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Farm Succession - An Unfortunate Experience For One Family

03 November 2014

It’s a common scenario – the son leaves school and works long hours on the family farm for low wages in the expectation that the farm will eventually be his. A recent case illustrates the consequences of the family’s failure to record their expectations in a business-like manner.

The son had worked on the family farm since leaving school.  In 1992 the son and his wife purchased a neighbouring farm for $500,000. They did not contribute any funds towards the purchase - it was financed by a deposit paid by the parents and borrowing secured over the new farm and the parents’ farm. The parents’ farm and the new farm were operated as one unit, although the father expressed his intention that the son and his wife would eventually take over the new farm on their own. By working hard as the farm manager for no more than a farm hand’s wages, the son and his wife contributed to the capital of the parents. They were not able to build up any savings or capital of their own because all the farm revenue was paid to the parents.

 

Things don’t work out

In 1997 the father and son had a falling out. The son told his father that he wanted to go it alone on the new farm. He felt that he had been running the farm on his own for several years and wanted to be in control of his own future. The father would not have a bar of it, so the son quit there and then and left the farm. Soon after that, the son and his wife separated.

 

The parents’ share of the new farm

By the time the case was heard by the Court in 2010, the new farm was valued at $1.8m. The parents and the son and daughter-in-law agreed that the parents were entitled to a share in the new farm based on “constructive trust”. A constructive trust arose because the parents had made financial contributions towards the new farm and it was a reasonable expectation for them to have an interest in it, even though they did not own it. The Court had to determine what that share should be. The son and daughter-in-law would then have to agree on how to divide the remaining share between them.

The judge weighed up various factors – including the hard work done by the son and his wife, the overall benefit to the farming business from the purchase of the new farm, the contributions of capital by the parents and the effect of the son and daughter-in-law’s abrupt departure. He came to the conclusion that the parents were entitled to a 38% share in the new farm and were liable for the relevant debt. The parents appealed that decision. In 2012 the Court of Appeal awarded them an increased share of 42%.

 

Planning is the key

This family went through a lengthy, stressful and expensive process to resolve the issues between them and separate their affairs. This could have been avoided if they had devoted time and money at the outset to planning their futures and having the arrangements properly documented by their lawyers.

 

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.