The family farm – who gets what ?

On a family farm, grandparents, parents and grandchildren may all work together and contribute their labour and capital to provide an income for all. In the course of day-to-day life, formalizing such arrangements by plan or contract may appear unnecessary as each family member provides their contribution. However, should there come a time when the enterprise must be sold or divided, ambiguity with respect to the business relationship and contribution of various family members may lead to bitter, protracted and expensive litigation.

In a recent case decided by the Ontario Court of Appeal, a son and the estate of another son (represented by a grandson) sued their mother (represented by another son) to recover the investment of the two sons in buildings and farm equipment on a family dairy farm owned by the mother. Prior to his death, the father had transferred the milk quota required for the dairy operation to the two sons and, through his will, he had left the farm property (including all buildings, equipment and the dairy herd) to his wife. Throughout the father’s life and for fourteen years following his death, the two sons carried on the dairy operation, depositing all proceeds in the farm bank account from which all expenses were paid and from which each family member drew an equivalent amount every month. In addition, after their father’s death, the two sons periodically withdrew larger sums which they individually invested in guaranteed investment certificates.

At the same time as the mother’s health began to fail and she ceased drawing from the farm bank account, the two sons redeemed a portion of the guaranteed investment certificates to undertake a significant expansion of the farm which included construction of a new barn, renovation of the existing barn, and purchase and installation of milking and manure removal equipment. Although their mother was aware of this investment, and had in the past in fact encouraged them to modernize the dairy operation, there was no evidence that she consented to this expansion. With her declining health, there was even some issue as to whether she had the necessary mental capacity to understand the expansion was being undertaken. In the meantime, the mother, the two sons, and a grandson continued to reside on the farm property.

Four years after the expansion was undertaken, one of the sons became ill and the two sons decided to terminate the dairy operation and sell the milk quota. After the death of one of the sons, the remaining son and his brother’s estate (represented by the grandson) commenced a court action against the mother (who, because of her incapacity, was represented by the other son) to recover the investment in buildings and equipment which had, of course, accrued to the benefit of the mother as the legal owner of the farm. Although the trial judge had decided that the brothers should recover their investment because otherwise the mother would be unjustly enriched, the Court of Appeal disagreed. In reversing the trial judge’s decision and dismissing the claim by the brothers for reimbursement, the court stated:

    “In my view…the only reasonable finding open to the trial judge was that (the sons) knew that (their) mother had not consented to the construction of the barn, that she appeared to disagree, that she was ‘not in her right mind’ at the time, that he ignored her and proceeded to construct the barn….The absence of (the mother’s) consent to the construction of the barn and the making of the other improvements to the farm – indeed, the absence of any evidence that she expressly requested her sons to undertake this work – is the essential reason why the respondent’s claim, based on unjust enrichment, should fail”.

For the brothers to have recovered their investment because of their mother’s unjust enrichment, the court held that the brothers were required to prove not only their mother’s enrichment and their own deprivation, but also the absence of any justification for the enrichment. The court found that the brothers could not succeed in demonstrating absence of justification for the enrichment unless they could establish not only their own reasonable expectation of reimbursement at the time of the investment but also their mother’s knowledge of that reasonable expectation. Even if the brothers had expected to be reimbursed, their mother was not required to account to them if she was unaware of their expectation because to do so would be to allow the brothers to unilaterally create legal obligations binding upon their mother. The court concluded:

    “Simply stated, this is a case where the evidence shows that (the sons) constructed the barn, and otherwise improved the farm property, without the consent of their mother who was the owner of the farm property, and subsequently expected that she would reimburse them for having done so. However, there was no evidence that when they incurred these expenses, (the sons) expected to be reimbursed by their mother. Moreover, even if the sons had such an expectation, there is no evidence that their mother accepted the improvements in circumstances in which she knew, or reasonably ought to have known, of her sons’ expectations….The plaintiffs failed to show that their mother was aware they were not making her a gift of the barn and the other improvements….Her sons, who paid no rent for the farm, in using the farm buildings and equipment for their benefit, had a moral obligation to replace buildings and equipment that they had ‘worn out’, or which had become obsolete….For all of the above reasons, it is my opinion that it was not the legitimate expectation of the parties that (the mother) would compensate (the sons) for the improvements they made to her farm. Furthermore, it is not evident that (the mother’s) retention of the benefits she received from her sons would be unjust or unfair in the circumstances of this appeal.”

The spectre of family members feuding about their respective entitlement to the family farm can be avoided. Through proper estate planning and contractual arrangements, families themselves can decide on an equitable recognition of the respective contributions of family members without the risk of retroactive assessment by the courts.