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Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
A Right of First Refusal (ROFR) is a contract between the owner of the real estate and the person who is receiving the right to purchase (Holder). If the owner wishes to sell or transfer the property, the Holder has a legal right to purchase the property subject to the terms and conditions of the ROFR. If the Holder does not exercise their right to purchase the property, the owner can transfer the property to the third-party buyer. A ROFR can be an effective way to help keep land ownership in the family.
A ROFR can be established in a number of ways including on a deed. However, in most situations the best method of creating a ROFR is a stand-alone document that is recorded with the county recorder. By using a separate document, the terms and conditions of the ROFR can be clearly expressed to avoid future confusion or conflict.
There are a number of terms and conditions to include in a ROFR. Perhaps the most important term is how to determine purchase price. One way to establish the purchase price is by matching a bona fide offer. Upon receiving an offer to purchase the land, the owner offers to sell the land at that same price to the Holder. If the Holder declines to purchase the land at that price, the owner is free to sell to the third party at that price.
Another way to establish the purchase price is by appraisal. If the appraisal method is used to establish the purchase price, a multi-step approach should be considered to avoid the effect of an outlier appraisal. For example, the owner can obtain and appraisal first. If the Holder objects to the owner’s appraisal, the Holder can obtain an appraisal of their own. If the two appraisals do not match or not within a certain percentage of each, the owner and Holder agree on a third appraisal. After the third appraisal is conducted, the middle appraisal of the three establishes the purchase price. Also, any qualifications for appraisers, such a licensed or unaffiliated with the parties, should be included in the terms.
Sometimes both the offer matching and appraisal will be used in a ROFR to establish the purchase price. Terms may include using the lesser of an offer and an appraisal for the purchase price. Or, if there is no offer and the owner would like to sell, then the appraisal method is used to establish the purchase price. The important thing is to make it very clear how the purchase price is established to avoid disputes between the owner and potential buyer.
Timelines should be included in the ROFR. Timelines should be included for:
- Number of days to provide an offer to the Holder
- Number of days to establish the purchase price by appraisal
- Number of days to accept or reject an offer by the Holder
- Number of days to close the purchase
An additional term to consider is what transfers are exempt from the ROFR. The owner of the land may want to be able to transfer to their family or spouse without triggering the ROFR. Therefore, the ROFR should specifically state any transfers that are exempt. The most common exempt transfers are those transfers to descendants and spouses.
Another important provision is the length of term of the ROFR. The ROFR should have a limit on its term whether it be a number of years or for the life of the owner. A ROFR that goes on generation after generation can cause big problems for a future owner because the Holder or their heirs may be difficult to find and/or cooperate.
Consider the following example of a common way in which a ROFR is used.
Mom and Dad want to gift five acres to their daughter, Jane, so that she can build a house. Mom and Dad’s only concern is that they do not want the five acres to leave the family because it sits in the middle of their farmland. Mom and Dad gift the five acres to Jane and enter into a ROFR at the same time. The ROFR requires Jane to offer Mom and Dad the first chance to buy the five acres before Jane transfers it. An exception is made that Jane may transfer the land to her children without triggering the ROFR. The purchase price is established by a three-step appraisal price with the appropriate timelines included. The ROFR will be in effect for the next 30 years and then will expire.
The ROFR gives Mom and Dad the assurance that Jane will not be able to simply sell the property to someone outside of the family. Without the ROFR, Mom and Dad may be reluctant to gift the land for fear of Jane transferring the land to someone else. The ROFR allows Jane to have full ownership of the property and the discretion to build a house as she wishes but also protects Mom and Dad from having an unwanted neighbor.
ROFRs can be effective in real estate transfers, particularly among family members, and in estate planning. Keep ROFRs in mind the next time you are considering transferring real estate or as you design your estate plan that includes real estate. A ROFR should be drafted with the assistance of an attorney to be sure that all the important terms and provisions are included, and it is executed and recorded property.
Do you worry about the possibility of long-term care needs and how those needs might affect your farming operation or family farmland? We'll examine that issue in an upcoming webinar for the National Agricultural Law Center. Join OSU Attorney and Research Specialist Robert Moore for the webinar, "Long-Term Care Impacts on Farming Operations."
Long-term care costs can be a significant threat to family farming operations. Nursing homes can cost around $100,000 per year, an expense that some farms cannot absorb while remaining viable. That's why many farmers believe long-term care will force the sale of farm assets, including farmland. But statistics and data indicate that, on average, this may not the case and that the average farmer can likely absorb the costs of long-term care. However, few farms can withstand the outlier scenario: where many years are spent in a long-term care facility.
In this webinar, Robert Moore will explore the costs and likelihood of needing long-term care. Using this data, he will analyze normal scenarios and the dreaded outlier scenarios of long stays in nursing homes. By understanding the actual risks of long-term care costs, we can better understand and assess strategies that can mitigate long-term care risks. Robert will review several strategies attorneys can use to lessen the exposure of farm assets to long-term care costs.
The National Agricultural Law Center (NALC) will host the webinar at noon on July 20. OSU's Agricultural & Resource Law Program is a research partner of NALC, and Robert's work is the result of funding provided by the USDA National Agricultural Library through our partnership with NALC.
There is no fee for the event, but registration is required. Register at https://nationalaglawcenter.org/webinars/longtermcare/.
Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
When we think of estate planning our thoughts usually go to a will or trust. However, in some situations, an effective estate plan can be implemented without the use of a will or trust. Using transfer on death or payable on death beneficiary designations, for some people, can be an adequate estate plan.
A transfer on death or payable on death designation can be added to almost any asset with a title. Transfer on death is used more for tangible assets such as land and vehicles while payable on death is used more for intangible assets such as financial accounts and life insurance. Both designations do the same thing – upon death, ownership is transfer from the deceased to the designated beneficiary outside of probate. This process of transferring ownership at death is usually simple and relatively easy.
The strategy of using beneficiary designations as the primary estate planning tool is best used when the distribution plan of assets is simple. For example, when the deceased’s assets will be divided equally among their children. Distributions plans that include more involved schemes such as unequal distributions, buy outs, leases or rights of first refusals are too complicated to use just beneficiary designations. In those situations, a trust-based plan will likely be needed. Using beneficiary designations as the primary estate planning strategy only fits a narrow band of farmers, but for those farmers and it can be an effective and relatively inexpensive plan.
Consider the following example. Mom and Dad’s farming operation is an LLC that holds farm machinery, livestock, and crops. They own 200 acres in their names. Their other assets include a bank account, retirement account and life insurance. At Mom and Dad’s death, they want all of their assets to go to their two children equally. Their net worth is $4 million.
In this example, the first thing to notice is that Mom and Dad are well under the federal estate tax limit. So, their estate plan does not need to be designed around minimizing estate taxes. Second, their plan is simple. Everything goes to their two children equally. Lastly, the assets they own are all titled assets that can include death beneficiary designations.
Mom and Dad can title their LLC ownership transfer on death to the children. Upon their deaths, the LLC ownership interests will transfer to the children outside of probate. The transfer is done with a few pieces of paper. The land can be made transfer on death by recording a Transfer on Death Affidavit. Upon Mom and Dad’s death, the children will record an affidavit with a death certificate and title is transferred – again, without probate. The children can be added as the payable on death beneficiaries of the financial accounts and life insurance. After death, the children will file paperwork with the financial institutions and funds will be transferred to them outside of probate. A $4 million estate has been transferred without the need to use a will or trust and probate has been avoided.
While this strategy does not use a will or trust for the transfer of assets, it is still a good idea to have a will as a backup. In the above example, Mom and Dad execute wills that state all of their assets go to their children equally. The will is there in case a beneficiary designation is in error or an asset is overlooked and must go through probate. The goal is not to use a will but there should be one as a backup just in case Mom and Dad forgot to add a transfer on death designation to the old livestock trailer that they haven’t used in five years.
The following assets can all have transfer on death or payable on death designations added to their title: vehicles, titled trailers, trucks, boats, real estate, bank accounts, financial accounts, life insurance, stocks, and business entities. Assets such as livestock, grain, crops and machinery are untitled so a transfer on death designation cannot be added. However, transferring those untitled assets into an LLC is a great way to essentially convert untitled assets to titled assets. After the untitled assets are transferred to the LLC, the LLC ownership can include a transfer on death designation.
When considering estate plans, farmers who have relatively simple plans and can add death beneficiary designations to all or most of their assets may not need a complicated will or trust. The beneficiary designations can be the primary estate plan with a simple will as backup. This strategy is effective, minimizes legal costs and avoids probate. As stated above, this strategy is not for everyone, but it should be considered. For more complicated plans or for high-net-worth individuals, a trust may be needed.
Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
A well-known statistic is that one-half of all marriages end in divorce. While there is some debate as to the accuracy of this statistic, there is no doubt that many marriages do end in divorce. According to Ohio law, all marital assets are to be divided equitably in the event of a divorce. Equitable does not necessarily mean equal although an equal division of assets between the spouses is often the result. It is important to note that only martial assets are subject to the equitable division between the spouses. Non-marital assets, or separate assets, are retained by the spouse who owns the asset.
Separate assets include the following:
- An inheritance received by a spouse during marriage
- A gift received by a spouse during marriage
- Property acquired by one spouse prior to the date of marriage
- Passive income and appreciation from separate property by one spouse during marriage
The above list would seem to make it an easy exercise to determine what are marital assets and what are separate assets in a divorce. However, like many legal issues, this is often not the case. Determining whether an asset is a marital assets or a separate asset can be complicated. For example, Ohio law also provides that the following is a marital asset:
“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage.”
So, it is possible for an asset to be partially a marital asset and partially a separate asset.
Consider the following example:
Andy and Beth are farmers and in the process of divorcing. Shortly after they were married, Beth inherited a 100-acre farm from her grandmother. When she inherited the farm, it was valued at $600,000. A few years after inheriting the farm, $80,000 of drainage tile was installed on the farm paid for by Andy and Beth’s farming operation. The current value of the farm is $1,000,000.
In this example, when Beth initially inherited the farm it was a separate asset. However, the tile that improved the quality and value of the farm was paid for by Andy and Beth’s joint farming operation. Therefore, Andy likely has a valid claim that at least part of the $400,000 increase in value is a marital asset due to the tile installation paid for by money earned during the marriage.
Perhaps Andy further argues that most of the increase in value was due to the fertilizer, tillage and other soil improvements made while Andy and Beth farmed the land. Andy’s argument tries to make the entire $400,000 increase a marital asset. Conversely, Beth argues that the land value increase was not actually earned during marriage but was merely a passive value increase due to market pressure and nothing that Andy did. Beth’s argument tries to make most of the $400,000 increase a separate asset.
As this example illustrates, an asset that is initially a separate asset can become, at least in part, a marital asset. Both Andy and Beth have valid arguments as to their positions. It is not hard to imagine how much time and legal fees could be spent resolving or litigating the issue in a contentious divorce.
People who own significant assets prior to marriage or may inherit assets during the marriage should consider a prenuptial agreement that will clearly identify which assets are to be marital and which assets are to be non-marital. If the couple did not enter into a prenuptial agreement, the spouses should be careful not to taint any assets they wish to keep separate. For farm assets, this may be difficult due to the nature of improving the assets as part of the farming operation. For some non-farm assets, such as financial accounts, it may be easier to maintain the separate status of the assets.
By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
Second marriages can present a unique challenge for farm succession planning. The challenge occurs when one or both spouses have children from a prior marriage. The spouses often want a plan that will ensure the surviving spouse has adequate income for the remainder of their life but at the death of the surviving spouse they will usually want their assets to go to their children, not their spouse’s children. So, the issue becomes, how to establish a plan to take care of the surviving spouse while ensuring the deceased spouse’s assets go to their own children?
Consider the following example, a typical second-marriage, farm succession scenario. Mark and Mindy each have two children from previous marriages. Mark farmed his whole life and built a large farming operation prior to marrying Mindy. Mindy is not involved in the farming operation. Mark’s two children plan to take over the farming operation. If Mark dies before Mindy, he wants to make sure Mindy has adequate income for the rest of her life. However, he wants his assets to ultimately go to his children and not Mindy’s children.
Let’s first look at what a bad plan might look like. If Mark and Mindy do not have an estate plan or a simple estate plan where everything goes to the surviving spouse then to the children, Mindy’s children could end up with some or all of Mark’s assets. Let’s assume they each have a will that says everything to each other then to the children. If Mark dies first, all of his assets will go to Mindy. At that point, Mindy will have total control of the assets and could sell them all or leave them all to her children. For second marriages, no plan or a simple plan is usually not adequate to meet the goals of a farm succession plan.
The better plan is to use a trust. The trust can hold the deceased spouse’s assets in trust for the surviving spouse’s life, thus providing income. Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children. The surviving spouse never has ownership of the deceased spouse’s trust assets so the assets are never in danger of ending up with the surviving spouse’s children.
Using the example above, Mark establishes a trust with the following terms: “Upon my death, my assets shall be held in trust for the life of Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. Upon the death of Mindy, my Trustee shall distribute the assets to my children.” This trust will provide income to Mindy but ultimately distribute the assets to Mark’s children.
Sometimes we may want some assets to go directly to the deceased spouse’s children at death and some held in trust. This is very common for farm plans. When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children. To implement this plan, the trust may have these provisions: “Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
As the examples show, trusts can be very effective at establishing plans for second marriages. The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children. A simple plan or no plan can result in some or all of the deceased spouse’s assets being inherited by the other spouse’s children. A trust can be designed with a great deal of flexibility and creativity. Farmer’s in second marriages should consult with legal counsel to determine if a trust may be best for their succession plan.
By Robert Moore
In the prior post, we explained partition and the risk it poses to family farmland. Fortunately, there are a few strategies that can be implemented to avoid partition.
One strategy that can prevent partition is the use of a Limited Liability Company (LLC). The concept of using the LLC is to replace the multiple owners of the land with one LLC owning the land. Then, those same owners own the LLC rather than the land. Partition rights only apply to real estate, not to business entities. So, instead of three people owning the land, three people own an LLC that owns the land. Since there are no partition rights with an LLC, no one owner can force the sale of the land.
Consider the following example. Andy, Betty and Charlie are siblings and own a farm together. Each is aware of partition rights and wants to prevent any of the owners, including future owners, from exercising their partition rights. They establish an LLC and transfer the land into ABC Family Farms LLC. The LLC operating agreement states that land can only be sold with the consent of all members.
The three owners of the land have eliminated the threat of partition to the family farmland. The legal owner of the farmland is now the LLC, not the three siblings. Andy, Betty and Charlie are the owners of the LLC but Ohio law does not provide for partition rights of an LLC. Additionally, as added protection, the siblings require unanimous consent before any of the land in the LLC can be sold. By placing the land in the LLC, the three owners have ensured that the only way the farm will leave the family is by joint agreement of the family. A well-designed LLC can make it nearly impossible for land to leave the family without the agreement of the family.
The above example illustrates how an LLC prevents partition by the owners and family members, but LLCs also protect against creditors and lawsuits. Let’s assume Andy has financial problems and creditors have filed and won lawsuits against him. Without the LLC, the creditor could force the sale of the land through foreclosure on Andy’s share. However, Ohio law only allows creditors to attach to an LLC owner’s interest. This means that a creditor is entitled to an owner’s share of the LLC profits but cannot force the sale of the assets owned by the LLC. In this example, Andy’s’s creditors are entitled to receive his share of the profits from the LLC but cannot force the sale of the land. An LLC can prevent an owner’s financial problems or lawsuits from causing the sale of family farmland.
LLCs are often used in estate and succession planning to protect the family farmland. Instead of multiple family members inheriting land (and the risk of partition), mom and dad may establish an LLC for the farmland. Then, the children inherit the LLC without the partition rights. By transferring the land via an LLC, mom and dad do not need to worry that one child or their creditors will force the family farmland to be sold.
Consider the following example. Mom and Dad want their three children to inherit their farmland. They would like their children to own the farmland together as it is too difficult to divide up the land equitably. Mom and Dad are aware of partition rights and want to make sure that no co-owner can force the sale of land against the family’s wishes. Mom and Dad transfer their land to an LLC. Their three children will inherit the LLC with the land. Because each child will own an interest in the LLC, and not an interest in the real estate directly, partition rights are not available. Mom and Dad also established the LLC with the requirement that any transfers of land require unanimous consent of all the members.
This example illustrates how LLCs can be incorporated into estate plans to minimize the risks of partition. By having multiple heirs and beneficiaries inherit the LLC, and not the land itself, the land will not be transferred out of the family due to partition. We often think of using LLCs for liability protection but LLCs may be even more valuable to protect against partition rights.
Another way to protect against partition rights for heirs is to use a trust. With this strategy, the land is owned by a trust rather than the beneficiaries. Since the beneficiaries do not legally own the land, they are not entitled to partition rights. The disadvantage to this strategy is that the trust beneficiaries will not be able to use the assets as collateral nor to build their wealth.
Consider the following example. Mom and Dad want their children to have the benefit of their land upon inheritance but want to be 100% sure that their children do not sell the land before their grandchildren can inherit it. Mom and Dad establish a trust that holds the land for their children’s lives. During the children’s lives, the children receive the rent but do not own the land. Thus, the children cannot take action to sell the land. Upon the death of the children, the grandchildren will receive the land.
While the land is in trust, the children do not own the land. Thus, they do not have partition rights and cannot force the sale of the land. The grandchildren are nearly certain to inherit the land. On the other hand, the land is not available as collateral for a loan and the other benefits of ownership are not available to the children.
As the example shows, trusts are an excellent method to avoid partition. However, trusts also severely restrict the rights of the beneficiaries while the land is held in trust. A careful analysis of the benefits and disadvantages of using a trust to avoid partition must be carefully considered.
In conclusion, before allowing land to be owned jointly, the owners should consider the risks of a forced sale of the land through partition. Partition can be avoided by using LLCs or trusts to hold the land. Be sure to consult an attorney to determine the best course of action to address the perils of partition.
It's time for another roundup of legal questions we've been receiving in the Agricultural & Resource Law Program. Our sampling this month includes registering a business, starting a butchery, noxious weed liability in a farm lease situation, promoting local craft beer at a farmers market, herd share agreements, and agritourism's exemption from zoning. Read on to hear the answers to these questions from across the state.
I want to name my farm business but am not an LLC or corporation. Do I have to register the name I want to use for the business?
Yes, if your business name won’t be your personal name and even if the business is not a formally organized entity such as an LLC. You must register the business with the Ohio Secretary of State. First, make sure the name you want to use is not already registered by another business. Check the name availability using the Secretary of State’s business name search tool at https://businesssearch.ohiosos.gov/. If the name is available, register the name with the Secretary of State using the form at https://www.sos.state.oh.us/businesses/filing-forms--fee-schedule/#name. If there is already a business registered with the name you want to use, you might be able to register a similar name if your proposed name is “distinguishable” from the registered name. The Secretary of State reviews names to make sure they are not already registered and are distinguishable from similar names. See the Guide to Name Availability page for examples of when names are or are not distinguishable from one another.
I am interested in starting a small butchery. What resources and information are helpful for beginning this endeavor?
There are legal issues associated with beginning a meat processing operation, and there are also feasibility issues to first consider. A good resource for initial considerations to make for starting a meat processing business is this toolkit from OSU at https://meatsci.osu.edu/programs/meat-processing-business-toolkit. A similar resource that targets niche meat marketers is at https://www.nichemeatprocessing.org/get-started/. On the legal side, requirements vary depending on whether you will only process meat as a custom operator or fully inspected operator, and if you also want to sell the meat through your own meat market. The Ohio Department of Agriculture’s Division of Meat Inspection has licensing information for different types of processors here: https://agri.ohio.gov/divisions/meat-inspection/home. If you also want to have a retail meat market, you’ll need a retail food establishment (RFE) license from your local health department. To help you with that process, it’s likely that your health department will have a food facility plan review resource like this one from the Putnam County Health Department.
Is Ohio’s noxious weeds law enforceable against the tenant operator of my farm, or just against me as the landowner?
Ohio’s noxious weed law states that the township trustees, upon receiving written information that noxious weeds are on land in their township, must notify the “owner, lessee, agent, or tenant having charge of the land.” This language means that the trustees are to notify a tenant operator if the operator is the one who is in charge of the land where the noxious weeds exist. The law then requires the notified party –which should be the tenant operator—to cut or destroy the noxious weeds within five days or show why there is no need to do so. The concern with a rental situation like yours is that if the tenant does not destroy the weeds in five days, the law requires the township to hire someone to do so and assess the costs of removal as a lien on the land. This puts you as the landowner at risk of financial responsibility for the lien and would require you to seek recourse against the tenant operator if you want to recover those costs. Another option is to take care of removing the noxious weeds yourself, but that could possibly expose you to a claim of crop damages from the tenant operator. A written farm lease can address this situation by clearing shifting the responsibility for noxious weeds in the crop to the tenant operator and stating how to deal with crop damages if the landowner must step in and destroy the noxious weeds.
Can we promote local craft beers at our farmers market?
Ohio established a new “F-11” permit in H.B. 674 last year. The F-11 is a temporary permit that allows a qualifying non-profit organization to organize and conduct an event that introduces, showcases, or promotes Ohio craft beers that are sold at the event. There are restrictions on how long the event can last, how much beer can be sold, who can participate in the event, and requirements that food must also be sold at the event. The permit is $60 per day for up to 3 days. Learn more about the permit on the Department of Commerce website at https://com.ohio.gov/divisions-and-programs/liquor-control/new-permit-info/guides-and-resources/permit-class-types.
Can a goat herdsman legally provide goat milk through a herd share agreement program?
Herd share agreements raise the raw milk controversy and whether it’s legal or safe to sell or consume raw milk. Ohio statutory law does clearly prohibit the sales of raw milk to an “ultimate consumer” in ORC 971.04, on the basis that raw milk poses a food safety risk to consumers. But the law does not prohibit animal owners from consuming raw milk from their own animals. A herd share agreement sells ownership in an animal, rather than selling the raw milk from the animal. Under the agreement, a person who pays the producer for a share of ownership in the animal may take their share of milk from the animal. The Ohio Department of Agriculture challenged the use of herd share agreements as illegal in the 2006 case of Schitmeyer v. ODA, but the court did not uphold the ODA’s attempt to revoke the license of the dairy that was using herd share agreements. As a result, it appears that the herd share agreement approach for raw milk sales is currently legally acceptable. But many still claim that raw milk consumption is risky because the lack of pasteurization can allow harmful bacteria to exist in the milk.
Can the township prohibit me from having a farm animal petting zoo on my hay farm?
It depends whether you qualify for the “agritourism exemption” granted in Ohio law. The agritourism exemption states that a county or township can’t use its zoning authority to prohibit “agritourism,” although it may have same zoning regulations that affect agritourism buildings, parking lots, and access to and from the property. “Agritourism” is an agriculturally related entertainment, recreational, cultural, educational or historical activity that takes place on a working farm where a certain amount of commercial agricultural production is also taking place. If you have more than ten acres in commercial production, like growing and selling your alfalfa, or you have less than ten acres but averaged more than $2,500 in gross sales from your alfalfa, you qualify under the agritourism exemption and the township zoning authorities cannot prohibit you from having your petting zoo. However, any zoning regulations the township has for ingress and egress on your property, buildings used primarily for your petting zoo, or necessary parking areas would apply to your petting zoo activity. If you don't qualify as "agritourism," the township zoning regulations could apply to the petting zoo activity, and you must determine whether a petting zoo is a permitted use according to your zoning district, which could depend upon whether or not you want to operate the petting zoo as a commercial business.
By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
One of the more common ways that farm families involuntarily lose farmland is through partition. Under Ohio law, any person that is a co-tenant (co-owner) of real estate has partition rights. Essentially, partition rights allow a co-tenant to force the other owners to buy them out or force the land to be sold. Partition is a harsh, but arguably necessary, right of every co-tenant of real estate. With proper planning, partition can be avoided.
Partition law is codified in Section 5307 of the Ohio Revised Code. A partition is initiated by a co-tenant filing a petition for partition with the common pleas court. A partition must be filed in the county in which the real estate is located. Any co-tenant, even one owning a small percentage of the real estate, may file the partition. The petition is very similar to filing a lawsuit and all co-tenants are served notice the petition. All defendant co-tenants are provided an opportunity to respond to the petition.
After all co-tenants have been served and had an opportunity to respond to the petition, the court will appoint a commissioner. The role of the commissioner is to essentially oversee the petition process on behalf of the court. The partition commissioner is permitted to physically divide the real estate if the property can be divided without the loss of value. Due to the unique nature of farmland and the variation within each parcel, administrators rarely will physically divide the land. Instead, the commissioner will usually decide to sell the land at auction and divide the sale proceeds among the owners. The first step in selling the land is to obtain the value of the land by appraisal.
After the value of the property is established, each party will be given an opportunity to buy the land at the appraised value. If no party wishes to purchase, the land will be ordered sold by the court. The land may be sold at sheriff’s sale but the parties usually agree to sell the land at public auction. The one issue that the feuding co-tenants can usually agree upon is that they are likely to get a better price at an advertised auction rather than a sheriff’s sale. The land must bring at least 2/3 of the appraisal price at auction. After the land is sold, the proceeds are divided among the co-tenants in proportion to ownership.
The reason that partition law is a necessity is that Ohio law provides very little guidance to co-tenants as to how to manage their co-owned real estate. For example, Ohio law implies that unanimous consent must be obtained in the management of real estate. Therefore, one co-tenant holding a minority ownership percentage can prevent the land from being leased or sold. Ohio law solves this issue by providing partition rights. Basically, the law says that if the co-tenants cannot resolve their differences, then any one of them can force sale the land and divide the proceeds. Partition is necessary because the law seeks to allow individuals to divest themselves of any asset they may own. Without partition, a person could be forced to own real estate that they may not want to own and/or do not receive financial benefit.
Consider the following example. Amy, Bob and Charlie inherit a farm from their parents. Amy and Bob want to lease the land to a neighbor farmer but Charlie insists he is going to farm it. Charlie has no experience farming and Amy and Bob know it will end up in a disaster if Charlie gets his wish. Any potential tenant that Amy and Bob consider is contacted by Charlie and told the farm is not for lease. Amy and Bob get frustrated and decide to file a partition because they are tired of dealing with Charlie and do not think they will get a fair, financial benefit from the farm if Charlie is the operator. The court orders the farm sold and Amy, Bob and Charlie share the proceeds.
The risk of partition is not limited to just the initial family members who may own the land. Any future owner also has the same partition rights. Spouses, children and anyone else who may become a co-tenant can force a partition.
Using the same scenario as above, assume Amy dies. Her parents assumed that Amy’s share of the farm would go to her children (their grandchildren) but Amy never got around to doing and estate plan. So, under Ohio law, everything goes to her husband, Dale. Dale has no attachment to the farm and just sees dollar signs now that he is a 1/3 owner of the farm. Dale quickly files for partition and forces the sale of the land so that he can have money to buy the boat he has always wanted.
This example illustrates how easy it is for someone to become a co-tenant and gain partition rights. Deaths, divorces, and poor business and estate planning can allow someone to become a unexpected and unwanted co-tenant. Partition law does not care how long farmland has been in the family or how vital it is for a farming operation. Partition law treats a city lot that has been owned for a few months the same as a 1,000-acre farm that has been in the family five generations. Partition can lead to harsh results that should be avoided if possible.
With proper planning, partition can be averted. In the next installment, the various strategies to prevent partition will be discussed.
See the prior blog post “Ohio Case Illustrates the Risk of Leaving Farmland to Co-Owners” by Peggy Hall for a discussion of a Madison County case and the perils of partition.
Farms and other businesses can benefit by using independent contractors to fill labor needs while not having the same financial and legal responsibilities the business has for its employees. But state and federal laws allow those advantages only if the worker is truly an independent contractor. When a worker classified as “independent contractor” functions as an employee in the eyes of the law, a business can be liable for failing to meet its employer obligations for the worker. That’s exactly what happened in a recent case before the Ohio Supreme Court.
The company. The case involved Ugicom (the company), paid by Time Warner Cable under a subcontract to provide workers to install underground cable. Workers used the company’s website to select and document installation jobs and the company paid the workers at rates it determined. The installers were required to wear badges and vests identifying the company and to pass drug tests and background checks, all coordinated by Time Warner. The company required installers to sign a one-year independent contractor agreement containing a “non-compete clause” that prohibited them from providing installation services for competitors. The contract also required installers to respond to service requests within two hours. Installers had to provide their own hand tools, transportation, cell phones, and laptops, but used cable obtained from Time Warner. They could work any day or time consented to by customers. The company paid the installers by the job and did not withhold taxes or provide any benefits.
The Bureau of Workers Compensation (BWC) audit. The BWC audited the company to decide whether it had paid the correct amount of workers’ compensation premiums for all of its employees. The BWC examined the company’s treatment of workers it had hired to install cable as independent contractors. Concluding that the company exercised “too much control” over the installers, the BWC determined that the installers were actually employees for workers’ compensation purposes and the company owed $346,817 in unpaid premiums for the employees. The company unsuccessfully appealed the decision to the agency and the Tenth District Court of Appeals and the case ended up before the Ohio Supreme Court.
The Ohio Supreme Court review. For purposes of the workers’ compensation program, Ohio law provides that the controlling determination in whether a worker is an independent contractor or an employee is “who had the right to control the manner or means of doing the work.” There is not a bright-line test for making such a determination, however. Instead, the Ohio Supreme Court explained, the BWC must consider a set of factors related to who controls the manner or means of the work. Those factors include:
- Whether the work is part of the regular business of the employer
- Whether the workers are engaged in an independent business
- The method of payment
- The length of employment
- Agreements or contracts in place
- Whether the parties believed they were creating an employment relationship
- Who provides tools for the job
- The skill required for the job
- The details and quality of the work
The Ohio Supreme Court’s role was to determine whether the BWC relied upon “some evidence” when reviewing each of the factors to reach its conclusion that the company controlled the manner or means of the installers’ work. The Court concluded that most, although not all, of the BWC’s conclusions were supported by at least some evidence and upheld the BWC’s decision. The factors and evidence that received the most attention from the Court included:
- Independence from the company. The installers’ public image when working identified them as being with the company; they all wore the same badges and vests, and some had signs on their vehicles with the company’s name.
- Method of payment. The company controlled the rate of payment, which was nonnegotiable and did not include a bid process as is typical for independent contractors. The “take-it-or-leave-it” approach indicated control over the installers.
- Length of employment. The installers had an ongoing relationship with the company and did not advertise their services to the community at large.
- Agreements and contracts. The company’s non-compete clause restricted the installers’ freedom to work and indicated a measure of control over the workers.
- Skill requirements. The BWC concluded that the minimal skill required to install the cable was not high or unique, and the company offered no facts to show that the installers required specialized skills.
Disagreement on the court. Two of the Supreme Court Justices, Kennedy and DeWine, dissented from the majority opinion. Their primary point of disagreement was that there was no evidence supporting the BWC decision. The evidence instead suggested that the company controlled only how the installers were paid, and the installers controlled the manner and means of doing their work. The dissent criticized the BWC for jumping to a quick conclusion that the company’s true motives were “to evade the obligations associated with having employees.”
What does this mean for farm employers? Farms often rely on independent contractors for seasonal and intermittent help with work like baling hay, running equipment, and doing books. Are these workers true independent contractors or are they employees? That is a fact dependent question, but we can imagine many scenarios where the farm has a majority of the control over the mode and manner of such work. Farms are subject to Ohio’s workers’ compensation law, so a farm could be audited by the BWC just as the company in this case was and could see similar results for misclassifying employees as independent contractors.
Implications for all businesses. The case carries several implications that raise needs for businesses that use independent contractors:
- Recognize that state and federal tests can differ. Many are familiar with the IRS test for independent contractors but note that the Ohio Supreme Court applied its unique Ohio test for determining independent contractors in regard to BWC premiums. State and federal laws differ. It’s important to apply the appropriate test for the situation.
- Review the manner and means factors for each independent contractor. For each worker claimed as an independent contractor, review the nine factors listed above to ensure that the business isn’t exerting the most control over the manner and means of the work. Where possible, adjust practices that give the business unnecessary control over how and when the work is performed. Consider these:
- Use employees to do the regular work of the business and independent contractors for high-skill or unique tasks.
- Ensure that the business isn’t controlling the public image of the workers. The workers should not be branded or identifiable with the business through clothing, name badges, hats, vehicles, etc.
- Require independent contractors to submit bids or proposals on the amount and method of payment for their work.
- Avoid using the same independent contractor for an extended period of time and ensure that the worker’s services are available to other businesses.
- Don’t restrict the worker’s freedom to work for others, especially via a contract or agreement.
- Maintain records and evidence of the work situation. The BWC need only have “some evidence” that the nine factors indicate a high level of control over the mode or manner of work, but the business may offer facts and evidence to the contrary. Good recordkeeping is imperative. A business that can’t provide stronger facts and evidence in favor of the business, like the company in this case, might be at risk of an employee classification by the BWC.
While there are benefits of using independent contractors to meet labor needs, farms must recognize the associated risk of misclassification. For workers' compensation purposes, farms can avoid those risks by ensuring that it is the independent contractor, not the farm, who controls the "manner or means" of doing the work. Read the Ohio Supreme Court’s opinion in State ex rel. Ugicom Enterprises v. Morrison here.
Higher input costs and higher crop prices have been the theme for the last several months. Higher production costs in 2021 gave way to even higher costs for the 2022 production year. Factors affecting both supply and demand have continued to drive commodity crop prices higher. The result of all of this change is a positive margin outlook for 2022 commodity crops.
Production costs for Ohio field crops are forecast to be higher than last year with higher fertilizer prices leading the way. Variable costs for corn in Ohio for 2022 are projected to range from $578 to $708 per acre depending on land productivity. The trend line corn yield (183.7 bpa) scenario included in the corn enterprise budget shows an increase in variable costs of 44%.
Variable costs for 2022 Ohio soybeans are projected to range from $311 to $360 per acre. Variable costs for trend-line soybeans (56.5 bpa) are expected to increase 40% in 2022 compared to 2021.
Wheat variable expenses for 2022 are projected to range from $249 to $321 per acre. The trend line wheat yield (74 bpa) scenario included in the wheat enterprise budget shows an increase in variable costs of 50%.
Returns will likely be positive for most producers depending on crop price change throughout the rest of the year. Grain prices used as assumptions in the 2022 crop enterprise budgets are $7.00/bushel for corn, $14.25/bushel for soybeans and $7.50/bushel for wheat. Projected returns above variable costs (contribution margin) range from $450 to $835 per acre for corn and $333 to $606 per acre for soybeans. Projected returns above variable costs for wheat range from $195 to $345 per acre although significant crop price increases since last fall (when the price was set for this enterprise budget) will likely cause wheat to be more profitable than these return projections indicate.
Return to Land is a measure calculated to assist in land rental and purchase decision making. The measure is calculated by starting with total receipts or revenue from the crop and subtracting all expenses except the land expense. Returns to Land for Ohio corn (Total receipts minus total costs except land cost) are projected to range from $260 to $619 per acre in 2022 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $205 to $462 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from $100 per acre to $239 per acre assuming a planting-time price of $7.50/bushel. If a current forward harvest price for wheat of $11.50/bushel is used, the Return to Land is in a much higher range of $325 to $576 per acre depending on land production capabilities.
Total costs projected for trend line corn production in Ohio are estimated to be $1,054 per acre. This includes all variable costs as well as fixed costs (or overhead if you prefer) including machinery, labor, management and land costs. Fixed machinery costs of $78 per acre include depreciation, interest, insurance and housing. A land charge of $207 per acre is based on data from the Western Ohio Cropland Values and Cash Rents Survey Summary. Labor and management costs combined are calculated at $105 per acre. Details of budget assumptions and numbers can be found in footnotes included in each budget.
Total costs projected for trend line soybean production in Ohio are estimated to be $678 per acre. (Fixed machinery costs: $62 per acre, land charge: $207 per acre, labor and management costs combined: $60 per acre.)
Total costs projected for trend line wheat production in Ohio are estimated to be $593 per acre. (Fixed machinery costs: $36 per acre, land charge: $207 per acre, labor and management costs combined: $52 per acre.)
Data used to compile these enterprise budgets includes research, surveys, market data, economic modeling, calculations and experience of authors.
Current budget analyses indicates very favorable returns for all three primary commodity crops but crop price change and harvest yields may change this outcome. These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2022. have been completed and posted to the Farm Office website: https://farmoffice.osu.edu/farm-mgt-tools/farm-budgets