COLORADO PURCHASE AND SALE ISSUES FOR BUYERS

JULY 2017 THE PRACTICAL REAL ESTATE LAWYER | 43

EDWARD N. BARAD is a shareholder with Brownstein Hyatt Farber Schreck, P.C. a law rm with oces in

Colorado, California, Nevada, New Mexico, New Jersey, and Washington, DC.

Steve Carey provided the inspiration for the concept of this article. I followed his lead in deciding how to approach

this presentation. I am deeply indebted to him. Special thanks to Reid Galbraith, Michael Kapoor, Kathy Oster, and

Sarah Reinhart for their important and invaluable devotion of time and assistance in research, drafting, and cita-

tion in the midst of their busy schedules. And to Terri McNabb and Jane Padilla for their important contributions.

Sincerest thanks also to Steve Carey, Larry Treece, Mark Senn, Bill Lawrence, Greg Berger, Joe Monzon, David Knapp, and Peter Griths for

their careful critiques of the concepts that I struggled with. I am grateful for their patience.

This article is not intended to provide legal advice. The views expressed (which may vary depending on the context) are not necessarily

those of the individuals mentioned above, Brownstein Hyatt Farber Schreck, nor the publication.

The real estate purchase and sale agreement in Colo-

rado (the “PSA”) is negotiated in many dierent ways,

with common law and custom being the main con-

trolling factors for determining the substance of the

nal contract. Unlike states such as California, very few

statutes control PSA practice in Colorado (See Property

– Real and Personal, Colo. Rev. Stat. §§ 38-1-101 – 38-53-

110 (2017)). This article is intended to provide buyer’s

counsel with a review of such law and custom in Colo-

rado that the author believes will be helpful in negoti-

ating a nal agreement.

1. RECITALS

Recitals are always utilized in PSA’s. They can help set

up the story that is to follow in the body and some-

times aid in developing dened terms. However, use

of recitals also creates risk. The deal can change during

negotiations resulting in ambiguity or error in the recit-

als. It is very easy to go through many drafts of a PSA

and get so tired of reading it that the recitals get lost in

the course of negotiation. Recitals that contradict the

substance of the PSA can be used as proof of ambi-

guity to obtain admission of parol evidence though

the language in the body of the PSA is perfectly clear.

“While recitals may have a material inuence on the

construction of the instrument and the determination

of the intent of the parties, they are not strictly any part

of the contract.” Las Animas Consolidated Canal Co. v.

Hinderlider, 68 P.2d 564, 566 (Colo. 1937) (citing 13 C.J.

§ 502, p. 538). Drafters do not want their recitals to con-

trol the outcome of a dispute. The rule should be: Keep

recitals short, minimal, and tight!

2. DUE DILIGENCE TERMINATION

RIGHT; THE “FREE LOOK”

A buyer is usually aorded the right to terminate the

PSA during the due diligence period for any or no rea-

son in its sole and absolute discretion and to obtain

a refund of the earnest money deposit. This is com-

monly called the “free look.” The breadth of the buyer’s

right to use its sole discretion in this convention has

changed in practice from the right to terminate for cer-

tain discrete reasons, such as a physical defect or envi-

ronmental contamination, to the right to terminate for

“any or no reason.”

In Texas and California, it has been held that use of this

unrestricted right of termination may create the risk of

a failure of consideration that converts the PSA into an

unenforceable option contract. Consideration may be

deemed to be insucient unless (i) the PSA contains

an agreement of the buyer to assume an obligation

that cannot be avoided by the right of termination or

(ii) if part performance of an obligation in fact occurs

during the due diligence period (e.g., submissions for

platting). See Stevens A. Carey, California Purchase and

Sale Issues for Buyers, 32 Prac. Real Est. Law. 38, 40 (July

2016); Stevens A. Carey, John R. Cauble, Jr., and Rich-

ard H. MacCrakcken, The “Free Look” in California—You

Get What You Pay For, 33 Real Property Law Reporter

89 (July 2010), available at www.pircher.com/media/

publication/28_FreeSAC.pdf. In such states, practitio-

ners structure a nominal earnest money deposit (e.g.,

$100) into the PSA as independent consideration that

is not refundable in the event buyer terminates during

the due diligence period.

COLORADO PURCHASE AND SALE ISSUES FOR BUYERS

44 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

However, in Colorado, no court has held that a fail-

ure of consideration exists in a PSA that provides for

a “free look,” and practitioners do not generally utilize

the concept of independent consideration. It has been

held (though in a case that did not involve analysis of a

“free look”) that “[a] promise exchanged for a promise

imposes mutual obligations and is sucient consider-

ation to render the contract enforceable.” DeFeyter v.

Riley, 606 P.2d 453, 454 (Colo. App. 1979) (citing Hoa-

gland v. Murray, 123 P. 64 (Colo. 1912)). It has also been

held (in a case involving an arbitration clause for the

benet of only one party) that “every contractual obli-

gation need not be mutual as long as each party has

provided some consideration to the contract.” Vernon

v. Qwest Communications Int’l., Inc., 857 F. Supp.2d

1135, 1154 (D. Colo. 2012) (citing Rains v. Foundation

Health Systems Life & Health, 23 P.3d 1249, 1255 (Colo.

App. 2001)).

This issue involves the distinction between a sales

contract and an option contract. A sales contract must

contain language that may reasonably be construed

as a promise by buyer to purchase the property or to

assume some obligation under the contract. Stelson

v. Haigler, 165 P. 265, 268 (Colo. 1917). An option con-

tract “gives the right to purchase, within a limited time,

without imposing any obligations to purchase.” Id. In

an option contract, the option payment is not refund-

able if buyer elects not to close.

If the PSA can be terminated by buyer for any or no

reason with a resultant refund of the deposit, is it really

a sales contract? Does buyer have any true obligations

or are buyer’s obligations illusory? If buyer’s obligations

during due diligence include inspection requirements,

such as an agreement to maintain insurance before

entering the property, are these conditions or obliga-

tions? What if the obligations are contingent (e.g., an

agreement to repair damage caused by inspection)? Is

an agreement to maintain the condentiality of due

diligence materials sucient consideration once due

diligence materials have been delivered to the buyer?

Does part performance (e.g., repairing damage) or con-

version of a contingent obligation to a xed obligation

(e.g., causing damage and thereby triggering a restora-

tion obligation) before expiration of the due diligence

period constitute assumption of an obligation? Would

the use of nominal independent consideration provide

sucient consideration to avoid conversion of a PSA

into an unenforceable option? How much should the

independent consideration be? See Rude v. Levy, 96 P.

560 (Colo. 1908) (where consideration of $1.00 stated

was insucient to render an oer irrevocable, because

such consideration is only nominal); see also 2 Colo.

Prac. Methods Of Practice § 61:5, Westlaw (database

updated Mar. 2017) (stating, “[t]he sum paid, or the

value delivered, should have some reasonable relation

to the right acquired.”).

These issues have not been answered in Colorado.

Since Colorado courts have found sucient consider-

ation in contracts providing only promises and at least

some consideration other than independent consider-

ation, current practice may not change. But practitio-

ners seeking to avoid the risks created by provision of

a “free look” in the PSA may wish to provide for inde-

pendent consideration.

3. TITLE INSURANCE AND ESCROW

3.1 Title Company Statute and Regulation

A title insurance company is subject to the provisions

of the Title Insurance Code of Colorado, Colo. Rev. Stat

§§ 10-11-101 – 126, and regulated by the Colorado Divi-

sion of Insurance (the “Division”), 3 Colo. Code. Regs.

§ 702-8 (2017). Title insurers are required to le rates

along with justications for them with the Division

before charging such rates to the public. 3 Colo. Code.

Regs. § 702-8:8-1-1, §6.G (2017). Rates must be similar

to other rates of the title insurer in the same county,

for products of the same size, risk, and other factors.

3 Colo. Code. Regs. § 702-8:8-1-1, § 6.F (2017). Rates

cannot dier from those that are led. No rate may

be charged on an unfairly discriminatory basis. 3 Colo.

Code. Regs. § 702-8:8-1-1, §6.J (2017).

3.2 Customary Forms of Policy and Endorsements

Title insurance companies use the ALTA Owner’s Policy

of Title Insurance Form - 2006 Rev. and the ALTA Loan

Policy of Title Insurance Form - 2006 Rev. Extended cov-

erage is most desirable for owners, because it deletes

standard exceptions 1 – 4 and gives broader cover-

age over parties in possession, easements not shown

in the public record, facts that a correct survey would

show, and mechanics liens. Extended coverage costs a

nominal amount and is customarily paid for by seller.

Commercial custom is that seller pays the premium for

the basic policy, and buyer pays for any endorsements

that it requires. Private mineral rights are often severed

from surface rights in Colorado. Buyer should seek

to obtain Endorsement 100.31 for the Owner’s Policy

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and 100.30 for the Loan Policy. These insure against

loss sustained as a result of physical, but not aesthetic,

damage to improvements existing on the land as of

the date of the policy or constructed thereafter, result-

ing from the exercise, after the date of the policy, of

any rights to use the surface of the land under the

mineral interests excepted on Schedule B of the policy.

Insurance for improvements “constructed thereafter” is

obviously of critical importance for developers.

Customized endorsements may be negotiated, but

title companies will resist diverging from the led

endorsements. A commitment to insure is eective

for six months but can be extended if it is reissued

every six months. There is also a “hold-open” process

that provides a way for the buyer to postpone obtain-

ing a policy until resale of the property. If the policy is

held open, buyer pays 10% of the basic premium and

closes but does not obtain an Owner’s Policy. This will

allow a savings of 40% to a buyer that intends to “ip” a

property, because the re-issue rate for a second policy

would otherwise be 50% of led rates. An additional

premium will be charged for any increase in policy

liability from initial closing to the second closing.

3.3 Title Commitments

Abstracts are no longer used in title practice except for

mineral rights review. The title commitment is not an

abstract. See Commitment to Insure, Conditions and

Stipulations, ALTA Form 2006 Rev. Preliminary reports

are not used. The commitment is issued for the sole

benet of the buyer. If the conditions of the commit-

ment are satised, the beneciary is entitled to issu-

ance of the policy pursuant to the terms of the com-

mitment. The commitment is eective only (i) “upon

payment of the premiums and charges and compli-

ance with the requirements” and (ii) “when the iden-

tity of the Proposed Insured and the amount of the

policy committed for have been inserted in Schedule

A by the Company.” See Commitment to Insure, ALTA

Form 2006 Rev. If the commitment is in error and the

conditions are satised, the beneciary can enforce its

right to obtain the policy and pursue relief subject to

its terms. The title company is not liable to the seller

under contract or tort theory. See Jimerson v. First Am.

Title Ins. Co., 989 P.2d 258 (Colo. App. 1999), (where the

Court of Appeals held that: (i) the title insurer owed no

contractual obligations to seller by virtue of the title

commitment and (ii) seller did not reasonably rely on

the title commitment and thus had no claim for negli-

gent misrepresentation).

3.4 The Escrow Agent

Closings in Colorado are usually consummated with

the title company acting as escrow agent. If the title

company is escrow agent and between the time of

closing and recording (the “Gap Period”) an item goes

of record, the title company is required to insure the

owner for the item, subject to the terms of the com-

mitment. 3 Colo. Code. Regs. § 702-8:8-1-2, Section 5.H

(2017). This eectively provides coverage over standard

exception 5 of the commitment.

3.5 Inquiry Notice

Colorado is a “race-notice” jurisdiction, meaning that

in a contest between two buyers, both of whom claim

to have purchased the same property, a bona de pur-

chaser for value (a “BFP”) will prevail over an earlier

BFP if the subsequent BFP (i) recorded its instrument

or document before the rst BFP and (ii) had no notice

of the earlier transfer. Colo. Rev. Stat. § 38-35-109(1)

(2017). Because notice includes not only actual notice,

but also implied and constructive notice, buyers have

a duty to inquire into potential adverse claims to prop-

erty. See Andreatta v. Andreatta, 537 P.2d 748, 752 (Colo.

App. 1975) (holding that notice, as used in Colo. Rev.

Stat. § 38-35-109 (2017) includes actual, constructive, or

implied notice). Failure to undertake such inquiry could

result in an owner losing BFP status and thus rst prior-

ity in title, even if it holds a rst priority in record title.

3.6 Mechanics Lien Coverage for Construction Lenders

Buyers often nd it dicult in Colorado to satisfy the

necessary rst priority lien requirements of construc-

tion lenders. The priority of mechanics’ liens for all

work on a project relates back to the rst work, and

the rst work will always precede the lien of the con-

struction loan (e.g., the engineering for survey and

plat). Buyer must try to get the best protection avail-

able for its lender by obtaining certain modications

of the title policy, with the ultimate protection for the

lender being “date down” endorsements at the time

loan advances are to be made showing that no liens or

claims for liens then exist.

3.6.1 Relation Back

The rule of relation back is that all mechanics’ liens

“relate back to the time of the commencement of work

46 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

under the contract between the owner and the rst

contractor, or, if said contract is not in writing, then

such liens shall relate back to and take eect as of the

time of the commencement of the work upon the

structure or improvement, and shall have priority over

any lien or encumbrance subsequently intervening, or

which may have been created prior thereto but which

was not then recorded and of which the lienor, under

this article, did not have actual notice.” Colo. Rev. Stat.

§ 38-22-106(1) (2017).

3.6.2 Title Protection

The mechanics’ lien exception in the loan policy can

be modied to read as follows with the noted deletion:

“Any lien or right to a lien, for services, labor or mate-

rial [heretofore or] hereafter furnished, imposed by

law and not shown by the Public Records.” The words

“heretofore or” are deleted so that the loan policy only

takes exception for liens arising from work furnished

after the deed of trust is recorded. An ALTA 32-06

(Construction Loan – Loss of Priority Endorsement)

should be issued with the loan policy, which allows

the date of the policy and the amount disbursed to

be updated by an ALTA 33-06 (Disbursement Endorse-

ment) (i.e., a “date down”) issued at the time of each

construction draw. Any liens that are recorded will be

shown on the ALTA 33-06. If lender thus discovers any

previously unrecorded liens, it will not make the next

additional advance. In order to obtain such title protec-

tion, owner and the general contractor (with respect

to its work and the work of its subcontractors) will be

required to provide an adavit and indemnity to the

title company for unpaid work furnished before and

after the deed of trust is recorded. Issuance may also

be dependent on review and approval of the owner’s

and contractor’s nancial statements.

3.6.3 Disburser’s Notice

The construction lender as “disburser” has a duty prior

to the rst disbursement under the loan to record a

disburser’s notice that includes the name and address

of the owner, the names, addresses, and phone num-

bers of the principal contractor and the disburser,

and the legal description and address of the property

being improved. If a disburser fails to record a dis-

burser’s notice, it becomes liable for amounts validly

claimed by a lien claimant or, if less, the total amount

disbursed by the disburser. If the disburser does record

the notice, the disburser’s interest may still be subject

to liens asserted by the lien claimant, but the disburser

retains all defenses otherwise available with respect

to lien claims (e.g., timeliness of ling, timeliness of

foreclosure). Upon such notice being received by the

disburser, it is the duty of the disburser, before disburs-

ing any funds to the person designated in the notice

with whom a claimant has contracted, to ascertain

the amount due to the claimant on any disbursement

date, and to pay such amount directly to the claimant

out of any undisbursed funds available for and due to

the person designated in the notice on such date. If

the disburser fails to comply with the foregoing and

the claimant suers loss by reason of such failure, the

disburser will be liable to the claimant for the amount

that the disburser should have paid the claimant to the

extent of the claimant’s loss. See Colo. Rev. Stat. §38-

22-126 (2017).

4. CLOSING MATTERS

4.1 Closing Documents

4.1.1 Form of Deed

Colorado statutes provide for four types of deeds: gen-

eral warranty (Colo. Rev. Stat. §38-30-113 (2017)), which

sets forth a statutory form of deed (the “Statutory

Form”), special warranty (Colo. Rev. Stat. § 38-30-115

(2017)), quitclaim (Colo. Rev. Stat. § 38-30-116 (2017)),

and bargain and sale (Colo. Rev. Stat. § 38-30-115 (2017)).

(a) The General Warranty Deed

A deed with the words “sell(s) and convey(s)” and

“warrant(s) the title to the same” is a general warranty

deed. Colo. Rev. Stat. § 38-30-113(1)(a) (2017); Colo. Rev.

Stat. § 38-30-113(1)(c) (2017). The warranties made are

that: (i) grantor is lawfully seized of indefeasible estate

in fee simple title with good right and full power to

convey the property, (ii) title is free and clear of all

encumbrances, except as set forth in the deed, and

(iii) grantor warrants the quiet and peaceable pos-

session of the property and covenants to defend the

same. Colo. Rev. Stat. § 38-30-113(2) (2017). Conveyance

of the property “with all appurtenances” constitutes a

conveyance of grantor’s interest “in any vacated street,

alley, or other right-of-way that adjoins the property

unless expressly excluded in the deed.” Colo. Rev. Stat.

§ 38-30-113(1)(d) (2017).

The risk of using a general warranty deed is that the

grantor guarantees title “against any defects arising

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before the grantor acquired title as well as against those

that arose during the grantor’s ownership.” See 2 Colo.

Prac., Methods Of Practice § 64:2, Westlaw (database

updated Mar. 2017) (emphasis added).

(b) The Special Warranty Deed

Customary use of the general warranty deed has been

supplanted by use of the special warranty deed in

commercial (but not residential) transactions, in large

part due to the fact that sellers customarily pay for the

premium of the owner’s title insurance policy and thus

provide buyers with insurance coverage as to prior

unrecorded encumbrances. A special warranty deed is

given when the Statutory Form is utilized with: (i) omis-

sion of the words “and warrant the title to the same”

and (ii) addition of the words “and warrant the title

against all persons claiming under me.” The special

warranty deed constitutes a covenant of the grantor

that title is free and clear of all encumbrances caused

or created by, through, or under grantor, except as set

forth in the deed. Colo. Rev. Stat. §§ 38-30-115 (2017).

Seller may want to except from its warranties all mat-

ters of record, but this is not customary and allows for

the anomaly of seller causing a matter to go of record

before closing that is not known to buyer and not cov-

ered by seller’s warranties. Buyer will want to limit the

exceptions set forth in the deed to those set forth in

the title commitment.

A quitclaim deed is given when the Statutory Form is

utilized with: (i) the word “quitclaim” substituted for the

word “convey” and (ii) the words “warrant the title to

the same” omitted. Colo. Rev. Stat. § 38-30-116 (2017). A

quitclaim deed does not convey land but only grant-

or’s present interest in the land, and therefore it is inef-

fectual to pass after-acquired title. Tuttle v. Burrows,

852 P.2d 1314, 1316 (Colo. App. 1992).

(d) The Bargain and Sale Deed

A bargain and sale deed is given when the Statutory

Form is utilized with omission of the words “and war-

rant the title to the same.” A bargain and sale deed

passes after-acquired title of grantor and is without

warranty. Colo. Rev. Stat. § 38-30-115 (2017).

4.1.2 Tenant Notices

For residential properties only, in order to obtain

release from any obligation with respect to a security

deposit, the deposit must be transferred to the buyer

and notice thereof must be mailed to the tenant with

the transferee’s name and address. Colo. Rev. Stat. §

38-12-103(4)(a) (2017). The Security Deposit Act (Colo.

Rev. Stat. § 38-12-101 – 104 (2017) does not apply to

commercial properties. Colo. Rev. Stat. § 38-12-102(2)

(2017); see Mountain Queen Condominium Ass’n, Inc.

v. Haan, 753 P.2d 1234 (Colo. 1988).

4.1.3 State Tax Withholding Certicate

Foreign entities are subject to withholding of taxes at

closing as described in Schedule 1. If the transferor

is a partnership as dened in §761(a) of the Internal

Revenue Code and required to le an annual federal

return of income under §6031(a) of the Internal Reve-

nue Code, it is not required to withhold. Since a limited

liability company is taxed as a partnership, it is also not

required to withhold.

4.2 Closing Cost Allocations

Real estate taxes are paid in arrears. The parties often

prorate based on the prior year’s tax bill and “true-up”

following receipt of the tax bill for the year of closing.

Transfer taxes are negotiated but usually are paid by

buyer, especially if the city or town ordinance speci-

es that buyer is the obligor. See Section 8.2.3 and

Schedule 3. Buyer pays the documentary fee. See

Section 8.2.4.

5. WARRANTIES AND REPRESENTATIONS

5.1 Seller’s Liability

There are many views as to what the structure for Seller

warranty liability should be. The author suggests that

the following is generally acceptable to the parties:

5.1.1

If a warranty or representation is untrue when made

and its falsity is known to buyer at or prior to the clos-

ing, buyer will be entitled to terminate the PSA, to

receive a refund of the earnest money deposit, and to

recover buyer’s actual out-of-pocket costs incurred in

connection with pursuit of the transaction subject to

a “cap.”

5.1.2

If a warranty or representation is untrue when made

and its falsity is not known to buyer until after the

48 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

closing, buyer will be entitled to recover actual dam-

ages subject to a higher “cap.”

5.1.3

If a warranty or representation is true when made, but

becomes false at or prior to closing for a reason other

than violation of seller’s obligations under the PSA,

buyer will be entitled only to terminate the PSA and

receive a refund of the earnest money deposit. This

situation is often discovered when the warranties and

representations are remade at closing. For example, if

seller represented that no governmental notice with

respect to violation of law had been received as of

the time of execution, but thereafter, such a notice is

received, the representation would be remade stating

the new fact, and buyer would have no claim against

seller. If it is material matter, buyer may elect to ter-

minate the PSA and obtain a refund of the deposit as

its sole remedy. However, the same result would not

apply if seller misrepresented a fact that was untrue

at the time of execution and is thereafter subject to

conditions within seller’s control. Thus, if seller repre-

sented that it had not breached any leases, but it then

did so in violation of the PSA, buyer would have a right

to terminate and claim damages to the extent the PSA

allows.

5.1.4

If the falsity of any representation or the breach of any

covenant is known to buyer prior to closing, and buyer

nevertheless elects to close, seller will have no liability

to buyer for the breach.

5.2 Warranties and Representations

as Conditions Precedent

The parties often agree upon conditions precedent

to their respective obligations to close. If a warranty

or representation is not true when made, a condition

precedent may not be satised. If a condition prece-

dent is not satised or if a warranty becomes untrue

as described in Section 5.1.3, it may not follow that a

default has occurred. If buyer intends that seller is obli-

gated to perform certain actions, the drafter should

structure such obligations as covenants and not simply

conditions precedent.

5.3 The Knowledge Rep

A contentious part of PSA negotiations is whether

to qualify certain warranties and representations by

use of the phrase “to the best of seller’s knowledge.”

Does this qualier include seller’s constructive knowl-

edge or actual knowledge, and what duties, if any, are

imposed by the use of the language? Though it seems

to impose the highest level of knowledge, one author

has commented that most reported cases have held

that use of the term “best knowledge” in an adavit,

application, or representation “embodies a level of

uncertainty.” Edward J. Levin, “Best” Is Not Always Best

When it Comes To Knowledge, 30 Prob. & Prop. 44, 45

(Jan. Feb. 2016). There is no case law or statutory inter-

pretation of this qualier in Colorado. Without express

denitions in the PSA, the word “knowledge” could

imply either “actual” or “constructive” knowledge.

“Actual knowledge” refers to a conscious and direct

awareness of the information at issue. Actual Knowl-

edge, Black’s Law Dictionary (10th ed. 2014). “Construc-

tive knowledge” is “knowledge that one using reason-

able care or diligence should have, and therefore that

is attributed by law to a given person.” Constructive

Knowledge, Black’s Law Dictionary (10th ed. 2014). The

author submits that buyer is better protected by a war-

ranty that seller has “no knowledge,” and seller is better

protected by a warranty that it has “no actual knowl-

edge.” But to date, custom remains that the parties

strike compromise by use of the qualier “to the best

of seller’s knowledge.” In all events, the drafter should

precisely dene the meaning of language related to

“knowledge” in the PSA.

5.4 Survival of Warranties,

Representations, and Covenants

It is customary to agree that the warranties and rep-

resentations of seller survive closing for an agreed

period of time. This insures that there is no ambigu-

ity as to their eectiveness following closing. However,

the parties do not always expressly agree as to which

covenants survive closing. Thus, a question commonly

arises as to whether covenants that are intended to

be performed following closing automatically survive

without express language indicating that they do so,

or do they merge into the closing instruments?

5.4.1 Merger

In general, “a deed delivered and accepted as com-

plete performance” of the PSA “merges all prior nego-

tiations and agreements into the deed.” Colorado Land

& Resources, Inc. v. Credithrift of America, Inc., 778 P.2d

320, 322 (Colo. App. 1989). However, “the doctrine of

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merger…is not a rule of property; the question of

merger depends upon intent.” Hart v. Monte Vista

Bldg. Ass’n, 257 P. 1079, 1079 (Colo. 1927). All covenants

in a PSA “that are not intended by the parties to be

incorporated in the deed, or that are not necessarily

satised by the execution and delivery of the deed, are

collateral agreements and are preserved from merger.”

Coe v. Crady Davis Corp., 60 P.3d 794, 796 (Colo. App.

2002). “If the terms of a sale and purchase agreement

are fullled by the delivery of a deed, there is a merger;

but if the delivery of the deed is only one of a number

of things to be performed under the terms of the con-

tract, the delivery of the deed constitutes part perfor-

mance, and the other matters to be performed remain

obligatory.” Glisan v. Smolenske, 387 P.2d 260, 263 (Colo.

1963). Therefore, it is not necessary to expressly agree

in the PSA that covenants intended to be performed

following closing are to survive, but the drafter should

be certain that the parties’ intent is clearly expressed.

For covenants relating to title to survive and not

be merged in the deed, the parties’ intent must

be explicitly stated in the PSA. Absent express

language to the contrary, the doctrine of merger

only extinguishes those covenants relating to

“title, possession, quantity or emblements of the

land.” City of Westminster v. Skyline Vista Develop.

Co., 431 P.2d 26, 29 (Colo. 1967) (quoting Urban

Farms, Inc. v. Seel, 208 A.2d 434, 437 (N.J. Super.

Ct. Ch. Div. 1965)); accord Coe v. Crady Davis Corp.,

supra. However, the doctrine of merger will not

“[prevent] the reformation of a deed in which

the words of description or of conveyance fail to

describe correctly or to convey the land or interest

that was agreed upon.” See Dennett v. Mt. Harvard

Development Co., 604 P.2d 699, 701 (Colo. App.

1979) (quoting 3 A. Corbin, Contracts, §604 at 631

(1963)).

5.4.2 Seller Guaranties of Surviving Obligations

In many transactions, buyers seek some form of assur-

ance that surviving obligations of seller will be per-

formed. These often include representations and war-

ranties, brokers’ fees, and “true-ups.” Seller is usually a

single purpose entity owning only the asset that has

been conveyed. Following conveyance of the asset,

seller will distribute all proceeds of the sale to its mem-

bers or partners in liquidation. Creditors of a limited

liability company formed under the laws of Colo-

rado may not assert a claim for unlawful distributions

against the members of the company under Colo.

Rev. Stat. § 7-80-606 (2017). See Weinstein v. Colborne

Foodbotics, LLC, 302 P.3d 263 (2013) (holding that only

the company may assert a claim against its members

for an unlawful distribution and that the manager of

an insolvent limited liability company does not owe

the creditors of the company the same duciary duty

that is owed by an insolvent corporation’s directors to

the corporation’s creditors). Therefore, buyers often

require that a creditworthy person guaranties the sur-

viving obligations of seller.

A guaranty usually provides a waiver of surety rights or

defenses. Surety defenses are not codied in Colorado,

but have been established by common law. A waiver

of surety defenses is enforceable. See Armed Forces

Bank, N.A. v. Hicks, 365 P.3d 378, 385-86 (Colo. App.

2014) (upholding contractual waiver of all defenses

based on suretyship).

5.4.3 Statute of Limitations

If the PSA does not limit the period of survival, the stat-

ute of limitations will control. In general, the statute

of limitations for a PSA is three years. Colo. Rev. Stat.

§ 13-80-101(a) (2017) states that “[t]he following civil

actions, regardless of the theory upon which suit is

brought, or against whom suit is brought, shall be com-

menced within three years after the cause of action

accrues, and not thereafter: (a)All contract actions,…

except as otherwise provided in§ 13-80-103.5.” Under

Colo. Rev. Stat. § 13-80-103.5(a) (2017), when the action

is based on breach of contract where the plainti

seeks a liquidated, determinable amount of money

due from the defendant, the action is governed by the

statute permitting an action to be commenced within

six years for actions of debt founded upon any con-

tract. Uhl v. Fox, 498 P.2d 1177, 1178 (Colo. App. 1972).

For purposes of determining whether Colo. Rev. Stat.

§ 13-80-103.5 applies, a debt is deemed “liquidated”

if the amount due is capable of being ascertained by

reference to an agreement or by simple computation.

The statute of limitations for a PSA can be waived or

shortened by agreement. Parties to a contract could

require that actions founded on the contract be com-

menced within a shorter period of time than that pre-

scribed by the applicable statute of limitations as long

as the applicable statute does not contain language

prohibiting contractually shortening the limitations

period. Grant Family Farms, Inc. v. Colo. Farm Bureau

Mut. Ins. Co., 155 P.3d 537, 539 (Colo. App. 2006).

50 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

6. THE “AS IS” PROVISION AND DISCLAIMERS

6.1 Disclaimers

It is customary in Colorado to exculpate the seller from

liability for defects in the physical condition of the

property and suitability for a particular purpose by use

of an “as-is” provision that disclaims representations

and sometimes releases the seller from liability for loss

due to physical conditions.

6.1.1 The Fraud Exception

Language providing that buyer takes the property “as

is” places the risk on buyer as to the existence of latent

defects for which neither party has knowledge. How-

ever, it does not protect a seller from failure to disclose

a latent defect if the seller has knowledge of the defect.

See Haney v. Castle Meadows, Inc., 839 F. Supp. 753, 757

(D. Colo. 1993), (where (i) a broad disclaimer of “no rep-

resentations and warranties” as to the condition of the

property and Haney’s acceptance of the agreements

based on his own inspection of the property, (ii) an “as

is” and release of liability clause, and (iii) a recital that

the agreements were made among “nancially sophis-

ticated and knowledgeable parties” were held to be

ineective to protect a seller, and claims were allowed

based on the fraudulent concealment of latent defects

of which seller allegedly had knowledge).

To gain some certainty as to the issue of fraud, a trend

in some states has been to expressly agree that a

claim for fraud is not waived by the “as-is” provision.

Seller’s risk of liability under such an agreement may

be broader than it intends. For example, actual knowl-

edge and intent to deceive do not need to be proven

in order to hold a person liable for fraud, because in

certain situations, the law may impute a fraudulent

intent. See Sodal v. French, 531 P.2d 972 (Colo. App.

1974), a’d, 547 P.2d 923 (Colo. 1976) (where a broker for

seller told the buyer of a home that a well would pro-

vide enough water for a family of ve without having

an honest belief as to the truth of the representation).

In addition, by agreeing that it may be exposed to

claims of fraud, seller may obviate its ability to use the

defense of the economic loss rule. The economic loss

rule has been described as follows: “a party suering

only economic loss from the breach of an express or

implied contractual duty may not assert a tort claim

for such a breach absent an independent duty of care

under tort law.” Town of Alma v. Azco Construction,

Inc., 10 P.3d 1256, 1264 (Colo. 2000). The economic loss

rule may bar a buyer’s claims of fraud when a buyer

has incurred only economic losses and the agreement

expressly provides for the seller’s duties of disclosure

that are alleged to be the basis of the tort claim. See

Former TCHR, LLC v. First Hand Management LLC, 317

P.3d 1226, 1232 (Colo. App. 2012) (where the “as is” clause

in the purchase and sale agreement was extremely

broad and included disclaimers and releases of warran-

ties along with express reliance solely on buyer’s own

investigation, plainti’s fraud-based claim was barred).

The Court in Former TCHR found that (i) Former TCHR

alleged only economic losses, (ii) although there is a

common law duty to refrain from fraudulent misrep-

resentation and concealment, any such duty existed

solely because of the sale agreement, and (iii) the tort

duties that Former TCHR invoked were imposed by the

sale agreement and did not dier from the contract

duties, including the implied covenant of good faith

and fair dealing. Id. at 1233.

6.1.2 Environmental Releases

The trend in Colorado is to provide a release of seller

for liability relating to any environmental conditions,

except to the extent of express warranties and rep-

resentations. Environmental warranties and represen-

tations are customarily made to the “best of seller’s

knowledge.” This model puts a burden on seller to dis-

close what it knows and a burden on buyer to perform

a thorough inspection of all environmental aspects of

the property to be certain that there is no condition

that seller did not know of or did not disclose.

One commentator has written the following with

respect to exculpation from loss due to environmental

conditions:

First, the doctrine of caveat emptor has been

eroded in real estate transactions by the enact-

ment of mandatory disclosure laws and the rec-

ognition by courts of a duty to disclose known

environmental conditions. While caveat emp-

tor generally still may apply in commercial real

estate transactions, the usefulness of the clauses

is severely limited in states with mandatory dis-

closure laws. Second, an as is clause may not

relieve a seller of direct cleanup liability, such as

liability under CERCLA, which holds former own-

ers and operators strictly, jointly and severally lia-

ble for cleanup costs regardless of culpability. An

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS COLORADO PURCHASE AND SALE ISSUES FOR BUYERS | 51

as is clause in a contract will not protect a party

against possible tort claims. Accordingly, to receive

the full benet of an as is clause, it should be used in

conjunction with indemnities and releases. As with

indemnity provisions, the party’s intent to include

environmental conditions should be stated

expressly in the provision so there is no question

as to which party is accepting the risk. See David

Goossen, Contractual Allocation of Environmental

Liabilities in Real Estate Transactions, 25 Colo. Law.

79, 81 nn.13-16 (March 1996) (emphasis added).

6.2 Requirements for Seller Disclosures.

6.2.1

The following disclosures are required by statute for

residential real property:

(a) The existence of special taxing districts and the

risk of levies for general obligation indebtedness.

Colo. Rev. Stat. § 38-35.7-101 (2017).

(b) A lead based paint warning if the residence

was built before 1978. 42 U.S.C. § 4852d(a)(3).

munity, disclosure with respect to the obligations

of such a community. Colo. Rev. Stat. § 38-35.7-102

(2017).

(d) The existence of a methamphetamine labora-

tory. Colo. Rev. Stat. § 38-35.7-103 (2017).

(e) The source of potable drinking water. Colo. Rev.

Stat. § 38-35.7-104 (2017).

(f) The existence of any proposed or existing trans-

portation project that aects or is expected to

aect the real property. Colo. Rev. Stat. § 38-35.7-

105 (2017).

(g) The potential for separate ownership of the

mineral estate and for use of the property for oil

and gas activities. Colo. Rev. Stat. § 38-35.7-108

(2017).

6.2.2

There are no statutory requirements for disclosures in

non-residential transactions.

7. GOOD FAITH AND BEST EFFORTS

7.1 The Covenant of Good Faith

The covenant of good faith is an express or implied

term in a contract that imposes a duty of good faith

upon each party in its performance under the con-

tract. Colo. Rev. Stat. § 4-1-201 (2017) denes good faith

as “honesty in fact and the observance of reasonable

commercial standards of fair dealing.” The obligation

of good faith attaches to contracts “to eectuate the

intentions of the parties or to honor their reasonable

expectations.” Amoco Oil Company v. Ervin, 908 P.2d

493, 498 (Colo. 1996).

“Under Colorado law, every contract contains an

implied duty of good faith and fair dealing.” City of

Golden v. Parker, 138 P.3d 285, 292 (Colo. 2006). While

the implied covenant initially developed in contract

law as a principle of contract interpretation requiring

a claim for breach of an express covenant that was vio-

lated in bad faith, Colorado law now holds that violat-

ing the implied covenant can constitute an indepen-

dent cause of action. Id.; see Cary v. United of Omaha

Life Ins., 68 P.3d 462, 466 (Colo. 2003).

However, use of the implied covenant has not gained

wide application. Colorado courts have only imposed

the implied covenant “when the manner of perfor-

mance under a specic contract term allows for dis-

cretion on the part of either party.” Amoco, supra, 908

P.2d at 498.

The implied covenant cannot be used to contradict

terms or conditions that a party has bargained for

within the agreement, and it cannot be drafted out of

an agreement through the use of provisions preclud-

ing it. Thus, an agreement with a covenant precluding

the use of an implied covenant along with the use of

an integration or merger clause did not allow parties

to circumvent the implied covenant of good faith and

fair dealing by limiting the parties’ obligations only to

application of the express language of the agreement,

because “the reasonable expectations of the parties

remain vital considerations in every contract.” Amoco,

supra, 908 P.2d at 499.

In addition to reliance upon the implied covenant of

good faith, the parties may expressly agree that the

performance of certain obligations must be made in

good faith. The breach of an express covenant of good

faith can give rise to a claim for breach of contract.

52 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

7.2 Best Eorts

The PSA often requires one of the parties to use a

requisite level of eort in performing certain actions.

Drafters often use the phrases “best eorts”, “reason-

able eorts”, “commercially reasonable eorts”, and

other variants believing there is a clear hierarchy in the

level of eort they impose. “Best eorts” is thought to

be at the top of the scale. It is generally accepted to

mean that the party making the covenant will take all

steps to perform including sacricing its own inter-

ests. “Commercially reasonable eorts” is generally

believed to reduce and to limit both the eort and

the obligations of the party making the covenant.

However, a review of case law demonstrates no uni-

versally accepted denitions or standards for interpret-

ing these provisions, because they must all be dened

contextually. In truth, these standards are vague and

may be equivalent. Kenneth A. Adams, Understanding

“Best Eorts” And Its Variants (Including Drafting Rec-

ommendations), 50 Prac. Real Est. Law. 11, 14 (August

2004) (stating that “instead of representing dierent

standards, other eorts standards mean the same

thing as best eorts, unless a contract denition pro-

vides otherwise.”) Because the eorts standards give

the covenanting party a large measure of discretion in

performing its duties, the drafter should provide some

context regarding the standard’s meaning (e.g., speci-

fying time periods, expectations of the other party,

amount of time or money expended, and limitations

such as “without litigation”). See Memorandum from

Arthur Wright to the Judicial Interpretations Working

Group of the M&A Committee regarding Judicial Inter-

pretation of “Best Eorts” Clauses, April 16, 2010 (on le

with author).

8. ENTITY, PROPERTY, TRANSFER AND SALES TAXES

8.1 Entity Taxes

There is no franchise tax in Colorado, only a nominal

ling fee for the annual period report.

8.2 Real Property Taxes.

8.2.1 Priority

Real property taxes have a super priority that will

“prime” any mortgage or deed. “Taxes levied on real

and personal property, together with any delinquent

interest, advertising costs, and fees prescribed by law

with respect to any such taxes as may have become

delinquent, shall be a perpetual lien thereon, and such

lien shall have priority over all other liens until such

taxes, delinquent interest, advertising costs, and fees

shall have been paid in full.” Colo. Rev. Stat. § 39-1-107

(2) (2017). Therefore, the lien of real estate taxes for the

year of closing will always be an exception to coverage

in the owner’s title policy and to any warranties in the

deed. Title protection should be obtained by modify-

ing the applicable exception to read “taxes and assess-

ments not yet due and payable.”

8.2.2 Assessments

Colorado law states that roughly 55% of all property

taxes must be borne by commercial properties and

45% by residential properties. The commercial assess-

ment ratio is set in law at 29% of actual value. The resi-

dential assessment ratio oats to maintain the 55/45

split. There are no roll-back taxes assessed in Colorado.

Colorado counties reappraise real estate every other

year, employing the “base year” method of valuation,

meaning that current year assessments are based upon

data from the past. January 1 of each year is the ocial

assessment date. Tax bills issued in January of 2017 are

for the 2016 assessment year. Owners may choose to

pay in two installments, due February 28 and June 15,

or in a single payment due April 30. There is no dis-

count for either method of payment. See Schedule 2.

8.2.3 Transfer Taxes

There is no statewide transfer tax. Transfer taxes have

been promulgated by municipal entities as set forth on

Schedule 3. Local ordinances usually require the buyer

to pay the tax, but often the obligation to pay is nego-

tiated. Under the Colorado Constitution, any municipal

entity that did not impose the tax as of December 31,

1992, cannot impose it thereafter. Colo. Const., art. X, §

20 (8)(a). Nor can a municipal entity raise its transfer tax

rate above the rate as of the same date. Id.

8.2.4 Documentary Fees

At closing, the buyer is obligated to pay a documentary

fee of $.01 per $100 of the amount paid for the prop-

erty without regard for the amount of any mortgage.

Colo. Rev. Stat. § 39-13-102 and § 39-13-105 (2017). The

recorder will mark the documentary fee on the deed,

so prices paid for the property will always be public

information.

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8.3 Sales and Use Taxes

Any exchange involving tangible personal property is

taxable. Colorado’s sales and use tax statute provides

for a sales tax upon the retail sale of tangible personal

property unless it qualies for an express exemption.

Colo. Rev. Stat. § 39-26-104 (2017). This includes the sale

of tangible personal property as part of the sale of real

property. Hotels and restaurants usually have signi-

cant tangible personal property for which this tax will

be assessed. There are nearly 100 home rule towns and

cities in Colorado that each may assess this tax in dier-

ing amounts and sometimes with dierent rules. Local

tax ordinances in addition to the state statute must be

reviewed for tax rates. Casual or occasional sales are not

exempt. The buyer of a business will generally be held

liable for any unpaid sales and use taxes owed by the

seller regardless of whether the transaction is an asset

or stock acquisition. The statute requires buyer to pay

the tax, but this is often negotiated in the PSA. Colo.

Rev. Stat. §39-26-108 (2017). Unless the buyer holds

back a sucient amount of the purchase money to

cover the amount of taxes due and unpaid, seller les

its nal return within 10 days after the sale, and buyer

obtains a tax clearance certicate from the Depart-

ment of Revenue, buyer can be responsible for unpaid

sales and use taxes. Colo. Rev. Stat. § 39-26-117(1) (2017).

Clearance certicates are not commonly used, so it is

customary for the parties to agree to indemnication

provisions for any tax due during their respective peri-

ods of ownership. See Bruce M. Nelson, James T. Collins

& John C. Healy, Sales and Use Tax Answer Book (2008).

9. PROPERTY AND TRANSACTIONSPECIFIC MATTERS

9.1 Bulk Sale Requirements

Bulk sales notice requirements in Colorado were

repealed in 1991. S. 91-127, 58th Gen. Ass., §1 (Co. 1991).

9.2 Subdivision Platting

Transfers of unplatted land comprised of less than 35

acres are prohibited, except as may be allowed by

home rule entities. Colo. Rev. Stat. § 30-28-110(4)(e)

(2017).

9.3 Rights of First Refusal

Statutory amendments passed in 1991 and 2006 have

all but eviscerated any remnants of the Rule Against

Perpetuities (“RAP”) in Colorado. As a result, parties

are not required to terminate options or rights of rst

refusal prior to the expiration of any lives in being.

Transfers made prior to May 31, 1991 are subject to the

common law RAP, but a statutory reformation period

applies, where a court, upon the petition of an inter-

ested person, “shall reform the disposition by inserting

a savings clause that preserves most closely the trans-

feror’s manifested plan of distribution and that brings

that plan within the limits of the rule against perpetu-

ities applicable when the nonvested property interest

or power of appointment was created.” Colo. Rev. Stat.

§ 15-11-1106(2) (2017). Any transfers made after May 31,

1991 are not subject to the RAP. See Colo. Rev. Stat. §

15-11-1107(2) (2017) (superseding and abolishing the

RAP for nonvested interests created after May 31, 1991).

The current version of Colorado’s RAP only applies to

interests in trust and powers of appointment. Colo.

Rev. Stat. § 15-11-1102.5 (2017).

10. REMEDIES

10.1 Buyer Default.

10.1.1 Liquidated Damages

A liquidated damage provision is the customary exclu-

sive remedy for a default by buyer. There are no stat-

utes controlling the validity or requirements of liqui-

dated damage provisions. It is dened in the common

law. The provision is enforceable if: (i) the damages to

be anticipated are uncertain in amount or dicult to

be proved, (ii) the parties intended to liquidate them

in advance, and (iii) the amount stated is a reasonable

one, not greatly disproportionate to the presumable

loss or injury. Perino v. Jarvis, 312 P.2d 108, 109 (Colo.

1957). “In contrast to a valid provision for liquidated

damages, a contract is for a penalty when there is an

agreement to pay a stipulated sum in case of default

which is intended to coerce performance or punish

default rather than provide for the payment of a rea-

sonable sum as anticipated damages. Penalty provi-

sions of this type are not enforceable and are in the

nature of a forfeiture which is not favored in the law.”

6 Colo. Prac., Civil Trial Practice § 12.12, Westlaw (data-

base updated August 2016).

10.2 Seller Default

Custom varies widely with respect to the seller default

provision. The options that are usually considered are

as follows:

54 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

10.2.1

Buyer will have the right to seek specic performance

or general damages (but not consequential, punitive,

incidental, or special damages); or

10.2.2

Buyer will have the right to seek specic performance

(with the right to record a lis pendens) but not dam-

ages, unless seller intentionally conveys to a third party

before closing in violation of its obligations under the

PSA or fails to satisfy a covenant that cannot be rem-

edied by specic performance; and

10.2.3

Buyer’s damages will be limited in all events to a cer-

tain amount that is often a percentage of the purchase

price (e.g., a damage “cap”).

10.3 Specic Performance

Specic performance is an equitable remedy that

is generally disfavored in Colorado and is granted

in the discretion of the court. CollectACheck, Inc. v.

Check Collection & Recovery, Inc., 2009 WL 1279329,

at *4 (D. Colo. May 6, 2009); Schreck v. T&C Sanderson

Farms, Inc., 37 P.3d 510, 515 (Colo. App. 2001). However,

because “[d]ierent tracts of land are not of equal type

and value like bushels of wheat from the same bin,”

specic performance will be granted even when the

plainti-buyer “might be fully compensated in dam-

ages for any injury resulting from a failure of the [defen-

dant-seller] to convey.” Prosser v. Schmidt, 197 P.2d 318,

320 (Colo. 1948); White v. Greenamyre, 234 P. 164, 165

(Colo. 1925). Specic performance may be denied if it

can be shown that a property encumbrance makes

seller’s performance impossible. Prosser, supra, 197

P.2d at 320. However, in other circumstances, a seller

“may be required to convey subject to encumbrance

with compensating abatement of the purchase price.”

Id. at 320.

10.4 Damages

The general measure of compensatory damages is the

dierence between the contract price and the mar-

ket value of the property at the time of breach. See

Bennett v. Price, 692 P.2d 1138, 1140 (Colo. App. 1984)

(purchaser’s damages for breach by seller of its obliga-

tion to convey). For breaches of warranties and repre-

sentations, the “measure of damages is the dierence

between the actual value of the property at the time

of purchase and its value as of that time had the rep-

resentations [or warranties] been true.” Denver Busi-

ness Sales Co. v. Lewis, 365 P.2d 895, 897 (Colo. 1961);

see Loveland Essential Group, LLC v. Grommon Farms,

Inc., 251 P.3d 1109 (Colo. App. 2010) (where the Seller

“warranted that it would ‘transfer the Property free and

clear of all liens and encumbrances other than those

agreed to…,’” but sold the property subject to a writ-

ten lease.)

10.5 Dispute Resolution

10.5.1 Jury Trial Waiver

Parties often agree to a waiver of the right to jury trial,

because it is generally believed that arbitration or trial

to the court will obtain a speedier result that is deter-

mined by a more reliable decision-maker. There is no

constitutional right to a jury trial. But “…the courts have

held that the right is important enough that it can be

lost only as expressly provided in the rules.” Stephen

A. Hess, Jury Demand and Jury Waiver, 5A Colo. Prac.,

Handbook On Civil Litigation, §9:2 (2016 ed.); See Colo.

R. Civ. P. 39(a)(1) (controlling waiver).

10.5.2 Arbitration

The right to arbitrate is voluntary in Colorado and

must be agreed to in the PSA. “Voluntary arbitration

is governed by the particular agreement to arbitrate

the particular dispute, and if no particular rules are

agreed upon by the parties, provisions of the Colorado

Uniform Arbitration Act will probably apply.” 2 Colo.

litig. FoRms & AnAlysis § 47:1, Westlaw (database updated

October 2016). If the PSA does not specify which arbi-

tration rules and procedures are to be used, then the

Colorado Uniform Arbitration Act governs. Colo. Rev.

stAt. § 13-22-203 (2004).

11. MISCELLANEOUS PROVISIONS

11.1 Plural and Singular

Certain drafters use a convention in which a noun

is drafted in the singular with an “(s)” following it to

indicate that the singular includes the plural. This is an

archaic device that will lead to ambiguity in construc-

tion if it is not used uniformly throughout the PSA. The

author recommends that the PSA include a rule of con-

struction that the plural includes the singular, and the

singular includes the plural. The same rule is used for

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the interpretation of Colorado statutes. Colo. Rev. stAt. §

2-4-102 (2017).

11.2 Brokers

Brokers have a right to lien the property that is the sub-

ject of the PSA pursuant to the requirements of the

Commercial Real Estate Brokers Commission Security

Act. Colo. Rev. Stat. §§ 38-22.5-101 – 111.

11.3 Assignment

Buyer’s rights under the PSA are assignable unless

assignment is prohibited by contract, operation of law,

or where the contract involves matters of personal

trust or condence, or matters constituting personal

services. Matson v. White, 220 P.2d 864, 867 (Colo.

1950); Roberts v. Holland & Hart, 857 P.2d 492, 495

(Colo. App. 1993); Parrish Chiropractic Centers, P.C. v.

Progressive Casualty Ins. Co., 874 P.2d 1049, 1052 (Colo.

1994). A party with the right to consent must be rea-

sonable without a freely negotiated provision giving it

the absolute right to withhold consent. See Cafeteria

Operators L.P. v. AMCAP/Denver Limited Partnership,

972 P.2d 276 (Colo. App. 1998) (where a landlord’s right

to withhold consent was considered). If the absolute

right to withhold consent is agreed upon, seller should

retain the right with language that it is not required to

be reasonable. One commentator has written in this

regard:

[A] party may specically bargain for the right to

act in its sole and absolute discretion. A common

example of such “bargained-for discretion” is the

right to withhold consent under an agreement

(for example, to a subsequent assignment of the

agreement, the sale of underlying collateral pur-

suant to a security agreement, or the expansion

of the uses of an easement), even if such consent

may be unreasonably or arbitrarily withheld. In such

cases, courts routinely uphold a party’s right to

exercise such bargained-for discretion where the

parties have negotiated for such a provision. This

is entirely consistent with well-established princi-

ples of contractual interpretation and the overrid-

ing purpose of eectuating the intentions of the

parties to the agreement. E. Lee Reichert, Good

Faith and Fair Dealing Developments – Part I, 27

Colo. Law. 115, 118 (June 1998) (emphasis added).

If the PSA states that consent is not to be unreasonably

or arbitrarily withheld, the standard imposed will be

what a reasonably prudent person would do. See List

v. Dahnke, 638 P.2d 824, 825 (Colo. App. 1981).

Generally, assignment to certain aliates is allowed

without required consent. Buyer will need that right to

enable it to acquire the property in a newly formed

special purpose entity.

Notwithstanding the rights that parties negotiate with

respect to consent to assignment, the concept is not as

crucial as it often seems. If the seller will not consent to

an assignment, buyer can always close into an escrow

whereby it immediately delivers a conveyance to a

third party. The only problem with such a mechanism

is that the warranties and representations of the seller

will not have been assigned to the third party, so the

buyer as assignor may be required to remake them.

11.4 Time of the Essence

The covenants of the PSA are always made subject to a

provision that “time is of the essence.” This term should

be enforceable, but an express contractual provision

stating that time is of the essence is not conclusive

where there is nothing in the record to show that time

was in fact of the essence. Houy v. Davis Oil Co., 486

P.2d 18, 21 (Colo. 1971) (where the driller commenced

performance after expiration of the prescribed period,

the owner was deemed to be estopped from assert-

ing breach as a discharge of its obligation to perform

due to violation of the time of the essence provision).

Regardless of the provisions of a contract, the circum-

stances surrounding the transaction must show that

timely performance was in fact essential. Id. at 21.

11.5 Integration

An integration or merger clause is drafted to limit

future contractual disputes between parties to the

express obligations set forth in the nal executed

agreement. Matthew K. Hobbs, Boilerplate Provisions:

Traps Exposed for the Drafter, 31 Colo. Law. 105 (July

2002). Thus, if any ancillary documents are to survive

the nal executed agreement, they should be speci-

cally identied in the PSA.

A boilerplate integration clause will not bar claims of

negligent or fraudulent misrepresentation. Keller v. A.O.

Smith Harvestore Products, Inc., 819 P.2d 69, 73 (Colo.

1991). Implied covenants of good faith and fair deal-

ing would be eectively meaningless if parties could

escape liability for negligent or fraudulent assurances

56 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

made in negotiations with an integration clause foot-

ing the nal contract. Hobbs, supra. See Sec tion 7.1

above.

11.6 Business Days

Business days are often not dened in the PSA. In that

case, the Rules of Civil Procedure for litigation may

apply. Colo. R. Civ. P. 6. See Schedule 4.

11.7 Attorney’s Fees

Attorney’s fees are collectible: (i) if there is a provision

specically allowing for collection. See Butler v. Lem-

beck, 182 P.3d 1185, 1189-90 (Colo. App. 2007) (citing

Negro Nest, LLC v. Mid–Northern Mgmt., Inc., 839

N.E.2d 1083, 1085 (Ill. Ct. App. 2005) (“denying attorney

fees because the contractual provision did not speci-

cally state that ‘attorney fees’ are recoverable; it merely

provided that management company would be

responsible for ‘all collection costs’ incurred”) and (ii) if

they are reasonable (as determined by the trial court).

Hartman v. Freedman, 591 P.2d 1318, 1322 (Colo. 1979).

11.8 Statute of Frauds

The Statute of Frauds requires a writing for a transfer

of an interest in land. The writing must be signed by

the party by whom the sale is to be made and must

include the identities of “the parties to the transaction,

the terms and conditions, a description of the prop-

erty, and the consideration.” Luttgen v. Fischer, 107 P.3d

1152, 1155 (Colo. App. 2005); Colo. Rev. Stat. § 38-10-108

(2017). Further, a PSA “cannot be validly changed or

modied as to a material condition…by a subsequent

oral agreement, without more, so as to make the origi-

nal [PSA], as orally modied, an enforceable obligation.

Burnford v. Blanning, 540 P.2d 337, 340 (Colo. 1975).

SCHEDULE 1

FORM DR 1083

In general. With certain exceptions, all sales of Colo-

rado real property in excess of $100,000 made by non-

residents of Colorado on or after January 1, 1993, will be

subject to withholding tax in anticipation of the Colo-

rado income tax that will be due on the gain from the

sale.

A transferor who is an individual, estate, or trust will be

subject to the withholding tax if either the federal Form

1099-S to be led with the Internal Revenue Service to

report the transaction or the authorization for the dis-

bursements of the funds resulting from the transaction

shows a non-Colorado address for the transferor.

A corporate transferor will be subject to the withhold-

ing tax if immediately after the transfer of the title to

the Colorado real property interest, it has no perma-

nent place of business in Colorado. A corporation will

be deemed to have a permanent place of business in

Colorado if it is a Colorado domestic corporation, if it is

qualied by law to transact business in Colorado, or if

it maintains and stas a permanent oce in Colorado.

Amount of Withholding. The withholding shall be

made by the title insurance company or its authorized

agent or any attorney, bank, savings and loan associa-

tion, savings bank, corporation, partnership, association,

joint stock company, trust, unincorporated organiza-

tion or any combination thereof acting separately or in

concert that provides closing and settlement services.

The amount to be withheld shall be the lesser of two

percent of the selling price of the property interest or

the net proceeds that would otherwise be due to the

transferor as shown on the settlement statement.

“Closing and settlement services” are services for the

benet of all necessary parties in connection with the

sale, leasing, encumbering, mortgaging, creating a

secured interest in and to the real property, and the

receipt and disbursement of money in connection

with any sale, lease, encumbrance, mortgage, or deed

of trust, [10-11-102(3.5), C.R.S..]

Exceptions to Withholding. Withholding shall not

be made when:

1. the selling price of the property is not more than

$100,000; the transferor is a corporation incorpo-

rated under Colorado law or currently registered

with the Secretary of State’s Oce as authorized to

transact business in Colorado;

2. the transferor is an individual, estate, or trust and

both the Form 1099-S and the authorization for

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS COLORADO PURCHASE AND SALE ISSUES FOR BUYERS | 57

disbursement of funds show a Colorado address for

the transferor;

3 the transferee is a bank or corporate beneciary

under a mortgage or beneciary under deed of trust

and the Colorado real property is acquired in judicial

or nonjudicial foreclosure or by deed in lieu of fore-

closure; or

4 the transferor is a corporation incorporated under

Colorado law or currently registered with the Secre-

tary of State’s Oce as authorized to transact busi-

ness in Colorado;

5. the transferor is a partnership as dened in section

761(a) of the Internal Revenue Code required to le

an annual federal return of income under section

6031(a) of the Internal Revenue Code; or

6. the title insurance company or the person providing

the closing and settlement services, in good faith,

relies upon a written armation executed by the

transferor, certifying under the penalty of perjury

one of the following:

(a) that the transferor, in an individual, estate, or

trust is a resident of Colorado;

(b) that the transferor, if a corporation, has a per-

manent place of business in Colorado;

veyed is the principal residence of the trans-

feror which could qualify for the rollover of

gain provisions of section 1034 of the internal

revenue code; or

(d) that the transferor will not owe Colorado

income tax reasonably estimated to be due

from the inclusion of the actual gain required

to be recognized on the transaction in the

gross income of the transferor.

Normally Colorado tax will be due on any transac-

tion upon which gain will be recognized for federal

income tax purposes. Gain will normally be recognized

for federal income tax purposes any time the selling

price of the property exceeds the total of the taxpay-

er’s adjusted basis in the property plus the expenses

incurred in the sale of the property. The taxpayer’s

adjusted basis of the property will normally be the

taxpayer’s total investment in the property minus any

depreciation thereon he has previously claimed for

federal income tax purposes.

Partnership as Transferor. Eective for tax years

beginning on or after January 1, 1996, sales of real

property interests by organizations recognized as part-

nership for federal income tax purposes and required

to le annual federal partnership returns of income will

not be subject to the Colorado withholding tax.

This exception will not apply to joint ownerships of

property which are not recognized as partnerships

for federal income tax purposes. The sale of property

jointly owned by a husband and wife, for example, is a

sale by two individuals, not a sale by a partnership, and

not exempt from withholding tax.

Completion of Form DR 1083. Form DR 1083 must

be completed and submitted to the Department of

Revenue with respect to sales of Colorado real prop-

erty occurring on or after January 1, 1993, if Colorado

tax was withheld from the net proceeds from the sale,

or if Colorado tax would have been withheld but for

the signing of an armation by the transferor.

SCHEDULE 2

2017 COLORADO NARRATIVE

2017 will be a reappraisal year for Colorado property

owners. Assessor’s oces across the state will mail

Notices of Valuation on or before May 1, 2017, for 2017

and 2018 values. 2017 and 2018 values are meant to

reect the fair market value of taxable real property as

of June 30, 2016. Cost, market, and income data were

gathered from the period beginning January 1, 2015,

through June 30, 2016, for commercial properties.

Market data was gathered from the same period for

all residential and multi-family housing. Colorado law

recognizes only the market approach to value and the

gross income multiplier for properties with residential

classication, (including apartments).

58 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

Real estate taxes are paid in arrears in Colorado. Tax bills

issued in January of 2017 are for the 2016 assessment

year. Owners may choose to pay in two installments, due

February 28 and June 15, or in a single payment due April

30. There is no discount for either method of payment.

Colorado counties reappraise real estate every other

year, employing the ‘base year’ method of valuation,

meaning that current year assessments are based

upon data from the past. January 1 of each year is the

ocial assessment date. Subsequent to 2017, the next

reappraisal is set for May 2019. At that time cost, mar-

ket, and income data from January 1 of 2017 to June

30, 2018 will be used to calculate assessments for com-

mercial properties. Market data, (comparative sales),

and rental information will be gathered from that same

period of time to calculate single family, apartment,

and nursing home assessments. Cost, market, and

income data from beyond the close of the gathering

period is technically not allowable for consideration

by assessor’s oces. In reality, such information does

inuence assessments, particularly in the case of newly

constructed or recently sold properties.

Personal property used for business purposes, (fur-

niture, xtures, and equipment), is taxable in Colo-

rado. Valuations are based on acquisition cost new,

less depreciation. Declarations, (rendition forms), are

mailed annually, and must be returned no later than

April 15.

Real estate values issued in 2017 will remain in place

until 2019, unless changed by appeal action, or a mate-

rial change at the property in question; (new construc-

tion or demolition).

There are two methods of real estate tax appeal in

Colorado. Owners may avail themselves of one or the

other, but not both. The primary and most common

method is to le an immediate appeal in response to a

notice of valuation. Appeals led in this manner must

be received in the local assessor’s oce by June 1 of

each year. The assessor’s oce has until June 30 to

respond. The appeal may be carried on to the county

board of equalization, with a ling deadline of July 15. If

the petitioner remains dissatised, the appeal may go

forward to either the Colorado Board of Assessment

Appeals, the District Court, or submitted for binding

arbitration, provided the ling is completed within 30

days of the date of the county board decision.

The second method of appeal is known as ‘abatement’.

This is when an owner chooses not to le an immedi-

ate appeal, but rather, opts to wait for the tax bill to be

issued for the assessment in question. In this circum-

stance, the abatement petition can be led for a period

of up to two years following the issuance of the tax bill.

For tax bills sent in January 2017, the nal day abate-

ments could be led would be December 31, 2018. The

abatement petition has certain advantages and disad-

vantages that must be considered. The advantages are

that the petition can be led for an extended period

of time, and owners have the opportunity to see how

increased assessments will actually impact their prop-

erties prior to ling appeals. A disadvantage is that the

owner is responsible for paying the tax bill while the

abatement is being dealt with, or accrue substantial

penalty interest and the possibility of tax sale.

A property owner may le an appeal for each assess-

ment year, irrespective of whether or not a reappraisal

has been completed. A property owner may le an

appeal for the current year notwithstanding the out-

come of any prior appeal. Each assessment year is

regarded as being separate and distinct. An appeal

led for the current year would not necessarily be prej-

udiced by the denial of a prior appeal.

Colorado property taxes are calculated as follows:

Assigned actual value by county assessor’s oce, mul-

tiplied by the assessment ratio as prescribed by law,

multiplied by the local mill levy as set by the various

taxing districts, equals taxes. (Value x ratio x mill levy

= taxes).

Colorado law states that roughly 55% of all property

taxes must be borne by commercial properties and

45% by residential properties. The commercial assess-

ment ratio is set in law at 29% of assigned actual value.

The residential assessment ratio oats to maintain the

55/45 split. For 2015 and 2016 the residential assess-

ment ratio was set at 7.96% of actual value.

A million dollars worth of commercial property had a

2015/2016 assessed value of $290,000. A million dollars

worth of residential property had a 2015/2016 assessed

value of $79,600.

2017/2018 valuations for assessment will reect the sus-

tained economic upswing experienced in the Colorado

real estate market for the last 4-6 years, with 2016 repre-

senting a new high water mark. Certain value increases

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS COLORADO PURCHASE AND SALE ISSUES FOR BUYERS | 59

may exceed 25%, particularly in the multi-family cat-

egory. Other property classes which should expect

substantial increases are Class A oces, industrial ware-

houses, and lodging properties. Values for retail, Class

B and C oces, vacant land, and single family residen-

tial improved, as well. Property owners who receive a

Notice of Valuation in May of 2017 and believe that their

assigned 2017/2018 value exceeds fair market value as

of 6-30-2016 should consider ling an appeal.

Monzon. This document may not be reprinted in part

or whole without permission.

SCHEDULE 3

State of Colorado - Local Real Estate Transfer Tax Table

REAL ESTATE TRANSFER TAX

COUNTY

CITY, TELEPHONE,

AND WEBSITE ORDINANCE PAYEE AND ADDRESS TAX RATE

FORMS

(*=Forms available online)

Eagle Avon

(970) 748-4019

www.avon.org

Ch. 3.12

Updated

3/24/2015 -

Ordinance

No. 15-02

Town of Avon

PO Box 975

Avon, CO 81620

For Primary

Residences

- the rst

$160,000 of the

purchase price

is exempted

from the 2%

transfer tax,

therefore the

maximum

exemption is

$3,200

RETT Application for

Exemption*

RETT Tax Exemption

Promissory Note and

Adavit for Primary

Residence

Exemption ($26

processing fee)*

Eagle Gypsum

970-524-7514

www.townofgypsum.com

Ch. 3.12 Town of Gypsum

PO Box 130,

Gypsum, CO 81637

1% Exemption Certicate

($5 processing fee)*

Eagle Minturn

(970) 827-5645

www.minturn.org

Ch. 4 Art. 4 Town of Minturn

PO Box 309

Minturn CO 81645

1% Applications for

and Certicate of

Exemptions

Pitkin Vail

970 - 479 -2119

www.vailgov.com

Section

2-6-2

Town of Vail

Town Attorney

Town of Vail

75 S Frontage Rd. W,

Vail, CO 81657

1% Exemption

Application*

Grand Winter Park

970-726-8081

www.wpgov.com

Ch. 10 Town of Winter Park

PO Box 3327

Winter Park, CO

80482

1% Application for

Exemption

60 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

COUNTY

CITY, TELEPHONE,

AND WEBSITE ORDINANCE PAYEE AND ADDRESS TAX RATE

FORMS

(*=Forms available online)

Gunnison Crested Butte

970-349-5338

www.crestedbutte-co.gov

Art. 4-3 Town of Crested

Butte

PO Box 39

Crested Butte, CO

81224

3% Application for

Exemption

Transfer Tax*

Pitkin Aspen

970-920-5029

www.aspenpitkin.com

Ch. 23.48 City of Aspen

Finance Dept.

130 S. Galena St.

Aspen, CO 81611

2 separate

RETTs totaling

1.5%.

0.5% for

Wheeler Opera

House, Plus

1% Housing

Real Estate

Transfer Tax

above 100,000

Transmittal*

Application for

Exemption*

Pitkin Snowmass Village

970-923-3796

http://co-snowmassvil-

lage.civicplus.com/index.

aspx?nid=299

Art. V

Sec. 4-91

Town of Snowmass

Village

Town Manager

PO Box 5010,

130 Kearns Road

Snowmass Village, CO

81615

1% Application for

Exemption

($25 processing fee)*

Certicate of Tax

Paid*

San Miguel Telluride

970-728-3071 www.

telluride-co.gov

Ch. 3.12 Town of Telluride

PO Box 397

113 W. Columbia

Telluride, CO 81435

3% Application for

Exemption*

Receipt for Transfer

Tax*

San Miguel Ophir

970-728-4943

www.colorado.gov/ophir

79-3 Town of Ophir

PO Box 683

Ophir, CO 81426

Summit Frisco

970-668-5276

www.townorisco.com

160-10 et

seq.

Town of Frisco

PO Box 4100

Frisco, CO 80443

1% Application for

Exemption

PURCHASE THIS ARTICLE ONLINE AT: WWW.ALI-CLE.ORG/PERIODICALS COLORADO PURCHASE AND SALE ISSUES FOR BUYERS | 61

COUNTY

CITY, TELEPHONE,

AND WEBSITE ORDINANCE PAYEE AND ADDRESS TAX RATE

FORMS

(*=Forms available online)

Summit Breckenridge

970-453-2251 www.

townofbreckenridge.com

Title 2 Ch.1

Town of Breckenridge

Attn: RETT Processing

150 Ski Hill Road, 3rd

Floor, PO Box 8629,

Breckenridge, CO

80424

1% Application for

Exemption*

Verication of Gross

Consideration*

Arapahoe City of Glendale

303-759 -1513

www.Glendale.co.us

Real Estate

Transfer

Tax was

repealed

by section

2014-5 –

Repeals

Ch. 3.24,

real

property

N/A

62 | THE PRACTICAL REAL ESTATE LAWYER JULY 2017

SCHEDULE 4

C.R.C.P. RULE 6

RULE 6. TIME

(a) COMPUTATION

(1) In computing any period of time prescribed or

allowed by these rules, the day of the act, event, or

default from which the designated period of time

begins to run shall not be included. Thereafter, every

day shall be counted, including holidays, Saturdays or

Sundays. The last day of the period so computed shall

be included, unless it is a Saturday, a Sunday, or a legal

holiday, in which event the period runs until the end

of the next day which is not a Saturday, a Sunday, or

a legal holiday. The “next day” is determined by con-

tinuing to count forward when the period is measured

after an event and backward when measured before

an event.

(2) As used in this Rule, “Legal holiday” includes the rst

day of January, observed as New Year’s Day; the third

Monday in January, observed as Martin Luther King

Day; the third Monday in February, observed as Wash-

ington-Lincoln Day; the last Monday in May, observed

as Memorial Day; the fourth day of July, observed as

Independence Day; the rst Monday in September,

observed as Labor Day; the second Monday in Octo-

ber, observed as Columbus Day; the 11

day of Novem-

ber, observed as Veteran’s Day; the fourth Thursday in

November, observed as Thanksgiving Day; the twenty-

fth day of December, observed as Christmas Day, and

any other day except Saturday or Sunday when the

court is closed.

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