By Blake Knickelbein
There are many issues farmers fail to consider when negotiating for the sale or purchase of farm real estate. While the purchase price is the biggest factor to negotiate, there are many other details to agree upon. Whether you are buying or selling, and whether the property is vacant farmland or land with a house and agricultural buildings, this article is a discussion of a few issues to consider.
• Contingencies. There are various contingencies that the buyer can include in the Offer to Purchase. A contingency is a provision that if certain circumstances are not met, the buyer can back out of the offer.
In many real estate transactions, the buyer will provide the seller with earnest money as a sign of good faith when the offer is signed to be applied to the purchase price at closing. If the buyer backs out of the offer due to one of the contingencies not being met, the buyer is entitled to a return of the earnest money.
Since the offer is usually executed early in the transaction process, there are many steps that need to be taken before closing, and if something is discovered during one of those steps, various contingencies protect the buyer. For example, while the buyer may have a preapproval from a lender before signing the offer, the lender does not have final approval until well after the offer is signed.
One of the most common contingencies is the financing contingency. If the buyer cannot obtain financing, the buyer has the right to terminate the offer and have the earnest money returned. Other contingencies include the inspection contingency and the appraisal contingency, among many others. The buyer should include a contingency for any circumstance that, if not met, he or she would like the right to terminate the offer and have the earnest money returned.
• Binding leases. An issue that arises frequently with farm sales is that the seller is leasing the property to a third party. Assuming the buyer does not want that lease to continue, the buyer should request to see a copy of that lease, and make the offer contingent upon that lease terminating at closing or at the end of the current crop year.
Many farm leases are verbal year-to-year leases, and Wisconsin law provides that a landlord must give an agricultural tenant 90 days’ written notice prior to the end of the year to terminate a year-to-year tenant. If the seller does not give proper notice to the tenant, the tenant could have the right to farm that property the following crop year. We routinely have the tenant sign a document prior to closing where he or she relinquishes any lease rights.
• Boundary survey. The buyer may want to obtain a boundary survey of the property showing the boundaries and whether there are any potential adverse possession claims. In short, adverse possession means that even though the legal description says you own this property, another person has been occupying this property for enough years to make it their property.
This situation is relatively common in farming, and I have spoken with clients who can think of multiple examples of potential adverse possession claims on their farmland. The neighbor may be cropping 10 feet beyond the property line or a residential neighbor’s yard may extend beyond the property line. Once the property is transferred, it could trigger the neighbor to file an adverse possession lawsuit.
A boundary survey can provide the buyer with peace of mind that there are no boundary disputes before closing on the purchase of farmland.
• Easements. An easement is necessary in certain sales of farm real estate. If the seller keeps the house and agricultural buildings, but sells farmland around the buildings, the buyer may need an easement over the driveway on the building site to access the adjoining fields. If the seller keeps woods behind a field he or she is selling, an easement could be necessary to access the hunting land. The easement should clarify who is responsible for maintenance and contain any special rules or agreements between the parties.
In general, the buyer and seller should be as specific as possible in the Offer to Purchase and include all the terms of the transaction. I often hear “we can figure it out,” implying that a certain detail of the transaction does not need to be included in the offer. However, anything not contained in the offer is not part of the binding agreement, and the other party is only obligated to do what the offer says.
If you are negotiating for the purchase or sale of farm real estate, you should pay attention to these issues and discuss all of the terms to be included in the transaction. It is a good idea to meet with your advisers early in the negotiation process to ensure the transaction goes smoothly.
Knicklelbein is an attorney in the Chilton, Wis., ag law firm Twohig, Reitbrock, Schneider and Halbach S.C. To contact Knickelbein, call 920-849-4999.