Succession Planning: Part Five – Living Arrangements For Family Members
During the succession planning process, the situation often arises where the older generation (parents/grandparents/aunts and uncles) want to continue to reside on the farm and live in their home, while the younger generation take on the responsibilities of running the farm.
It is important for the older generation to protect their rights to continue to live on the farm as much as possible. The main ways that they can protect their rights to continue to live on the farm are as follows:
- Continue to own all or part of the farm land;
- Obtain a lifelong tenancy agreement or lease over the parcel of land that contains the house;
- Secure a mortgage over all or part of the land for any vendor financing provided to their children;
- Reconfigure the boundaries of the farm to separate the parents’ house from the rest of the farm.
In discussing the below options we will refer to the ‘older generation’ as ‘the parents’ for simplicity.
Option 1: Continue to own all or part of the farm land
Most farms consist of multiple lots of land, one of which will have the parents’ house on it (the ‘home farm’). One option for the parents to look at is transferring the other lots of the farm land to their children as part of their succession plan but keep the home farm in their own name. The benefits of this option include:
- a. The parents continue to have legal ownership of the home farm; and
- b. The home farm can be quarantined and protected from any 'creditors or predators' to the children or the farming business.
Option 2: Lifelong tenancy agreement or lease over the home farm
If the parents do choose to transfer the home farm to the children before they are ready to move out of their home, another option is to secure a right to continue to live in the house by registering a lease over the home farm for the remainder of their life. Typically the arrangement is for the parents to continue to reside in the house on a rent-free basis whilst continuing to maintain the house, keep it insured and contribute towards the rates and water, etc.
However, from the parents’ perspective, this lease option does not afford as much protection and security as retaining legal ownership of the home farm. A lease can potentially be set aside (terminated) in the instance the landowners (children) get into financial strife or there is a marital separation and the Family Court chooses to set aside the lease for the purposes of dividing up the marital assets (including the farm).
Option 3: Secure a mortgage over all or part of the land for the Vendor Financing
This option comes in handy when the parents transfer all of the farm land to their children and agree to be paid a sum for the farm over a period of time (often referred to as 'Vendor Financing'). We discussed Vendor Financing in Part 3 of our series. The parents can secure the repayment of the loan by taking a first registered mortgage over part or all of the farm land, or if there is an existing mortgage held over the land, the parents may be able to secure a second ranking mortgage over part or all of the land.
The advantages of registering a mortgage over the land, is that it makes the parents secured creditors meaning if the landowners (children) ever get into financial difficulty, they would be paid out their loan in front of any unsecured creditors (such as suppliers etc).
In addition to securing a mortgage over the property, the parents should also take out a lease or tenancy agreement to remain in occupation of their home. As set out above, the lease can be set aside in some instances.
The registered mortgage offers a layer of protection to the parents so that they can get paid any debts owed to them out of any forced sale of the farm before having to move out of their home. This will enable them to have funds to find alternative accommodation elsewhere.
Option 4: Reconfigure the boundaries of the farm to separate the house from the rest of the farm
Lastly, farming families can look at whether it is possible to re-configure the boundaries of the current lots of the farm to allow the parents to continue to own their house and transfer the majority of the farm land to their children.
One of the first things that need to be checked is that the home farm is not connected to the lots that make up the rest of the farm. If they are connected, which is usually noted on the title by a covenant or local government agreement, they may not be able to be separately owned. Your solicitor can check to see if these apply to your farm.
Boundary re-alignments or re-configurations need to be approved by Council. A Town Planner would generally be engaged along with a Surveyor in order to reconfigure the boundaries and submit the new plans to Council for approval. If this option is considered, we recommend you have an initial consultation with a Town Planner to ascertain the prospects of success and costs for such a proposal.
At McKays, we have experienced commercial lawyers with farming knowledge that can assist you with your succession planning needs.
If you have any questions or would like to know more about succession planning, please contact our team.