Intrafamily Sales and Another Case Showing the Need for Clear Agreements

I have several times recommended in Discussing the Law: The Online Edition that people making agreements work out as many of the terms as possible, particularly when the deal is one that the law may not fill in the gaps predictably. A recent case from Washington illustrates the problem once again.

The owners of a farm and timberland in eastern Washington decided that they were not making enough income from farming and the occasional sale of small amounts of timber. They sold the land to two of their children, keeping the rights to the property for the remainder of their lives and agreeing to take payments in the form 30 years of monthly payments. Although they did not reduce the agreement to writing, one of the buyers later confirmed the agreement in two e-mails. About 12 years after the original agreement, the parents invited a third child to live on the farm and help them farm it. Although the buyers signed a lease with the third child, disputes arose between everyone involved (and the children who weren’t involved took sides).

Two years after bringing the third child onto the property, the parents signed a new agreement with the buyers. This agreement confirmed the buyers’ property right and the parents’ right to use the property, but limited the parents’ rights to manage the timber and to decide on farming activities. It also gave the buyers the right to enter the farm, build buildings, and confer with the parents on farming.

Six months later, the buyers canceled the third child’s lease and removed some of his farming equipment. At that point, the parents sued. The trial judge confirmed that the parents had the right to use the farm for their lives and the buyers would receive the farm afterward, and that the buyers should eventually receive roughly what they bargained for..

The main issue at trial was how much timber would be harvested. During the sixteen years from the agreement to trial, reports submitted by the parents’ forestry consultant and the buyers’ expert showed that the timber on the farm had increased from about 1 million board feet to 1.5 million, with only about $2.000 worth of timber removed a year. The judge approved harvesting up to 19,000 board feet a year and salvage logging of timber considered at risk, which, because of a significant growth of lodgepole pine and grand fir, two short-lived species, was likely to come to 400,000 board feet in the first two years. Net proceeds of any logging in excess of the approved figures would be shared 60 percent to the parents and 40 percent to the buyers.

The appellate court approved this ruling, noting that the purpose of the sale was to ensure the parents’ financial stability and that the buyers had paid above the market rate for their interest. The most important point raised by the buyers was that usually, when someone has the right to use property for life, they are not allowed to remove substantial timber or minerals because the rights of their successors would be harmed. In this case, however, the appellate court noted that the amount allowed to be removed was approximately the amount that the timber had grown since the sale, and effectively, the parents were extracting the profits of their own careful management, and that because the removal would mostly be salvage, it would actually protect against loss of other timber. As a result, the parents were within their rights to take a reasonable amount of timber and not to deplete the timber.

It appears the courts have, after much expense to the parties, worked out a fair result. Unfortunately, a lot of the time and expense could have been avoided by a bit of forethought. Everyone knew the parents wanted additional income and the buyers wanted an eventual home to retire to. An agreement at the beginning stating a maximum timber harvest per year or that the amount of standing timber should not be substantially decreased below the initial stand probably would have clarified matters and limited the issues in the suit.

If you’re planning to enter into a deal with relatives, don’t forget that even if blood is thicker than water, relations may still sour. Consider discussing options with a lawyer to get advice as to what you may want to agree to.

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