Buying or selling a farm is a major undertaking. It is a complex matter and, if buying, it is essential that comprehensive due diligence is carried out before any decision is made to proceed. In this article we will discuss the areas which a due diligence should cover.
Before you get to the sale/purchase agreement stage there are many issues which need to be considered, not least of which is financing. If you are looking to purchase a farm then talk to your bank early and let them know you are considering a purchase. They have a lot of knowledge on farm financing and can help clarify what funding you can obtain. Have good legal and accounting expertise at hand – you will need experts to guide you through the process. Come and see us early to get the best advice possible.
When you find a property which you are interested in then, first and foremost, check who owns the land and the farming operation. Land, stock, equipment, chattels, water rights, resource consents and other related assets can have different owners. It is essential that the sale and purchase agreement reflects the correct ownership of everything being purchased.
Review of Titles – Encumbrances and History
Once you have established the correct ownership then you need to review the titles to the land and whether there are any easements or other instruments registered against the land title. Are there any other restrictions to the use of the land? A land information memorandum (LIM) report from the local council will provide further details including rates, consents, building regulatory history, details of any hazards on the land (including natural hazards and contamination arising from past land uses).
GST and Asset Values
Make sure you are aware what part of the land is subject to GST. If both the vendor and purchaser are GST registered then the transaction will be zero rated. Most farm properties include at least one residential dwelling - this, along with the immediate land around it, referred to as the curtilage, will be exempt from GST. There is also likely to be some other farm buildings and farm chattels. Make sure these are all included and valued. For the purchase of a farm with a purchase price of more than $1M, it is advisable to record the allocation of the purchase price between the land, dwelling and curtilage, and other assets in the agreement. Refer to our article about purchase price allocation for more information.
Water rights are critical - does the property have the benefit of any rights to take water that are recorded on the land title, or are the arrangements informal which should be recorded in a more formal way? If the farm takes surface or ground water then there may be resource consents held by the current owner that will need to be transferred to the new owner.
Is there a forest? Does it have a commercial value? For taxation reasons values need to be established and recorded in the contract. There may also be carbon credits and obligations under the Emissions Trading Scheme that need to be dealt with. Determining whether there is any carbon liability in relation to the areas of the property that are registered under the Emissions Trading Scheme, and requiring the vendor to satisfy those liabilities, is critical.
What harvested feed or grass cover is to be included with the property? Again, volumes and/or values need to be established and recorded in the contract.
Stock can be purchased as part of the farm purchase and if so, then the contract needs to provide how, when and by whom stock is to be valued. Due diligence should also be undertaken as to whether there is any risk associated with Microplasma Bovis and other livestock diseases.
A clause on how the farm is to be managed from the date of contract until settlement should also be included. This should state that the vendor will continue to manage the property within accepted farming practice, will not increase stock numbers, remove trees or remove any improvements or fixtures relating to the farm.
You should identify whether the current owner is complying with the conditions of any resource consents which may include consents for to take water and to discharge effluents. Whilst your agreement should include warranties from the owner that these conditions are complied with, it is always best practice to identify these issues before you pay for the property on settlement. Where the farm is a dairy farm you should confirm that all conditions of supply to the dairy company are complied with in relation to the standard of the dairy shed and related infrastructure.
An inspection of the farm property may show up maintenance matters that should be considered for inclusion in the contract for example septic tanks that may need cleaning prior to settlement or fences that are in need of fixing prior to settlement. Your agreement should require the owner to attend to these matters before settlement.
The timing between the date of the contract and settlement may exceed 93 days. If this is the case then a Core Acquisition Price clause should be added to the contract. This is for the benefit of the vendor as without this clause the purchaser may be deemed to have an interest claim in the purchase between the contract date and the settlement date. The vendor would have to treat part of the sale price as taxable interest income, which would not be ideal for the vendor. It is important that the agreement reviewed by your accountant before you make an offer so that they can provide you with advice in respect of these matters.
Buying and selling a farm is a complex matter. If you are interested in buying or selling a farm, please contact Michael O'Hagan or someone from our team. Let us get on top of all the issues for you early!
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