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Farm sale at $1.8m below market value fair and morally defensible

19 April 2015

Ross Blackwell owned a dry stock farm in the Waikato. Ross developed a close friendship with his neighbours the Chicks and their son Adam. In 2000 Ross was diagnosed with an inoperable brain tumour and was told he had only six months to live. Ross approached the Chicks and asked them to lease his farm. Despite the initial prognosis Ross recovered and by 2002 he was back working on the farm.

In 2004 the lease to the Chicks was due for renewal. Ross told Mr Chick he wanted to leave the farm to Adam in his will. Mr Chick persuaded Ross against this because Ross had his wife to consider and Ross’ will could be challenged. Mr Chick suggested Ross give them an option to purchase the farm. Ross wanted the farm to be affordable for Adam so he suggested an option price at half the farm’s value. Mr Chick rejected that price as being too low. After some discussion Ross and the Chicks renewed the lease and included an option for the Chicks to purchase the farm for $1.5 m. This was $300,000 below the farm’s market value in 2004.

In 2008 Ross suffered a series of strokes. This affected his memory severely and he was admitted to hospital where he remained until his death several years later.

In 2010 the Chicks exercised the option to purchase the farm for $1.5m. This was $1.8m below the farm’s market value of $3.3m. Ross’ brothers, who were by then managing his affairs, refused to complete the sale. The Chicks obtained an order from the High Court compelling the Blackwells to complete the sale (“an order for specific performance”). The Blackwells opposed the sale on the grounds that Ross had lacked mental capacity when he granted the option and that the bargain was unconscionable. The Chicks were successful so the Blackwells took their case to the Court of Appeal.

 

Did Ross understand what he was doing?

There was extensive evidence put before the Court as to Ross’ mental capacity, both before he gave the option and at the times the lease had been renewed and varied. The evidence variously described Ross before suffering the brain tumour as “of borderline intellect”, “a bit naïve” and “an odd ball”, although there was also evidence that Ross was “a lot more intelligent than people gave him credit for”. The Court also considered the effect of the brain tumour and treatment on Ross’ mental capacity. The Court found that the sale could not be set aside on this ground because Ross had the mental capacity to understand the general nature of the transactions and there was nothing in the evidence to suggest that Ross did not know what he was doing.

 

Was the sale an unconscionable bargain?

For this defence to succeed the Blackwells would have to satisfy the Court that Ross was under a disability or disadvantage and the Chicks’ conduct was such that it would be unconscionable for them to take the benefit of the sale at $1.5m.

The Court found that the Chicks had not acted improperly. Ross and the Chicks had a close and mutually supportive relationship. This was not the case of a stronger party exploiting a weaker party in a morally reprehensible way. Ross had never wavered from the course he set in 2004 when he granted the option. He had made deliberate and rational decisions to benefit the Chicks which had enabled him to have free access to the farm, to retain ownership during his lifetime, to ensure the farm remained as a dry stock unit and that the Chicks would continue leasing the farm rather than pursue other options. The Court did not accept that the bargain should be set aside because it was unconscionable. In the end Ross’ decisions had achieved a fair and morally defensible result.

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.