FOR RETIRING FARMERS AND THEIR FAMILIES

What has to be in a vendor finance agreement?

You don't need to draft a vendor finance agreement yourself, but you do need to know what can't be left out, so you can tell whether your adviser has covered it.

Start with an agreement in principle

Write it between the two of you. Put down everything you've agreed in plain language, and both sign it.

It's the brief for your lawyer and accountant, not the formal agreement they'll draft, and it stops that formal document drifting away from what you shook hands on. Don't skip it, because it's the cheapest hour in the whole process.

What the formal agreement must cover

At minimum, it must cover:

• The money. Deposit, balance, interest rate, whether that rate is fixed or reviewable, the repayment schedule, and when payments start. Match the start of repayments to when the farm actually produces income, not to the settlement date, because the two are rarely the same.
• The term, and the exit. How long it runs, whether the buyer may pay out early and on what terms, and whether there's a date by which the balance must be refinanced or cleared. Say what happens if it isn't.
• The security, and its ranking. Who holds what, and in what order. If a bank holds a first mortgage, the seller's security ranks behind the bank's, and that has to be written down rather than assumed.
• Default. What counts as default, how much time the buyer has to fix it, and what the seller can actually do. This is the clause everyone avoids writing and everyone needs.
• The worst cases. Death, serious illness, a marriage ending or a separation, on either side. If one of you dies partway through the term, the arrangement continues with someone who never agreed to it, and the document is the only thing that tells them what to do.
• The land afterwards, if that matters to you. Vendor finance ends when the balance is paid, and the farm is then an ordinary asset again, free to be sold to anyone. If you care who holds it in 20 years, ask at the start whether that can be written in, and what it costs. It can't be added later.

Title and term

How the title moves depends on the structure. Under a transfer and mortgage back, the farm is the buyer's from settlement and the seller holds a mortgage over it. Under a terms contract, the seller keeps the title until the last payment.

Which of these it is, and what your state's law says about each, is a question for your solicitor before you rely on either description.

Most arrangements run 10 to 15 years, and some are written so the buyer must refinance or clear the balance by a set year, often year 10. Most include the right to pay out early.

Read more: What to ask your solicitor, accountant and bank before vendor finance and What kills a vendor finance deal?.

This is general information, not legal or tax advice.

The full guide, Ageing on Farm, is free at cultivatefarms.com/resources.

You can build your own plan at cultivatefarms.com/plan.