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Signing up to buy a farm is a serious business

28 October 2016

Signing up to buy a farm is a serious business. There’s an obscene amount of money involved. There’s the time spent finding the right farm in the right price range, inspecting it and getting together all the information you need to know - production, stock numbers, staffing requirements, fertiliser application, water rights, water supply and farm buildings and infrastructure. Things get really serious when you decide to put in an offer. More often than not the agent prepares the agreement. It’s going to be sent to your lawyer for approval before you sign it. You don’t really understand what all the extra wording means but the price, deposit, settlement date and chattels all look good to you. Surely all the rest of the wording will be standard so your lawyer will just “run his or her eye over it” and you will be able to sign?

Standard clauses - give them the attention they deserve

Your lawyer wants to change the wording of some of the clauses in the agreement and has questions to ask you about them. You wonder why your lawyer is concerned about what look like standard clauses. Your lawyer also explains that she has had clients who have had a bad experience when they bought a farm that included these clauses.

The bad experience

The bad experience involved a sale and purchase agreement of a dairy farm that contained warranties by the seller that all the farm buildings (including the new cow shed) had Council permits and Code Compliance Certificates. There was also a clause stating that the purchasers relied on their own enquiries when signing the agreement and not on any statements made or information provided by the seller. These types of clauses are commonly included in sale and purchase agreements and little attention is paid to them.

After the agreement had been signed the purchasers found out the cow shed and other buildings did not have Code Compliance Certificates. It was going to be expensive to put things right. The purchasers also found out that the quantity and type of fertiliser had not been applied as the seller had led them to believe. There was no clause in the agreement stating what fertiliser had been applied.

The purchasers claimed a reduction in the purchase price.  Their claim was based on the seller’s breach of the warranty regarding the buildings and the seller’s misrepresentation as to the fertiliser the seller had applied to the farm. The claim was also based on misrepresentation under the Fair Trading Act 1986. The relationship between the seller and the purchasers deteriorated. The lawyer arranged for settlement to take place but money to cover the purchasers’ loss was held in a solicitor’s trust account until the dispute had been solved.

The purchasers and the seller agreed to resolve the dispute by going to mediation. The purchasers were advised that if they didn’t reach agreement at mediation the legal costs of court proceedings or arbitration would be eye-watering. Even if they were successful the legal costs the purchasers would recover would be a small proportion of the total costs they would incur.  No doubt the seller’s lawyer gave the seller the same advice. Although the purchasers had a strong claim for the breach of the seller’s warranty regarding the Code Compliance Certificates, they realised that the clause stating that they had not relied on any statements made by the seller weakened their claim in respect of the fertiliser. After considering their lawyer’s advice the purchasers took a commercially realistic view and settled the dispute for much less than they would have liked.

Wording in agreement to be taken seriously

You start to realise why your lawyer wants to add a clause making the agreement conditional on you being satisfied with further investigations, including making enquiries of the Council. You also realise why your lawyer asks you if there are any matters that have been discussed between you and the seller or promises made by the seller that are important to you. With so much money involved you understand why you need to take the wording of the agreement more seriously before you sign it.

 

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.

 

Barbara McDermott