August 25, 2017

Due Diligence in Farm Real Estate Transactions

Written By

John P. Broadhead
Member, Stoll Keenon Ogden PLLC

The market for farm real estate remains active, and purchase prices remain high by historical standards.

Purchasers of farm real estate should be interested in making sure they get full value for their purchase price, and that they understand the matters that will affect title to the real estate being purchased.  Sellers of farm real estate should be interested in being sure that there will be no problems they are asked to remedy after the sale.

There are several “due diligence” items to which attention should be given during the negotiation and pre-closing process in connection with the purchase and sale of farm real estate to be sure that the interests of both the seller and purchaser are protected.  They include the following:

  1. Survey.  Will there be a survey, and if so, who will pay for it?  A survey may be important to verify the number of acres actually being purchased and sold, to identify any boundary line discrepancy issues that may exist, and to assure there is good access to the real estate.
  2. Title Insurance Commitment.  The title insurance commitment discloses matters of record that will affect the purchaser’s title to the farm real estate, and also discloses other exceptions to the title insurance coverage under the title insurance policy that will be issued pursuant to the title insurance commitment.  Matters of record disclosed by the title insurance commitment include easements, restrictions, liens, and prior reservations and conveyances of minerals.  The level of detail of the title search that will be undertaken in connection with the preparation and issuance of the title insurance commitment, and the exceptions that will be acceptable to the purchaser, often need to be negotiated.  The purchaser also needs to be in a position to reject title to the real estate, even after the execution of the purchase agreement, based on exceptions disclosed by the title insurance commitment, which is never issued until after the purchase agreement is signed.
  3. Possession Date.  When the seller will deliver possession of farm real estate to the purchaser is critical.  If there is a farm tenant on the farm real estate when the purchase and sale is being negotiated, the rights of the farm tenant under any existing lease (oral or written) must be taken into account.
  4. Environmental Conditions.  Because a purchaser can become liable for cleaning up environmental conditions that exist on real estate that is purchased, it is important to make sufficient investigation to be sure no such environmental conditions exist on the real estate.  In the case of unimproved farm real estate, environmental conditions are usually not an issue, but there can be exceptions, notably old oil wells that have not been plugged, dumping grounds, or underground storage tank sites.  More attention may need to be given to farm real estate that is the location of old farmstead sites.  The goal is to make sure the purchaser does not acquire a liability that diminishes the value of the farm real estate to the purchaser.
  5. Purchase Agreement.  The purchase agreement is entered into by the seller and purchaser to initiate the real estate transaction.  A purchaser of farm real estate can do some due diligence activity respecting the farm real estate prior to entering into the purchase agreement, but much of the due diligence must occur after the purchase agreement is signed, but prior to closing.  And the purchaser needs to be able to escape the obligation to close under the terms of the purchase agreement if problems are disclosed during the due diligence phase by the survey, title insurance commitment, environmental survey, or otherwise.

The bottom line is, if you are a purchaser of farm real estate, it pays to do your homework in advance.  And if you are a seller, it pays to take steps to make sure that the purchaser is not disappointed and looking to remedy that disappointment after the transaction, instead of dealing with any issues that exist as a part of the transaction.

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