By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
The relationship between farmland owner and tenant often goes beyond just a business transaction. It is common for the tenant to lease the same farmland for many years or for the tenant/landowner relationship to span several generations. The relationship between the parties may evolve into one of great trust and respect – the landowner knowing that the tenant will treat the land like their own and the tenant knowing the landlord will always be fair with them.
Sometimes, when the landowner knows that their heirs do not have interest in owning the land, they will promise to give the tenant the first chance to buy the farm at landowner’s death. Tenants will always appreciate this gesture so that they do not have to outbid their neighbors at a public auction when the landowner dies. However, a mere promise is not enough. To protect the tenant’s right to purchase the farm, the landowner must take proactive measures.
Under Ohio law, and every other state, verbal promises regarding real estate are rarely enforceable. Because real estate is such an important asset, courts do not want to have to guess as to what a buyer and seller may have agreed upon. So, in most situations, if it is not in writing, a court will not enforce verbal promises regarding real estate.
Example. Landowner has leased her land to Tenant for 25 years and verbally promised that when she dies Tenant will get to buy her farm. Upon her death, her heirs do not want to sell to Tenant because they think they will get more at auction. Because Landlord’s promise was only verbal, the heirs can ignore Tenant and sell at auction.
So, what can be done to ensure that a landlord’s desire for a tenant to buy the farm is enforceable? The following are options available to Landlord and Tenant.
Will or Trust
The landlord can include a provision in their will or trust giving the tenant the right to buy the farm. Upon landlord’s death, the trustee or executor will be obligated to sell the land to the tenant. This is an easy solution to give the tenant a chance to buy the farm. However, it is not a perfect solution.
Wills and trusts can be changed at any time. The tenant has no guarantee that a landlord will not change their will or trust and remove the purchase provision. For as long as the landowner has mental capacity, they can change their will or trust anytime they wish. So, while putting the purchase option in the will or trust is better than a verbal promise, it is not a guarantee the tenant will have a chance to buy the farm.
Practice Pointer. When giving a tenant the right to purchase a farm, consider also providing them with a small amount of money from the estate/trust. By giving them even $100, the tenant becomes a beneficiary of the estate/trust and is entitled to be informed of all aspects of the administration. There could be some dispute as to whether the tenant is a beneficiary of the estate/trust if they only have purchase rights. A beneficiary of an estate/trust has certain rights that a mere buyer would not have.
Right of First Refusal
For the tenant, a better strategy may be to enter into a Right of First Refusal (ROFR) with the landowner. A ROFR is an agreement that gives the tenant the chance to buy land at the landowner’s death or before the landowner can transfer it. The ROFR includes a provision that makes it binding upon the landowner and their heirs so that the ROFR survives the landowner’s death. Upon the landowner's death and before the land can be transferred to heirs, the ROFR is triggered and tenant can decide if they wish to buy the land. The ROFR should be signed by both parties, notarized and recorded.
Example. Landowner wants to ensure that Tenant has a chance to buy her farm when she passes away. Landowner and Tenant execute a ROFR that states upon Landowner’s death, Tenant will have a chance to buy the land at appraised value. The ROFR is made binding upon the Landowner’s heirs and recorded. When Landowner dies, the purchase provision in the ROFR will be triggered and Tenant will have an opportunity to buy the land.
The disadvantage of the ROFR for the landowner is that it cannot be changed. The ROFR is a contract and once signed cannot be changed without the tenant’s consent. If the landowner wants to keep the option to change their mind regarding the sale of the farm, they should not enter into a ROFR but opt for the will/trust strategy instead.
Regardless of which of the aforementioned strategies are used, time and effort should be spent specifying the purchase terms. The will/trust or ROFR should include specific language addressing the following:
- Identify the Property. Use parcel numbers, legal descriptions, FSA farm numbers and/or acreage to specify what land is being offered for sale. Do not leave any room for misunderstandings of what land is being offered to the tenant. Avoid using only farm names to identify (i.e. “Smith Farm”)
- Purchase Price. Clearly state how the purchase price is determined. If by appraisal, consider using a licensed, certified appraiser to avoid any perception that the appraiser favors one party or the other. Also consider including a three-step appraisal process allowing either party to get their own appraisal if they dispute the original appraisal. A flat price can be used for the purchase price but the parties risk the flat price not adjusting to market conditions. The landowner may also include a discount % on the purchase price to help the tenant.
- Deadlines. The purchase terms should give the tenant a specific number of days to decide if they want to purchase the farm. This term should begin to run after the purchase price has been established. The tenant should be required to exercise their purchase option by giving written notice to the estate/trust. A closing date should also be set, usually a specific number of days after the tenant has provided the written notice to purchase.
- Other Purchase Terms. Include any other purchase terms like title insurance and transaction costs.
Landowners and tenants should not rely on verbal promises for the purchase of the farm at landowner’s death. Using either a will/trust or ROFR can ensure that a tenant will have a legally enforceable right to purchase the farm. When drafting the will/trust or ROFR, include specific purchase terms to avoid conflict between the tenant and the landowner’s heirs. The parties should seek legal counsel to assist in drafting the documents to be sure that all legal requirements are met.
Tags: legal groundwork, tenant, farm lease, right to purchase