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Buyer beware - due diligence critical when purchasing a farm

29 April 2016

Dairy farming is a challenging business. There is a need for real care when deciding whether to purchase a farm. In the recent case of Aldrie Holdings Limited v Clover Bay Park Limited [2016] NZHC 250) the buyer did not carry out proper investigations before she purchased a farm. Instead she chose to rely on statements made to her during the negotiations. That proved to be an expensive mistake. Some of the statements made by the seller had been carelessly made and were incorrect.  For the seller’s part, his carelessness and inaccuracy also proved to be an expensive mistake.

In this case the buyer had decided to buy another farm as an investment. She was not a hands on farmer but was described by the judge as a “shrewd” and “experienced” businesswoman. The seller was a real estate agent, a dairy farmer of some 30 years’ experience and a “relatively sophisticated businessman”. The buyer saw the farm for sale on the TradeMe website. The farm met her requirements – 200 cows producing 60,000 kgs which could support a manager.

After negotiations comprising numerous telephone discussions and email correspondence and a farm visit of two hours, the buyer signed an agreement to purchase the farm. Before signing she did not seek legal advice about the prudence of the purchase or whether the representations made to her by the seller should be included in the agreement. Nor did she arrange for someone with farming operational experience to walk over the property, or prepare a budget or engage an accountant.

Soon after settlement the buyer discovered that the farm production was much lower than the seller had represented to her. She issued legal proceedings against the seller claiming that misrepresentations had been made to her regarding the production, the amount of fertiliser and supplement used, the effective land available, the state of the water supply and the cow shed, and the grazing of stock off the farm. She claimed the seller was liable under the Fair Trading Act, the Contractual Remedies Act and in the tort of deceit.

Caveat emptor and its limitations

The judge referred to the principle of “caveat emptor” - let the buyer beware. The onus is on a purchaser to make enquiries when deciding whether to buy.  This principle can be overridden by the Contractual Remedies Act and the Fair Trading Act. Those Acts require the seller to answer any questions honestly and accurately.  In addition, if the seller makes a false statement knowing it to be untrue or recklessly, without caring whether it was true or not, for the purpose of influencing a buyer to enter into a contract, the seller has acted dishonestly and may be liable to the buyer in deceit.

The unsuccessful claim in deceit

The buyer was not successful with her claim based on deceit. The judge found that the seller may have been guilty of exaggeration, of recklessly answering the questions put to him and of “gilding the lily”, but he had not acted dishonestly to the extent that a finding of deceit was warranted.

The unsuccessful Contractual Remedies Act claim

Under this Act, a party to a contract to claim damages where he or she has been induced to enter into a contract by a misrepresentation made by the other party to the contract. The false statement is treated as if it was a term of the contract that had been broken. The buyer was not successful on this ground.  The judge was not satisfied that the seller’s statements had induced the buyer to enter into the contract because the seller would have expected her to make further enquiries before she signed the agreement. In relation to the description of the water supply and cow shed as being “excellent”, the judge noted that these statements were no more than “puffery” and could not have been taken seriously as statements on which the buyer was entitled to rely upon to enter into the contract.

The successful Fair Trading Act claim

The Fair Trading Act prohibits someone, in trade, from engaging in misleading or deceptive conduct. The judge found that the seller had made misleading statements about the effective area of the land, the farm production and the farm’s likely projected income. This was conduct prohibited by the Act. The amount of the buyer’s loss was $500,000 – being the difference in the true market value of the farm and what had been paid. However, the judge reduced the amount of damages payable to the buyer by 50% to $250,000. He said that she must bear a significant part of the blame for the predicament in which she found herself.

Buying or selling a farm?

If you are buying a farm, remember the principle of caveat emptor and undertake a thorough due diligence investigation. If statements made to you by the seller are important to you, make sure they are included as written terms of the agreement. As a seller, you should obviously take care to answer questions put to you honestly and accurately.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.