court decides that the cy pres conditions have not been met, even if the parties to the conservation agree- ment consent to the change. C. Termination by Means Other than Eminent Domain In addition to eminent domain, statutes and common law allow for the termination of conservation easements in a number of different ways, such as through merger, cited as “McLaughlin & Machlis.” “The doctrine of cy pres is a simple rule of judicial construction, designed to aid the court to ascertain and carry out, as nearly as may be, the intention of the donor when that intent cannot be effectuated to the letter of the donor’s directions or specifications.” 88 AM. JUR. PROOF OF FACTS 3D 469 § 2 (2007). 220 88 AM. JUR. PROOF OF FACTS 3D 469 § 2 (2007). 221 McLaughlin & Machlis, supra note 219, at 54–55. 222 Id. 223 See, e.g., Hicks v. Dowd, 2007 WY 74, 157 P.3d 914 (2007) (citing WYO. STAT. ANN. § 4-10-110 authorizing the Attorney General to “exercise the rights of a qualified beneficiary with respect to a charitable trust”).

39 judicial sale, and marketable title legislation. Knowl- edge of each of these mechanisms will be helpful to transportation agencies in the processes of either seek- ing to perpetuate or terminate conservation easements. These topics should be evaluated, based on local state laws, during the drafting of conservation easements by transportation agencies and also in the consideration of long-term monitoring and reporting. Under the common law, conservation easements may cease to exist via the doctrine of merger. Generally, merger occurs when the owner of the servient estate (the property burdened by the easement) acquires the dominant estate (the rights granted by the easement) or vice versa.224 However, at least one state’s enabling leg- islation (Maine’s) expressly provides that the doctrine of merger does not apply to conservation easements.225 Also, should a court be convinced to view a conservation easement as creating a charitable trust, the merger doctrine may be inapplicable since the public stands as a beneficiary thus, preventing complete unity of title.226 Despite these apparent limitations on the merger doc- trine as it relates to conservation easements specifi- cally,227 transportation agencies need to be cognizant of the doctrine of merger, especially when public transpor- tation dollars are being used to acquire conservation easements. In the conservation easement context, the doctrine of merger may become relevant if, for example, a trans- portation agency holds a conservation easement over wetlands and subsequently obtains the underlying fee title by eminent domain or some other means. At that point, the transportation agency may wish to continue the use of land for conservation purposes or it may not. The question of whether a merger automatically extin- guished the conservation easement and the protections afforded therein is significant. Similarly, a landowner may be given the opportunity to acquire the easement over his or her property. In such a case, the private land trust may avoid the potential merger argument at the outset by including a co-holder, such as a govern- ment agency, who also would have to be convinced to release the easement before it could be sold. By doing so, the holder—or holders—could avoid the doctrine of merger, if recognized in their state, from voiding the easement without their consent. Also, while some states terminate conservation easements upon foreclosure actions,228 others provide exceptions to that rule. For example, in Colorado, con- servation easements are not terminated as a result of 224 See ELY & BRUCE, supra note 124, at § 2.27. 225 ME. REV. STAT. ANN. tit. 33, § 479(10). 226 See Lindstrom, supra note 152, at 25, 42. 227 See generally Nancy A. McLaughlin, Conservation Easements and the Doctrine of Merger, DUKE J. OF L. AND CONTEMP. PROBS. 74 (2011). 228 See ELY & BRUCE, supra note 124, at § 10:41. C.f. ME. REV. STAT. ANN. tit. 33, § 479(9) (conservation easements survive municipal tax liens and foreclosures). property tax lien foreclosures.229 However, the effects of these exceptions as applied to conservation easements are limited. The general rule is that a judicial sale gives clear title to subsequent purchasers free and clear of past liens. For this reason, the requirement for the fee owners to pay property taxes and all other liens takes on utmost importance. To deal with this, as part of the ongoing monitoring process, conservation easement holders should periodically review the property’s tax records and be on guard for subsequent liens and judi- cial sales. The possibility of termination by judicial sale im- pacts the way conservation easements are structured. For example, under federal tax law, property owners must ensure that any outstanding mortgage interests are subordinated to the conservation easement.230 Sub- ordination means that in the event of foreclosure, the bank’s mortgage takes a back seat to the holder’s inter- est in the property (the conservation easement), thereby allowing the conservation easement to persist despite the property owner’s default. Banks are understandably reluctant to agree to subordination, so this represents a major point of caution in regards to acquiring conserva- tion easements on leveraged property. The title search conducted during the acquisition of the conservation easement should notify the grantee if any mortgages, liens, or delinquent taxes exist on the property. In the case of uncertainty or as a matter of course, the grantee or holder may require a title insurance policy for the property. This helps cut down on the monitoring and enforcement efforts needed to secure the conservation easement, as well as help protect the public’s invest- ment. Finally, in addition to merger and judicial sale, state marketable title acts can have the potential to under- mine conservation easements in the long term. The purpose of these acts is to extinguish all private restric- tions on property after a certain period of time unless subsequent notice filings or other indices of ownership take place to preserve the interest.231 Marketable title acts work differently from state to state; however, gen- erally the laws establish a period of years after which all liens and encumbrances on real property are void in the absence of affirmative conduct by the lienholder. These laws ensure the efficient administration of local property records and the reduction of costs attendant to property transactions. For conservation easements, marketable title acts demand a farsighted, organized approach to monitoring and management by holders. 229 COLO. REV. STAT. § 39-11-136(3). 230 Treas. Reg. § 1.170A-14(g)(2); 26 C.F.R. § 1.170A- 14(g)(2). 231 See generally Bill Silberstein & Bridget McNeil, Protecting Conservation Easements from Marketable Title Act Extinguishment, LAND TRUST ALLIANCE EXCHANGE (Winter 2002), http://learningcenter.lta.org/attached-files/0/20/2040/ exchange_21_01_08.pdf.

40 Though some states provide exceptions for conservation easements,232 this is not the standard practice. As a result, to ensure continued regulatory compli- ance and protect the public’s investment over the long term, transportation agencies should evaluate the ap- plicability of state marketable title acts and design mechanisms for addressing these issues. For example, when the transportation agency holds the conservation easement, internal processes should be developed to periodically update title. Where others hold conserva- tion easements that were secured in part with transpor- tation agency funds, the conservation easement should be structured to require periodic updating as it relates to marketable title act requirements. 232 CAL. CIV. CODE § 880.240(d).