Contracts In Agriculture
ADAM R. BIRK
CAPE GIRARDEAU, MISSOURI
Contracts are a part of everyday life. We are constantly agreeing to something. This is especially true for farmers and business owners who have a lot of activities going on and moving pieces to their operation. Knowing some of the basic laws behind contracts can help you protect yourself and your business as well as protecting relationships with those who you do business with.
The first thing to know is that a verbal contract can indeed be a valid contract. A handshake deal can often times be the best way to contract and do business with someone when that person is a person of high character and trust and the terms are straightforward. When conducting business by way of verbal contract on a handshake, keep in mind that often times the contract is only as good as the character of the parties who are agreeing to honor it.
The statute of frauds is a law which outlines when a contract must be in writing to be enforceable. There are many rules and specifics about the statute of frauds but here are the highlights for a farmer. Anything involving real estate must be in writing to be enforceable. Any contract for goods over $500 must be in writing to be enforceable.
As always, there is the law and then there is practical application in the real world. Let’s go through some examples. Any sale or transfer of land must be in writing. Ex. 1) If you don’t create a deed and the seller doesn’t sign the deed then that sale did not happen and the heirs of both the buyer and seller are sure to be in major legal battle in the future. This is a hard line. A deed must be drafted and signed by the seller to validly transfer land.
Ex. 2) If you verbally make an agreement to sell land then you may very well complete the sale, draft and sign a deed and the end result is the transfer of the land and transfer of money. As stated above, a verbal contract can reach the end result you want and turn out great so long as all parties honor their agreements. The issue is enforceability when someone doesn’t honor their word. If you do not have a contract and the other person backs out of the sale for any reason and at any time, then you have no recourse to enforce the contract because it was not in writing. In other words, without a written contract, no matter how much time and money you spent preparing to buy or sell the property, you are completely at the mercy of the other person to follow through on their word.
Ex. 3) You rent a farm for 3 years at $250 per acre cash rent on a verbal contract. After the first year someone else comes along and offers $300 per acre. If your landlord decides to take the other offer, they absolutely can and again, you have no recourse. The issue and purpose of a contract is all about enforceability. If nothing ever goes wrong, then a verbal contract is perfectly fine because it never has to be enforced. As farmers, we all know that reality is that something changes and “goes wrong” just about every time we put our boots on. Contracts are made to protect all parties to the contract by creating rules of how issues should be handled when something “goes wrong.” Contracts make for good friends because everyone knows the rules up-front and everyone is treated in the way that they agreed to be treated. For perspective, if you sign a contract but don’t like the end result, you can only blame yourself for making a bad deal.
There is one exception to the rule about contracts and real estate in that leases for 1 year or less do not have to be in writing to be enforceable. Ex. 4) If you have a verbal contract for a farm for 1 year, or even 3 years, and the landlord tries to kick you out in the middle of the year, you can take the landlord to court and enforce your contract even though it is verbal. In other words, assuming you can somehow prove the verbal contract was made (a difficult standard to meet), then you can continue to rent the ground the rest of that year. If you make a 3 year verbal contract, the law doesn’t recognize the 3 year aspect of it but instead will consider it a 1 year lease with automatic renewal unless terminated by either party.
Lastly, a contract for goods over $500 must be in writing. Goods are any tangible personal property, for example seed, chemicals, or a trailer. If you buy more than $500 worth of seed on credit (not sure it’s possible to buy less than $500 of seed at a time anymore) then it will always be evidenced by a receipt which they want your signature on and acts as the contract between you to enforce payment of the seed later on. Another example, if you verbally agree to sell a trailer for $499 and the buyer shows up and now won’t pay more than $400. Assuming you could prove the verbal contract was made for $499 then you could enforce that contract and the court could order the buyer to pay you $499. Alternatively, if you verbally agree to sell the trailer for $501 but again the buyer says no more than $400, you would not be able to enforce the contract and make him purchase it for $501. I make these examples right at the $500 mark to explain the rule. It may not seem like a big deal when we’re talking about $500 but extrapolate this to a trailer you are selling for $50,000, a deal which is really important to you and makes you a handsome profit, but suddenly the buyer will only pay $40,000 and you are breaking even. Enforceability of that contract is very important.
Farmers make a lot of deals and contracts within their life. Be sure to properly protect your interests and rights by contracting in writing and with legal assistance. If you have questions regarding contracts or have topics you’d like me to discuss, please email me at abirk@birklegal.com. This article and the statements made within are intended for informational purposes only. In no way should this article and the statements made within be construed as legal advice. ∆
ADAM R. BIRK
BIRK LAW FIRM, LC