The sale and purchase of rural land often involves a number of complex issues that need to be properly addressed in the Contract to best protect your interests.
Unfortunately however, the Contract is often entered into before you have had the chance to receive legal advice in relation to its terms and you only realise the matters that should have been addressed when a problem arises. It is therefore important that you obtain legal advice about the Contract before you sign it to make sure that it fully addresses your particular circumstances and needs.
Before signing a Contract to buy or sell rural land, we suggest that you consider a number is issues:
EXACTLY WHAT IS INCLUDED IN THE SALE?
Often the sale will include not only land, but also:
- water entitlements;
- chattels (e.g. plant and equipment, machinery);
- stock;
You need to ensure that these included items are actually listed in the Contract and are properly addressed. Each of these items can raise a number of issues that may need to be addressed in the Contract.
Water Entitlements
- You need to make sure that you understand exactly what type of entitlements are included in the sale and that the Contract correctly addresses the documents that are required to transfer them (refer to our article on Water Entitlements for more detail in that regard);
- You should ensure that all associated water infrastructure is included in the sale;
- We would recommend due diligence provisions for Buyers to allow investigations in relation to the various entitlements and for them to physically inspect any infrastructure and flow etc.
Chattels and Stock
- As GST will be payable on these items, we recommend that you agree to their value in the Contract to avoid argument immediately before settlement;
- The Contract should deal with who is to pay any transaction levy for stock;
- Sellers should determine who owns and can sell the items (noting land and operating entities are often different) and Buyers should consider which entity should buy them (their land owning or operating entity); and
- Releases of any personal property security interests over included items should be considered.
Crops
- The Contract needs to address whether any standing crops are included or excluded from the sale;
- If any excluded crops won’t be harvested by settlement, provisions allowing the Seller to access the land (and detailing the terms of the access) after settlement should be included;
- If crops are to be included in the sale, you need to consider:
- who is responsible for caring for them once the Contract has been signed;
- what entity should buy the crops (land or operating entity?);
- whether GST is payable on them (noting they will be treated as GST free fixtures is certain circumstances and as chattels, which GST must be paid on, in other circumstances), and if so, we would recommend that their agreed apportionment be included in the Contract.
- Are there any associated agreements (e.g. forward sale Contracts, technology user agreements) that need to be addressed?
Sellers should also consider any fixtures that they want to exclude from the sale.
Has GST been correctly considered and addressed?
If the land has been continuously used for a farming business for the 5 years immediately before the sale and the Buyer intends that a farming business will be undertaken on it after settlement, the GST farmland exemption should apply to the sale of the land and fixed improvements.
This exemption does not however extend to any chattels, stock or, in certain circumstances, crops, included in the sale. If any of these are included in the sale, you need to ensure that the Contract addresses who is to pay the GST on these items (normally the Buyer).
You should also consider negotiating an apportionment of the price for these items in the Contract so that you know exactly how much GST will be payable from the outset (which will be relevant for duty calculations and may affect the amount of a finance required for Buyers).
If it is questionable whether the land has been (or will be) used for a farming business (as opposed to a hobby farm) issues can arise and need to be addressed in the Contract.
Is there anything necessary for the continued operation of the business that needs to be addressed in the Contract?
A licence, permit or authority etc. may be necessary for some of the activities undertaken on the land – e.g. operating a dairy, piggery, feedlot or quarry.
If the Buyer wants to continue with these operations, they need to investigate how the licence etc. can be transferred or whether a new licence needs to be applied for and the requirements in that regard. The Contract needs to be drafted to appropriately address this and to allow sufficient time for the transfer/issue of the licence.
Are there any Agreements that need to be taken into account?
Rural properties are often affected by agreements with neighbours, Government bodies and other organisations – e.g.
- Shared bore arrangements;
- Access agreements with neighbours;
- Sharefarming or agistment agreements;
- Gravel agreements with Councils or third parties;
- Landcare Agreements; and
- River Improvement Agreements.
Sellers will often want to ensure that the Contract does not include any representations in relation to these agreements and to pass on any obligations under them to the Buyer. The Contract needs to be drafted to adequately address these concerns.
If a Buyer is relying on obtaining the benefit of these arrangements, they should ensure that the Contract is subject to the agreement being assigned to them or new agreements (on terms they are happy with) being entered into.
You should also determine whether the Seller (or previous owners of the land) has entered into any agreements (e.g. Conduct and Compensation Agreements or Deferral Agreements) with any mining or energy companies. If so, the terms of the Agreement will need to be reviewed to determine any requirements for the sale and ensure that they are addressed in the Contract. The Contract should also address who is entitled to any future compensation payable under the Agreement.
It is also quite common for Buyers and Sellers to enter into a “gentleman’s agreement” about various matters – e.g. work being undertaken before settlement, items being left on the property after settlement. These issues should be addressed in the Contract to ensure that they binding on the parties.
Do either of the parties need access to the property before or after settlement?
Buyers will often want to access the property before settlement and Sellers will often need to access the property after settlement.
For example, a Buyer may want to access the property before settlement to:
- Graze their livestock;
- Care for a crop included in the sale; or
- Plant a crop before settlement.
A Seller may need access after settlement to:
- remove its livestock (e.g. if it doesn’t want to remove or sell its livestock until it has the guarantee that settlement has been effected);
- hold a clearing sale (and store its items on the property leading up to the clearing sale) ;
- harvest any crops not included in the sale; or
- continue to live in the house for a period after settlement.
The Contract needs to not only include provisions allowing this access, but also detailing the parties obligations and liability in that regard – e.g. in relation to risk, insurance, costs, maintenance and use obligations, rectification of damage, liability and indemnity.
In addition to the above considerations, there are also a number of matters that Buyers and Sellers should specifically consider:
Buyer
- We recommend that you talk to your accountant and our Future Planning team about the best purchasing entity (and whether separate buyers are needed for the land and chattel/crop/stock components of the purchase).
- Does the purchase need to be subject to anything other than obtaining finance approval – e.g. the sale of another property, redeeming investments, receiving monies from other sources?
- Do you want to investigate any particular issue in relation to the property (e.g. water entitlements, any proposed development plans) or include a due diligence condition?
- Are you are a “foreign person” and is Government approval to the purchase necessary?
Seller
- Are there any environmental issues affecting the property or is it listed on the Environmental Management Register (noting the Buyer can terminate the Contract in certain circumstances if you don’t give the notice required under the relevant legislation)?
- You need to ensure that you correctly provide all of the required legislative disclosures (e.g. in relation to QCAT orders or notices, pools, smoke alarms and safety switches) – noting that failure to do so can result in penalties or, in some cases, allow the Buyer to terminate the Contract.
- If the sale includes any chattels (or crops that will be harvested before settlement or are owned by a different entity than the land), you will need to obtain a discharge of all personal property security interests that are registered against them.
- Are there any encumbrances, State land (e.g. stock routes, road reserves, forestry entitlement areas) or notices received from any Authorities that need to be disclosed in the Contract.
- If the price is $750,000.00 or above you will need to obtain a CGT Clearance Certificate from the ATO (otherwise the Buyer is legally required to pay 12.5% of the purchase price to the ATO at settlement and you will need to claim it back from the Government).
CONCLUSION
The above issues are by no means an exhaustive list of the matters that you need to consider when buying or selling rural land, but simply demonstrate the wide variety of matters that may need to be taken into account in the Contract.
Murdoch Lawyers’ Property Law team have extensive experience in assisting rural buyers and sellers and are able to meet their individual needs in an easy to understand and timely matter.
We invite you to contact our Property Law team to discuss any proposed sale or purchase and look forward to assisting you in that regard.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.
