October 20, 2023
This may have happened to you or someone you’ve known. You’ve had a good, long-standing relationship with a particular landlord. Then one day, that landlord decides to put the land up for sale, and you’re caught flat-footed. The next thing you know, your farming footprint has decreased by a couple hundred acres.
Fortunately, there’s a way to possibly prevent those scenarios by drafting up a right-of-first-refusal document, or an ROFR.
“It’s surprisingly not as well known or well used as it should be,” says Clint Fischer, an ag adviser based in South Dakota. “If you have an absentee landlord, it could be especially helpful. It protects tenants in a way that can be mutually beneficial.”
An ROFR is a contractual agreement that gives the tenant the first opportunity to purchase rental land if that land goes up for sale. In other words, the ROFR gives the tenant the opportunity to match any offer made by another buyer before the sale is completed.
Ideally, the ROFR should be a formal, written agreement that is signed by both parties. Consider various terms and conditions that could include how the purchase price is calculated, the timeline for notification and other details. For example, you might stipulate that you would be allowed 30 days to match an auction sale offer.
Some ROFRs go so far as to list a specific price point, but Fischer advises against that due to the ever-changing trends in land values.
“You’re going to want to make it so it’s not burdensome at all for the landlord,” he says.
ROFR documents often have “carve out” conditions that provide additional ease of mind for landlords, Fischer adds.
For example, the landowner might have a son, daughter or other family member who wants to acquire the land if it comes up for sale in the future. An ROFR can specify certain exceptions that address these possibilities.
If you’re able to get an ROFR in place for a particular piece of land, some additional steps should be taken. First, explore financing options with your lender to make sure you can secure the necessary funds when and if the ROFR is exercised.
You should also conduct thorough due diligence on the property, which could include various inspections and environmental assessments. It’s also worth it to consult with some outside advisers, including legal counsel, to ensure that your agreement is in compliance with local laws and regulations.
Fischer notes that every state has different regulations regarding ROFR documents.
There’s also the option to get the ROFR notarized. “It’s not necessarily legally required, but it doesn’t hurt,” Fischer says. “It’s like wearing a belt with suspenders. It’s an extra layer of protection because now it has been recorded in the county’s public office.”
As with many aspects of farming, flexibility and communication are also important. Think about how to best foster goodwill and cooperation with your landlord, and you’ll set the stage for the best chance of success.
Finally, periodically review and update the ROFR agreement. It might meet the needs and expectations of both parties today, but that might not be the case two or three years down the road. If circumstances change for either party, it will be prudent to revisit the agreement.
Another great thing about ROFR agreements is that you don’t even have to be a current tenant. For instance, if you suspect that one of your neighbors is about to retire in a couple of years, and they don’t have a younger generation set to step into that operation, an ROFR might be a way to match future offers on that ground and move to the front of the line.
It certainly doesn’t hurt to ask.
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