Succession Planning – Put it in Writing!

Farm families may contemplate transfer of farmland and farm assets from one generation to the next as compensation for the succeeding generation continuing to live and work on the family farm and contributing to its ongoing operations. However, where such arrangements are not properly documented or completed as part of an estate plan or testamentary disposition on death, disputes may arise with respect to the fulfillment of these intentions.

The Ontario Court of Appeal has recently considered an appeal from a trial judgment dismissing the claim of a son for a declaration of his beneficial interest in the family farm upon which he had laboured for 24 years in anticipation of receiving farmland and farm assets. Both parents died prior to completing this disposition and other family members contested the son’s entitlement. The trial judge dismissed the son’s claim in the absence of any written agreement with the parents supporting the alleged agreement and in the absence of conduct by the son necessarily referable to such an agreement.

In considering the son’s appeal from the trial judge’s denial of his claim, the appellate court addressed the legal requirements for a written agreement or acts referable to such an agreement. The court stated:

“Fundamentally, the issue whether a valid and binding oral agreement exists does not depend on the existence of a formal written document between the contracting parties … the essential terms of an oral contract for the purchase and sale of real property are the parties, property and price … if these terms have been agreed on, then a contract may be found without the need for evidence of a written agreement …

“ … The acts of part performance need not be ‘referable only to the contract alleged’. Rather, the test as established by [earlier authority] is that it is sufficient if the acts are ‘unequivocally referable in their own nature to some dealing with the land’”.

In allowing the son’s appeal and directing a new trial, the appellate court concluded that the trial judge had misconceived the appropriate legal tests and misapprehended trial evidence which supported the alleged agreement. This evidence included the notes and recollection of the family’s bookkeeper and tax advisor of the parents’ intention to transfer the farm assets to the son, statements by the parents to this effect, and their consultations with lawyers for this purpose. The court held:

“The trial judge’s application of the legal test for part performance reveals a failure to consider and appreciate the context of this case. This was a family farming operation. Yet the trial judge treated [the son] as though he were a farmhand – and an overpaid one at that – when in reality, [the son] and [the father] acted as partners in a family business …”

“In assessing the evidence before him, the trial judge failed to apply the common sense approach described in [earlier authority]. Again, this was a family farming operation. The trial judge did not take into account the [the son] had devoted his working life to this family enterprise and that he did so not as an employee but as a partner with his father. This course of conduct was capable of constituting detrimental reliance on [the son’s] part. Yet the trial judge overlooked this reliance and engaged in an evidentiary analysis that was inapposite to the circumstances at hand …”

“In focusing on whether [the son] had been underpaid for his full time work on the farm for the 24 years that he worked with [the father], the trial judge lost sight of the elementary fact that [the father] and [the son], father and son, were operating the farm together as more or less equals.”

“There can be no question on this record that [the father] and [the son] were engaged in the farming operation together and that it was not on an employer-employee basis, nor was it an arm’s-length relationship. [The son] was not treated by his father as a mere farmhand, nor did he conduct himself as such. [The son] received cattle from his father at no expense or at less than market value. He had access to the feed account, authority to order and pay for commodities, and had authority over the farming financial arrangements. Their relationship was not formalized, but in the circumstances, this is not surprising.”

For farm families intending to reward the labour of the succeeding generation with transfer of farm assets, the lesson is clear. To avoid subsequent disputes, such arrangements should be clearly documented as part of an estate plan or testamentary disposition on death. To rely upon informal, oral arrangements creates the very real risk that the parties’ intentions will never be realized and the succeeding generation will remain uncompensated for their contributions.