Why written farm agreements are important

The financial costs can be high if farm enterprises aren’t properly structured with written agreements or if important business decisions are neglected. This can be especially true when a farm is planning to transition.

Lawyers often see the impact of poor farm enterprise planning. The lack of proper agreements can make addressing or resolving conflicts challenging and, in some cases, costly.

“The process of sitting down, sharing mutual concerns, exchanging facts and setting expectations can do a lot to set a farming relationship off on the right foot, as well as providing for solid legal protection if things go wrong,” says Jacob Van Boekel, a farmer and lawyer with Nesbitt Coulter LLP in Oxford County, Ont.

The process of sitting down, sharing mutual concerns, exchanging facts and setting expectations can set a farming relationship off on the right foot.

Get it in writing, even with family

In situations where the next generation has taken ownership of farmland, siblings may find themselves farming together, one or more as landowners and the others as land renters.

“This is a good example of when agreements among family members are important for communicating expectations and setting out the rules for their ongoing relationship,” Van Boekel says.

Even if it’s a simple lease, he recommends siblings have a written agreement covering:

• How the land is to be taken care of

• What payments will be

• Whether payment amounts change if it’s a good production year or if there are good sales results

• Whether payment amounts change if it’s a poor production year or poor sales results

“When people get into tough times and get desperate for money, that’s when conflicts start to happen,” Van Boekel says.

Agreements during transition

Many of us choose to avoid dwelling on what would happen in the event of an untimely death, divorce or disability, but the possibility of such misfortunes makes planning vital, for sole proprietors and corporations alike.

What if Mom dies, Dad remarries, and suddenly there’s a blended family? Or what if someone in a farm partnership ends up with a debt problem? What if you or your partner becomes ill or disabled? What if a family law issue resulted in a claim against the farm? What if one of the farm business partners decides to farm on their own, leaving other partners to carry out the workload of the shared operation?

Consider these scenarios and others, and know that planning can go a long way, Van Boekel suggests. Think of the eventualities of how various plans and agreements can benefit your farm, what conversations you need to have and with which partners. As the eventualities are discussed, bring in your team of experts, including a lawyer, a financial advisor, and an accountant, Van Boekel says.

Structure and procedures

Partnership agreements should cover the structure of the farm, such as the ownership split, procedures for disability, death, disagreement or the exit of a partner, especially when partners aren’t spouses.

For farm corporations, experts say a unanimous shareholder agreement (USA) is important, especially when the corporation extends beyond a spouse to include children. This is helpful if discrepancies arise after the death of a partner, such as contradictions between the will and the partnership agreement.

In addition, a valuation process for assets is needed, where an agreed-upon way to determine what the assets, and therefore the shares, are worth. This valuation process is essential for shareholders, whether buying into the corporation or exiting. It also helps address equalization issues with non-farming children.

In a sole proprietorship, experts state there’s often an assumption that registering land in joint names is enough to qualify the farmer's spouse for the lifetime capital gains exemption. However, that’s not the case. To qualify, the person whose name appears on the title must have had two years in which gross farm income exceeded all other income. A written agreement is insufficient for CRA.

Since many operations lack a formal partnership agreement, the capital gains exemption may be affected. Check with your accountant on managing this as a sole proprietorship.

Start now

Van Boekel says that ideally, farm agreements begin at the start of the business venture or reorganization, but it’s natural to focus on the excitement of moving ahead.

Even if your agreements are already in place, a handshake or understanding, it’s best to start now to get the arrangement down on paper. Begin the conversation with your agreement partner and bring in the experts.

While it may be tempting to look at a written agreement as a DIY venture to save money on legal and accounting fees, professional fees are for their expertise in forming the agreement, and can pale in comparison to lost tax exemptions or the legal fees to wind down an operation or the costs – both economic and personal – of fighting legal battles between unhappy partners or shareholders.

Article by: Richard Kamchen

Disclaimer

Farm Credit Canada (FCC) provides these resources for general informational purposes only; it is not intended to provide specific business advice and should not be solely relied upon or used as a replacement or substitute for specific professional advice.