Proper planning important when buying a farm

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Once a prospective purchaser has decided to ignore the points raised by government in respect of the acceleration of land reform and purchase a farm, the intrepid purchaser would be well advised to first conduct a comprehensive due diligence investigation in respect of his target farm.

Such an investigation should not be limited to the profitability of the farm but should primarily cover a wide range of aspects dealing with the farming land. These include servitudes and other title deed conditions, a physical verification of the boundaries, zoning, use restrictions, water rights, suitability of soil for the intended type of farming (where applicable), whether any claims have been lodged against the farm in terms of the Restitution of Land Act and whether or not the structures on the farms comply with all relevant laws. These investigations should be conducted by experts such as appropriately-experienced attorneys, land surveyors and town planners.

Environment laws

Of particular importance is clarifying the extent to which the applicable environment laws have been complied with by the present and past owners of the farm, as those laws in some cases impose the liability for failure to comply with such laws on the successors in title of the farm, such as our purchaser. For instance in terms of the Water Act, the purchaser will be obliged to take all reasonable measures to prevent any pollution of a water source that may result from any activity conducted by the seller of the farm, and which is likely to cause pollution of a water source.

Once the potential purchaser has satisfied himself regarding the status of the farming land, his attention should turn to the legal and, in many cases, illegal occupants of the farm. For security purposes, to ensure the ability to exercise proper control over the farm and to secure residences for the workers the purchaser intends to employ on the farm, the purchaser must ensure he understands the nature of the rights of all occupants to continue their occupancy of the farm. An acquisition of a farm without a proper appreciation of these rights may result in unexpected additional costs for the purchaser in securing the termination of those occupation rights.

Unless structured properly the purchaser will in most cases acquire the farm with the existing employees. Our purchaser will therefore have to establish who the employees are and what their terms of employment are. He will have to identify the exact rights of those employees as the purchaser will become the party against whom those rights will be enforced.

Storage and packaging

In many cases, the acquisition of a farm will only make sense if the purchaser also acquires the ability to pack, store and market its produce. The purchaser must in such cases also investigate whether he can acquire rights such as storage rights, packaging rights and marketing assistance from agricultural businesses in the area that serves the farm. If these rights are linked to the acquisition of shares in such a business, he must establish whether or not those businesses will approve the transfer of those shares to him. The High Court has recently confirmed the principle that the board of a company may refuse such a transfer where the transfer is not in the best interests of the company. The purchaser should therefore determine whether a transfer of such shares to him will be approved.

Our purchaser will then consider whether the machinery and equipment necessary to operate the farm will be acquired as part of the farm and whether or not such machinery and equipment has been properly maintained. He will also review whether or not the existing stock is acceptable.

In many cases such as with fruit farms and wine farms, the farm may house production facilities for the production of wine or the packing and storage of fruit. In such cases, the purchase is made even more complicated as it will effectively be that of a farm and a production facility. The purchaser will in these instances have to take particular care that all the applicable laws governing such facilities have been complied with.

The farm may also use valuable intellectual property assets such as trademarks and plant breeder rights that are required for purposes of the farming operation. Ownership of these rights or the licenses that allow the use thereof, must be verified. The continued successful operation of the farm may also be dependent upon the existence of marketing, distribution and export agreements and it will as such be important to determine whether or not those agreements will survive the purchase.

In cases where licenses are required for the operation of the farm or the sale of produce, such as liquor licenses, the manner in which those licenses must be dealt with and secured for the purchaser must be determined.

Purchase agreement

Once our purchaser has completed his investigation, he must identify an attorney experienced in the acquisition of farming businesses to render assistance with the negotiating and drafting of a comprehensive purchase agreement and with a set of warranties that will ensure that the purchaser takes delivery of the farming business being purchased. The purchaser will have to determine the manner of acquisition (for instance an asset acquisition of share acquisition) and will have to structure the transaction in a manner that suits him.

The purchaser should also employ his tax advisor to ensure that the transaction is structured in the most efficient manner. His attorney should also ensure that all the resolutions and regulatory approvals - such as approval by the securities regulation panel and the Financial Surveillance Department of the South African Reserve Bank that may be required for the purchase of the farm - are adopted and obtained.

These are but some of the issues a prospective purchaser may face when embarking on the purchase of a farm. Depending on the type of farm, there may be many other issues. It would be a penny-wise and pond-foolish purchaser that in today's environment attempts the purchase of a farm without proper planning, investigation and without the assistance of experienced advisors.