Agricultural land contracts: get it in writing
The case has been made in previous articles (The case to put it in writing and Farmland leases: get it in writing) to put all agricultural contracts, including land leases, in writing, rather than relying on the age-old “handshake agreement”. This article discusses farm land contracts and some important things to consider when putting them in writing.
A land contract is an agreement for the sale of property (not just vacant land). It is sometimes mistakenly referred to as a “lease with option to buy” or “lease with option to buy” arrangement because the payments are spread over a period of time. To be clear though, a land contract is a binding contract for the purchase of property. The buyer or “seller” under a land contract agrees to make installment payments of the purchase price and to complete the purchase before 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 receiving interest on the purchase price, which is factored into each installment payment.
Reluctance to put a land contract in writing must be ruled out in light of Michigan’s “fraud statute”. This law requires that certain real estate agreements, including land contracts, be in writing to be considered 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 usually last several years. As such, they must specify the various obligations of the parties with respect to the property during this period. For example, a land contract should define who is responsible for paying annual property taxes and assessments, maintaining insurance on the property, and managing any other property-related expenses that may arise. The land contract should also clearly state the respective rights of the parties to use the property, such as the right to use the property or to lease it to others to use it, as long as it remains under the land contract. In addition, the land contract should specify the buyer’s responsibility to maintain the property in the event the sale is not completed, as well as the seller’s responsibility to deed the property if the land contract is successfully concluded.
A land contract can be an attractive option for someone looking to purchase agricultural property who either cannot obtain sufficient financing from a lending institution or can obtain a better interest rate directly from the seller. A land contract buyer should keep in mind, however, that the seller may have the same enforcement rights as a traditional lender if payments are not made or other terms and conditions of the land contract are breached. . Generally, a land contract seller will have both remedies of forfeiture, in which case the seller retains all payments already made and retains the property, or foreclosure, whereby the seller seeks payment in full for the total land contract.
All agricultural contracts must be in writing. This is true for leases that permit the temporary use of agricultural property, and it is certainly true for land contracts for the purchase and sale of agricultural property.