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Farm Succession - One Family's Experience

14 March 2011

It's a common scenario – the son leaves school at 15 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 differing expectations of the arrangement and failure to record it in a businesslike manner.

 

The Background

In this recent case, the parents carried on a farming business. One of their sons had worked on the farm since leaving school. In 1992 the son and his wife purchased a neighbouring farm for $500,000. The son and his wife 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' Claim

The parents and the son and daughter-in-law agreed that the parents were entitled to a share in the new farm, now valued at $1.8m, based on "constructive trust". 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 judge was asked to determine what share the parents should be entitled to in the new farm. Once the share of the parents had been determined, it would be up to the son and daughter-in-law to agree on how to divide the remaining share between them.

 

Assessing the Parents' Share

In order to determine the parents’ share, the judge considered how hard the son and daughter-in-law had worked on the farm, the overall benefit to the farming business from the purchase of the new farm and the financial contributions by the parents. The parents’ financial contributions comprised the purchase price of $500,000 and farm expenses of a capital nature. With the help of accountants’ evidence, the judge concluded that the farm improvements, half the expenditure on the water supply, and some of the expenditure on fencing could be included as contributions by the parents. Expenditure on fertiliser was not included, as it was regarded as a maintenance item, not a capital item. The judge also increased the amount of the parents’ contributions by taking into account the son and daughter-in-law’s abrupt departure from the farm and the fact that they had not taken on any responsibilities as owners of the farm since they had left. The judge came to the conclusion that the parents were entitled to a 38% share in the new farm, and that they were liable for any relevant debt.

 

The Benefit of Hindsight

This family has been through a stressful and expensive process to resolve the issues between them and separate their affairs. With the benefit of hindsight, they might have avoided the stress and expense if they had devoted more time and expense at the outset planning and documenting their futures, including taking appropriate legal advice.

 

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.