Farm Land Contracts: Get it in Writing

The case has been made in previous articles (The Case for Putting It in Writing and Farming Land Leases: Get it in Writing) for putting all agricultural contracts, including land leases, in writing, rather than relying on the time-honored “handshake agreement.” This article discusses farm land contracts, and some important things to consider about putting them in writing.

A land contract is an agreement for the sale of property (and not just vacant land). It is sometimes mistakenly thought of as a “rent to own” or “lease with option to buy” arrangement because the payments are spread over a period of time. To be clear however, a land contract is a binding contract to purchase the property. The buyer or “vendee” under a land contract agrees to make installment payments against the purchase price, and to complete the purchase by the end of the land contract period. The seller or “vendor” effectively acts as the buyer’s lender, agreeing to be paid for the property over time in exchange for also being paid interest on the purchase price, which is factored into each installment payment.

Hesitation about putting a land contract in writing should be set aside in light of Michigan’s “statute of frauds.” This law mandates that certain real estate agreements, including land contracts, be in writing in order to be deemed valid. As such, a party to a verbal land contract that goes south may find it difficult, if not impossible, to enforce the terms of the land contract against the other party.

Land contracts typically last for a period of several years. As such, they should spell out the various obligations of the parties with respect to the property over that period. For instance, a land contract ought to define who is responsible for paying the annual property taxes and assessments, for maintaining insurance on the property, and for handling any other property-related expenses that may arise. The land contract should also clearly set out the parties’ respective rights to use the property, such as the right to farm the property, or lease it to others to farm, while it remains under land contract. In addition, the land contract ought to specify the buyer’s responsibility to maintain the property in case the sale is not completed, as well as the seller’s responsibility to deed over the property if the land contract is successfully concluded.

A land contract can be an attractive option to someone seeking to buy farm property who either cannot secure sufficient financing from a lending institution, or else can obtain a better interest rate directly from the seller.  A land contract buyer must keep in mind, however, that the seller can have the same enforcement rights as a traditional lender if payments are not made or other terms and conditions of the land contract are not met. Commonly, a land contract seller will have the remedies of both forfeiture, in which case the seller keeps all payments already made and retains the property, or foreclosure, by which the seller seeks payment in full of the total land contract.

All agricultural contracts should be in writing. This is true for leases that permit the temporary use of farm property, and it is certainly true for land contracts for the purchase and sale of farm property. Foster Swift can help you get your land contract in writing. If you have questions as to the details, contact Steve Smith at 269.983.1400 or by email at ssmith@fosterswift.com. Steve devotes his practice to advising and representing individuals, families, and businesses in the broad spectrum of real estate and property matters, as well as assisting them with wills and trusts and issues of corporate formation and management.