Thinking of purchasing a farm ?

Introduction
Farming is a business - big business! The total capital value of Ontario farm assets in 2001 was $ 50.5 billion. The value of the average Ontario farm is approaching $ 900,000. The cash receipts in 2001 from Ontario farming operations totalled approximately $ 8.5 billion.  One in seven jobs in Canada is in the agri-food sector.
Think of the purchase and sale of farms in much the same way that you would treat the purchase and sale of other commercial property and businesses. Some farm purchases involve land only. Others involve a variety of assets. I have tried to touch on most of the issues that arise in the purchase and sale of farms. Some of the areas that I cover also pertain to rural, non-farm land. The topics are arranged in alphabetical order.
Access to the Property
Make sure that there is road access to the property being purchased for whatever part of the year the Purchaser will need access. If the Purchaser intends to live on the property, year-round access will be needed to the house at least. However, the Purchaser may not require access to the fields year-round. Do not assume that every road in a municipality is open year-round. You would be surprised how many roads are posted "No Winter Maintenance Beyond This Point."
The Purchaser's lawyer should ask the Purchaser what kind of road access he or she is expecting. Also ask the Purchaser what the roads look like that provide access to the subject property. Ask the Vendor for a Warranty that the roads are useable and maintained by the municipality year-round (or whatever lesser time is acceptable to the Purchaser). Consider asking the municipality for a letter stipulating the level of access and maintenance that is provided. If the municipality is taking the position that it is not responsible for maintaining a particular road, you want to find that out before Closing!

If access to the property being purchased is either a provincial highway or a county road, you will need to find out if an entrance permit was obtained or is needed. This is an issue wherever you have an entrance - whether from the main buildings or from a field. If a permit was issued to the Vendor or to one of the Vendor's predecessors, ask for it to be produced.

Pursuant to Sections 31 and 34 of the Public Transportation and Highway Improvement Act, R.S.O. 1990, c. P.50, a permit from the Ministry of Transportation is required to construct, change or use a private entranceway or private road to gain access to a provincial highway.

Section 63 of the Public Transportation and Highway Improvement Act permits a county to pass a bylaw requiring a permit from the county to construct, change or use a private entranceway or private road to gain access to a county road.
Aggregate Resources Act
Many farm and other rural properties have sand or gravel deposits. Are there licenced aggregate extract operations on the Vendor's property? If so, have the provisions of the Aggregate Resources Act, R.S.O. 1990, c. A.8, been complied with?
Agricultural Associations
There are several agricultural associations in Ontario and throughout Canada. They can be an excellent source of information for you and your client. 
Assets
It is important to list the assets being purchased with as much clarification as possible. Not only are the details needed for the purchase, but they will also be needed for securing the farm loan. The various assets usually come under one or more of the following headings:
1. land  
2. house
3. farm buildings
4. fixtures  
5. machinery  
6. tools  
7. livestock  
8. quota  
9. feed for animals
10. crops - in storage in the barn, silo, granary or elsewhere
    - in the field
11. goodwill  

The various assets are treated differently by the various taxing statutes. (Please see comments under the various Tax Headings.)

Boundaries
If there is a doubt or dispute about the location of the boundary of a parcel of land, you will need to consider the provisions of the Boundaries Act, R.S.O. 1990, c. B.10. You may also have to resort to mediation or court.

Fence-viewers do not have the authority under the Line Fences Act to determine the location of a disputed boundary line.

Bulk Sales Act
A sale in bulk of the farmer's livestock and implements is subject to the provisions of the Bulk Sales Act, R.S.O. 1990, c. B.14. Therefore, you need to comply with Sections 4 and 8 of the Act.

When the Bulk Sales Act applies, the Vendor must also comply with Section 6 of the Retail Sales Tax Act, R.S.O. 1990, c. R.31, and obtain a certificate from the Minister of Finance stating that all taxes collectable or payable by the Vendor have been paid or that the Vendor has entered into an arrangement satisfactory to the Minister for the payment of such taxes.
Closing (including Closing Date)
Because there are so many variables involved in the Closing of each farm purchase and sale,  develop a checklist that applies to your transaction.

If a marketing board quota is part of the transaction, you will want to pay particular attention to the closing date when drafting the Offer to Purchase. Some Marketing Boards will only make the transfer effective at a certain time of the month.

The Dairy Farmers of Ontario, for example, will make the quota transfer effective on the 1st day of the month. Therefore, if you are buying an ongoing dairy farm operation, you will want to have the Closing take place on the first or last day of the month.

On the other hand, if you are buying a chicken operation, you should set a closing date, which is after a crop of chickens has been marketed and the barns are empty.
Conditions for the Offer to Purchase
While conditions are important in all types of Offers to Purchase, they are of vital importance when purchasing a farm. Since each farm purchase will be different, I will not try to list all of the possible conditions here. I have commented on some of the conditions that should be included in the Agreement of Purchase and Sale.

When wording the Offer to Purchase, do not say "This Offer is conditional upon …." Instead, try using wording that stipulates who is to do what by when.

For example, if the Purchaser needs to arrange financing in order to be able to complete the transaction, you could say:

This Agreement of Purchase and Sale may be terminated by the Purchaser if the Purchaser is unable to obtain financing which is suitable to the Purchaser. The Purchaser must notify the Vendor or the Vendor's lawyer in writing within [ 15 ] days of the acceptance of this Offer of the Purchaser's inability to obtain such financing. If no such notification is made by the Purchaser, this condition shall be deemed to have been waived by the Purchaser and this Agreement of Purchase and Sale shall be valid and binding whether or not such financing is in fact obtained.

Conservation Authority
Section 28 of The Conservation Authorities Act, R.S.O. 1990, c. C.27, allows a Conservation Authority to make regulations applicable to the area under its jurisdiction for prohibiting or regulating or requiring the permission of the Conservation Authority for development (including the construction of any building) if, in the opinion of the Conservation Authority, the control of flooding, erosion, pollution or the conservation of land may be affected by the development.

Therefore, if the land being purchased is within the jurisdiction of a Conservation Authority, you should write to that local Conservation Authority to obtain full particulars of the regulations affecting the land. Generally the Conservation Authority will tell you that it is alright to grow crops on land deemed susceptible to flooding or erosion, but your client won't be able to build on the land. You will also likely need permission for the removal of any trees.

Construction Lien Act
The provisions of the Construction Lien Act, R.S.O. 1990, c. C.30 apply to agricultural land and buildings. Therefore, you will want the usual Declaration from the Vendor that no work has been done on the property in the 45 days immediately prior to Closing for which a lien under the Construction Lien Act could be registered.

 

Corporate Vendor
If the Vendor is a corporation, you will need the same resolutions that you would have if you were buying any other type of business assets from a corporation. When a Marketing Board quota is part of the assets, be careful if you are buying the shares of a corporate farm. A change in ownership of the shares is usually treated the same way for quota transfer purposes as if the farm was owned by a non-corporation. Marketing Board approval will likely be needed to effect the transfer of the quota.

You do not have to contact the Ministry of Finance to check for liens owed under the Corporations Tax Act. Since 1980, if the Ministry of Finance (formerly the Ministry of Revenue) claims a lien, it has to register the lien on title in the Land Registry Office.
Crops
If there are crops in the barn, silo, granary and fields, are any of them to be included in the purchase? If so, don't just say "all crops" in the Offer to Purchase. Particularize the crops.

If the Vendor is retaining ownership of crops that will still be in the fields after the Closing, you need to address this issue in the Offer to Purchase. This will include the Vendor's right to tend to the growing crops and to harvest or otherwise remove the growing crops from the fields.

If the Purchaser is acquiring the growing crops, something should be stated in the Agreement of Purchase and Sale about the crops that are to be harvested by the Purchaser after the Closing. The Purchaser will want to make sure that the Vendor continues operating the farm until Closing in accordance with normal farm practice. This will include properly tending to the crops in the field until Closing. (The Farming and Food Production Protection Act, S.O. 1998, c. 1, may be of assistance in determining "normal farm practice.")

If the Vendor and the Purchaser disagree on whether normal farm practice is being continued, they will want a speedy resolution of the issue. Probably the best way to resolve the dispute quickly would be to go to arbitration. Therefore, such a clause needs to be included in the Offer to Purchase.

Will the Vendor be entitled to use the hay and the feed to maintain the farming operation until Closing? This topic needs to be covered in the Offer to Purchase.

Are the fields going to be left empty from the time of the Agreement of Purchase and Sale until Closing? If so, consider whether the Purchaser wants to have access to the fields in advance of the Closing in order to be able to plant crops, which can be harvested after the Closing. What happens to these crops if the transaction does not Close on time or at all?

You should indicate in what condition the Vendor is to leave the fields as of Closing, whether ploughed or in some other condition.

Deposit
When you are dealing with the purchase and sale of agricultural land, and particularly working farms, it is very common to have a sizable deposit. The Purchaser will want the money to be earning interest prior to Closing. Usually the Purchaser will receive the benefit of that interest. Therefore, make sure that you stipulate that the Purchaser is responsible for any income tax payable on the interest.

If the transaction is not completed, specify in the Agreement of Purchase and Sale who is entitled to the deposit and to the accrued interest.
Description
Do you have a registerable description of the land? If you are in doubt, check with your Land Registrar. Is a survey of the property available? You may need a Reference Plan. If so, negotiate who is to pay for it.
Dispute Resolution
Disputes between the Vendor and the Purchaser can arise at any time after the Agreement of Purchase and Sale has been signed, whether before or after Closing. As in so many real estate and commercial transactions, most of the time the Parties want the problem solved. And being business persons, they want it solved as quickly as possible. They usually don't want their lawyers telling them that they can back out of the deal. They want the transaction to be completed.

Sometimes it is appropriate to make an Application to the Ontario Superior Court of Justice pursuant to the Vendors and Purchasers Act, R.S.O. 1990, c. V.2. This can be done without anything specifically being said in the Agreement of Purchase and Sale.

At other times the Parties may want or need to go to arbitration or mediation. This is particularly true if there is a disagreement about the management of the ongoing farming business where time is critical. Therefore, you should consider appropriate wording to include in the Offer to Purchase.
 

Drainage
There are three different drainage statutes to consider when dealing with farm property.

Drainage Act

The Drainage Act, R.S.O. 1990, c. D.17 deals with two different types of drains.

Section 2 Drains are "Mutual Agreement Drains" whereby two or more land owners agree to work together to construct or improve a drainage works. These agreements may be filed with the municipal clerk and may be registered in the Land Registry Office. If the agreement is registered in the Land Registry Office, it is binding upon the heirs and successors of each party to the agreement.

Section 4 Drains are "Petition Drains" whereby some of the land owners in an area can force all of the land owners in that area to participate in the construction of a municipal drain to drain the area. The cost of the owner's share of the municipal drain is added to the owner's tax roll. It cannot be prepaid by the owner or his or her successors on title. Therefore, the Purchaser cannot require the Vendor to pay off a Section 4 drainage assessment. It will be included in the usual adjustments for real estate taxes.

Section 67 of the Act provides that the unpaid amount of the cost of the drainage works charged against the lands shall be borne by the purchaser of the farm land unless otherwise provided by agreement. The standard Agreement of Purchase and Sale form provides:
"realty taxes including local improvement rates … shall be apportioned and allowed to the date of completion."
During the negotiations and before the Offer to Purchase is submitted, you might want to consider inserting a clause in the Offer dealing with the adjustment for the unpaid balance. (Perhaps the purchase price can be reduced by all or a portion of the amount still outstanding under the Section 4 drainage assessment.)

The Purchaser will also want to know if the property is subject to any potential drainage assessments. Therefore, when you write to the municipality, make sure that you ask for full particulars of any drainage assessment or any petitions for drainage work which have not yet been entered on the tax roll.

Tile Drainage Act

The Tile Drainage Act, R.S.O. 1990, c. T.8, allows a farmer to borrow money from the municipality for the purpose of tiling his or her land. The tile loan is made to the farmer for a 10 year period. It is added to the farmer's yearly property taxes repayable by equal annual installments of principal and interest.

Section 9 of the Tile Drainage Act states that the balance of the tile loan is immediately due and payable if the land is no longer used for agriculture.

Section 13 of the Tile Drainage Act allows the farmer to pay off the tile loan at any time.

The Ontario Divisional Court in Elliott v. Keshwar (1991), 5 O.R. (3d) 342, ruled that a loan under the Tile Drainage Act is an encumbrance which the Vendor is obliged to discharge on Closing. In other words, it is not to be treated like property taxes and adjusted on the Statement of Adjustments, even though the Vendor is allowed to amortize the loan over a period of time and to pay it as part of the farm property tax bill.

 Contact the local municipality. Specifically request details of tile drainage loans which have been entered on the Vendor's tax roll and tile drainage loans which have not yet been entered on the Vendor's tax roll.

If there is a tile loan, requisition a discharge from the Vendor's lawyer pursuant to Section 13 of the Tile Drainage Act.

Put a clause in the Offer to Purchase specifically saying that the Vendor is to pay off the tile loan. Of course, the Purchaser could specifically agree to assume the tile loan, in which case such a clause should be inserted in Offer to Purchase. If the tile loan is being assumed, you should specify in the Offer to Purchase how much the balance of the tile loan is and what the annual payments are.

The Purchaser will want a Warranty on Closing from the Vendor saying that all drainage works are in good operating condition.

The Purchaser will also want to obtain from the Vendor for future maintenance purposes the maps and plans for the land that has been drained.

The Purchaser will want assurance from the Vendor that all tile drainage works are installed on the Vendor's property, and where part is installed on an abutting neighbour's property, the Vendor will provide a proper drainage easement in the farm's favour from the abutting neighbour.

Agricultural Tile Drainage Installation Act

The Agricultural Tile Drainage Installation Act, R.S.O. 1990, c. A.14, requires that a drainage system on a farm be installed by a licensed person (unless the person is the owner or occupier of the agricultural land.) Therefore, you should ask the Vendor about this and obtain something in writing on Closing.

Environmental Issues
Section 197 of the Environmental Protection Act, R.S.O. 1990, c. E.19, requires the Vendor to give to the Purchaser copies of any orders or decisions made by a person authorized by the Act which affect the property. If this is not done prior to Closing, the deal is voidable at the instance of the Purchaser. Such an order or decision may also be registered on title.

The Purchaser should insist on the Vendor giving a Warranty on Closing - at least to the best of the Vendor's knowledge and belief - that:
1. all environmental laws and regulations have been complied with;
2. no hazardous substances or other contaminants exist on the land;
3. there are no outstanding Ministry of the Environment orders, investigations or prosecutions; and
4. there is no pending litigation respecting environmental matters.

The Purchaser should have a clause in the Offer to Purchase which authorizes the Ministry of the Environment to release to the Purchaser, his or her agent and solicitor, all information that may be on record with the Ministry of the Environment with respect to the said property.
Factory Farms
At the present time, municipalities can pass bylaws that deal with all types of farms, from the smallest to the largest. The larger farm operations are what are commonly referred to as "factory farms."

However, by the Spring of 2003, the Ontario  Nutrient Management Act came into effect.Municipalities no longer have the right to regulate factory farms. The Regulations under this Act  replace all of the municipal bylaws. Most of Ontario's farmers are required to submit detailed information about the number of livestock and the types and amounts of nutrients that they use on their farms. There are setback distances for applying nutrients around waterways and restrictions for spreading nutrients on snow-covered land. The Ministry of Agriculture and Food must approve the plans and the Ministry of the Environment enforce the regulations.

The Act and its Regulations will set clear, consistent standards for nutrient management on farms and protect the environment.
 
Farm Implements and Machinery
Farm machinery and tools should be described by the manufacturer, make, model and serial number together with the appropriate description of all of the attachments. Often the Vendor's insurance policy is a good source for the particulars.

The Purchaser will want a Warranty from the Vendor that all of the farm implements and machinery are in good working order and will remain so as of the date of Closing.

The Purchaser will also want the Vendor to Warrant that the farm machinery, implements and tools being purchased are free of all liens, including possible liens under the Repair and Storage Liens Act, R.S.O. 1990, c. R.25. Of course, the Purchaser's lawyer will still conduct a Personal Property Security Act search to confirm that there are no registered liens.

If any of the chattels is a rental, that should be stated in the Agreement of Purchase and Sale. This could include the hot water tank and the propane tank
Fixtures
Today it is possible for farms to come equipped with such things as prefabricated silos erected on concrete pads, feeding and watering systems and milking systems. If you have any of these fixtures in your transaction, they should be specified in the Offer to Purchase.

GST Issues
The sale of farmland is subject to GST if the use of the farmland continues to be the business of farming, or if the farmer is selling his or her land for development purposes. However, under the Excise Tax Act certain sales of farm land are exempt from GST.
A Section 167 election not to pay GST is available if ALL of the following conditions are met:

i)

all, or substantially all, of the farming property that can reasonably be regarded as necessary for the purchaser to be capable of carrying on the business is transferred;

ii)

the purchaser is a GST registrant;

iii)

the vendor and the purchaser jointly agree; and

iv)

the purchaser files an election.
   
If the Purchaser is going to use the land for his or her own personal use and not for the business of farming, a GST exemption is possible in the following situations:
1. The sale of farmland by an individual to a related individual or former spouse (including a former common-law spouse) is exempt if both of the following conditions are met:

i)

the vendor is using the property in the business of farming immediately prior to the transfer of ownership; and

ii)

the purchaser is acquiring the farmland for his or her own personal use and enjoyment, and is not going to use the land in the business of farming.
2. The sale of farmland by an individual to a person who is changing the use of the farmland from the business of farming to a personal use is exempt if all of the following conditions are met:

a)

immediately before the transfer of ownership,
 

i)

all or substantially all of the land is used in the business of farming;
 

ii)

the individual purchaser is a shareholder of the corporation, a member of the partnership or a beneficiary of the trust; and
 

iii)

the purchaser, or the spouse of the purchaser or a child of the purchaser, is actively engaged in the business of the corporation, partnership or trust; and

b)

immediately after the transfer of ownership, the farmland is for the personal use and enjoyment of the purchaser, and is not going to be used in the business of farming.
3. The sale of farmland by a corporation, partnership or trust to an individual is exempt if both of the following conditions are met:

i)

the vendor was using the property in the business of farming immediately prior to the transfer of ownership; and

ii)

the purchaser is acquiring the farmland for his or her own personal use and enjoyment, and is not going to use the land in the business of farming.


If none of the above exemptions apply, you can exempt the GST on the portion of the farmland this is being used for the purchaser's personal residence provided that in the Agreement of Purchase and Sale you have allocated a portion of the purchase price to the personal residence.


The Agreement of Purchase and Sale should provide for the Section 167 election referred to above, if that is what is intended.

There should also be a clause in the Offer to Purchase that the purchase price does not include GST, and that, if the transaction is subject to GST, the GST will be in addition to the purchase price.

Hydro Issues
Hydro Arrears
Hydro arrears no longer affect the property. Therefore, there is no need to search for arrears. (The same is true for natural gas arrears.)
Hydro Easements
You will need to search to determine if there are any unregistered hydro easements. You can do this in one of two ways:
1. Send a letter of inquiry to Hydro One Networks Inc., Real Estate Services, 12th Floor, North Tower, 483 Bay St., Toronto, Ontario, M5G 2P5; or
2. You can search online .

 

Income Tax Act
The Vendor needs to comply with Section 116 of the Income Tax Act regarding being a resident of Canada.

Inspection of Assets
You should include a provision in the Offer to Purchase, which will give the Purchaser a right of inspection before Closing and what is to happen if problems are discovered. However, even if such a provision is omitted from the Offer, Re Harkness and Cooney (1979), 131 D.L.R. (3d) 765 (Ontario County Court), is authority for saying that the Purchaser has the right to inspect the property prior to Closing. Therefore, when acting for the Purchaser, you should include this request in your letter of requisitions so that the Vendor is not caught by surprise.
Prior to Closing, the Purchaser and his or her agents (not meant to read "real estate agent") should attend at the site to determine if everything appears to be the same as when the Purchaser submitted the Offer to Purchase. If anything is missing or broken, the Vendor should rectify it before Closing or there should be a holdback on Closing or there should be a reduction in the purchase price.
Land Transfer Tax
All Purchasers - resident and non-resident - of agricultural land pay Land Transfer Tax at the same rate. 
 
Leases
Is any of the land that is being purchased leased to a third party? If so, can the lease be terminated? When is the rent payable? Does there have to be an adjustment for rent that the Vendor has already received? Does there have to be an adjustment for rent that will be received after Closing? Ask the Vendor for a copy of the lease.

Does the Vendor farmer rent land from a third party that is required for the farming operation? If so, obtain a copy of the lease and look at its terms. Decide if the Purchaser wants (or needs) to continue with the lease. Does there have to be an adjustment for any rent which the Vendor has pre-paid or which the Purchaser (as the Tenant) will owe? Is permission required from the Landlord for the Purchaser to continue with the lease?

Line Fences
The purpose of the Line Fences Act, R.S.O. 1990, c. L.17 is to help all people - rural and urban - resolve disputes over the construction and maintenance of a line (or boundary) fence. The Act imposes a duty upon a municipality to appoint fence-viewers to carry out the provisions of the Act. One of the duties of the fence-viewers in certain situations is to arrive at an amount where one person must pay a certain amount of money. This is known as the fence-viewers' award. Section 12(5) of the Act provides a procedure for entering the amount of the fence-viewers' award on the responsible party's tax roll.

Therefore, when you are acting for a Purchaser, in your search letter to the municipality, you need to inquire whether there are any proceedings that are pending under the Line Fences Act or if there are awards that have been made where the work is yet to be done, or which has been done and remains unpaid.

You will also want the Vendor to warrant that there are no ongoing or pending proceedings under the Line Fences Act.

You may also want to ask your Purchaser client about the condition of the fences. Are they such that an application under the Line Fences Act may be contemplated by a neighbour, thus causing your client to incur unexpected expenses soon after the deal closes?

The Line Fences Act does not confer upon fence-viewers the authority to settle questions of title to land or to determine the location of a disputed boundary line. Such disputes can only be settled by the Courts. (See Re Griffin v. Catfish Creek Conservation Authority, [1968] 1 O.R. 574 and Delamatter v. Brown (1908), 13 O.W.R. 58)

Livestock
All of us can tell a horse from a cow from a sheep from a goat. But when talking about the purchase and sale of livestock, you need to be more descriptive in the Agreement of Purchase and Sale and in the Bill of Sale. The easiest way to obtain the particulars about the livestock is to ask your client. He or she will be able to tell you about the breed of livestock being purchased and whether you have purebred registered animals and whether you have such things as cows, bulls, steers, heifers, calves, ewes, sows, etc. This information can then be included in the Offer to Purchase and in the Bill of Sale.

If the Purchaser is acquiring livestock, the Purchaser should include the following provisions in the Offer to Purchase:
1. All animals will be free of disease on the date of Closing;
2. All inoculations and vaccinations for the animals will be current;
3. The animals being sold are in good health and will be in good health at the time of Closing;
4. The Purchaser has the right to have the animals examined by a Veterinarian of his or her choosing prior to Closing;
5. Specify what is to happen if the Veterinarian says that an animal is not in good health; and
6. (If the transaction involves registered animals), the Vendor will provide to the Purchaser on Closing all of the registration papers for the animals.

As with the purchase of any ongoing business, when the transaction includes livestock, the Purchaser will want to make sure that the Vendor continues operating the farm until Closing in accordance with normal farm practice. (The Farming and Food Production Protection Act, S.O. 1998, c. 1, may be of assistance in determining "normal farm practice.") Therefore, the appropriate clauses need to be included in the Offer to Purchase.

If the Vendor and the Purchaser disagree on whether normal farm practice is being continued, they will want to refer the matter to arbitration for a speedy resolution. Therefore, such a clause needs to be included in the Offer to Purchase.

Mining and Minerals

There are parcels of land in Ontario where the landowners own the surface rights but do not own the mineral rights below the land. Therefore, you need to determine whether the Vendor owns the mineral rights. To do this you look at the Crown Patent to determine whether mineral rights were granted by the Crown, and then see who ended up owning the mineral rights. Any reconveyance of the mineral rights to the Crown will appear in the abstract of title.

Canada Company Land

Some of the land in Ontario was owned by the Canada Company. As it sold land to settlers, the Canada Company often reserved the mineral rights to itself. The Canada Company eventually quit claimed all of the mineral rights to the Crown. For many years, owners of the surface rights were able to apply to the Ontario Government and obtain those mineral rights. On December 18, 1997, Section 180.1 of the Mining Act, R.S.O. 1990, c. M.14, vested the mineral rights in any former Canada Company Land to the owners of the surface rights of those lands. The Ministry of Northern Development and Mines will not issue any form of certificate of this vested right. However, the landowner may choose to apply under Section 75 of the Land Titles Act, or register a deposit under Section 105 of the Registry Act, stating that the mineral rights vest with the landowner by virtue of Section 180.1 of the Mining Act.

Mining Act

The Mining Act, R.S.O. 1990, c. M.14, provides a statutory right to stake mining claims in Crown mineral rights even if the surface rights are privately owned. Section 78 of the Act requires that the holder of the mining claim notify the landowner of an intention to perform assessment work on the claim. The holder of the mining claim can then enter upon the land at any time and perform the work. Therefore, the Purchaser of land where the Vendor does not own the mineral rights will want to know if the Vendor has received any notice under Section 78 of the Mining Act.

Section 79 of the Mining Act provides for a process of compensation if there is damage to the landowner's property. Thus, the Purchaser's lawyer will need to ask if there is any money still to be paid under Section 79 of the Mining Act and who is entitled to it.

Section 32 of the Mining Act prohibits prospecting and staking on that part of a lot where there is a dwelling, a garden, an orchard, a vineyard, a plantation, or growing crops that may be damaged, except in certain circumstances.

Section 151 of the Mining Act allows the Government to register a Charge in the Registry Office against land where the Government is recovering certain costs that it has incurred in the rehabilitation of mining lands. No transfer of the land can take place until the Charge is cancelled.

Section 189 of the Mining Act makes owners of the mining rights liable for a mining land tax. Section 190 of the Act does allow the Minister of Northern Development and Mines to exempt land that is being used for farming where there is not a severance of the surface and mining rights. Again, the Purchaser should make inquiry in appropriate circumstances.

Mining Tax Act

Other than checking the title to the property in the Registry Office, you do not have to conduct any searches for liens under the Mining Tax Act, R.S.O. 1990, c. M.15. Section 18 of the Act 

Non-Resident Purchaser
If the Purchaser is a non-Canadian who does not yet live in Canada, the Offer to Purchase should be conditional on the Purchaser obtaining a landed immigrant visa.

Much of the legislation which penalized non-resident purchasers of farm land in the past has been repealed or replaced.
Investment Canada Act

The Investment Canada Act, which is the federal successor to the Foreign Investment Review Act, does not apply to the purchase by a non-Canadian of a farming business. - see Section 10 (1) (k) of the Investment Canada Act

Land Transfer Tax

The 20 per cent Land Transfer tax that was payable by non-residents on the purchase of farm land, recreational land, woodlots, orchards and other agricultural land was eliminated with the May 6, 1997 Ontario Budget. Non-residents now pay Land Transfer Tax at the same rate as residents.

Non-Resident Agricultural Land Interests Registration Act

The Non-Resident Agricultural Land Interests Registration Act had required non-resident purchasers of agricultural land to file certain documentation. However, this statute was repealed effective March 1, 1997.

Offer to Purchase
While some of the clauses in an Offer to Purchase are common to all other types of real estate transactions, there are clauses that are specific to farm purchases. Since each farm purchase will be different, I will not try to list all of the possible clauses here. Throughout my paper, I have commented on some of the clauses that should be included in the Offer to Purchase.

If the Purchaser intends to build a residence on the farm, the Offer to Purchase should be conditional upon the Purchaser:

1. being able to obtain a building permit prior to Closing; and
2. being able to obtain approval prior to Closing to construct a suitable septic system after Closing. 

Today farm operations often have their own pumping and storage facilities for gasoline, diesel and propane which are used for the tractor, combine and other farm vehicles. Clarify in the Offer to Purchase who owns these facilities.

Oil and Gas Leases
Many farms and other rural properties are subject to registered oil and gas leases. Most of the leases are drawn for a fixed period of time and provide that the lease is null and void if no drilling occurs within the time period, or alternatively, if no rent is paid.

If the lease is no longer in force, ask the Vendor's lawyer to provide a Vendor's Declaration that there has been no drilling or payment of rent under the lease. The lease is then usually void in accordance with the terms of the lease.

Sections 2 and 3 of the Gas and Oil Leases Act, R.S.O. 1990, c. G.3, provide the procedure for obtaining an Order in the Ontario Superior Court of Justice vacating an oil and gas lease from the Vendor's title. Pursuant to Section 7 of the Act, an Order declaring the gas or oil lease void and vacating the registration of the lease can then be registered on title.

If the lease is still in force and the Lessee will not provide a surrender, ask the Vendor to provide an assignment of the lease. There can then be an appropriate credit made on the Statement of Adjustments in favour of the Purchaser for any prepaid rent.
Planning Act
In urban areas, a whole lot in a plan of subdivision can be conveyed without requiring a severance even though the Vendor owns an abutting whole lot in a plan of subdivision. (See Section 50 of the Planning Act.) However, in rural areas, a whole lot in a concession is not exempt from the severance requirements. Therefore, if the Vendor owns all of Lots 1 and 2, Concession 5 and those lots abut each other, the Vendor needs a severance in order to be able to sell one of the lots while retaining the other.

Some natural boundaries sever a rural property; some do not.

Examples of boundaries which do sever a rural property are:
1. A railway line that is still in separate ownership. But be careful. Today many of the railway lines have been torn up and the land deeded to the adjoining owner.
2. Open or unopened road allowances (unless validly conveyed to the adjoining land owner).
3. A navigable waterway traversing a farm or other rural property, whether a lake, a river or a stream.

 

Property Taxes
Just as you do in any other purchase of real estate, you need to contact the municipality to verify the amount of the property taxes and to check for any arrears that the Vendor may owe.

Ask the Vendor for the current year's property tax bill and the latest Property Assessment Notice.

Certain farmland is eligible for special property tax treatment. Under the Assessment Act, R.S.O. 1990, c. A.31, eligible farmlands in Ontario can be classed in the Farmlands Property Class and, under Section 363 (14) of the Municipal Act, R.S.O. 1990, c. M.45, taxed at 25 per cent of the municipal residential rate.

The Ontario Ministry of Agriculture and Food has produced a Factsheet for farmland owners regarding property taxes. Among other things, the Factsheet provides the eligibility criteria and the information that the Purchaser needs from the Vendor. The Purchaser's lawyer will need to ask for this information in the letter of requisitions.

Not every farm is eligible for the reduced property tax rate. There are provisions for a Purchaser to have the property become eligible. However, if the farm being purchased is being taxed at the full residential rate, the classification cannot be changed for the remainder of the current tax year. The Ontario Property Assessment Corporation can also re-classify the property so that the Purchaser has to pay property tax at the higher rate. If the Purchaser is buying early in the year and/or is counting on the reduced tax rate, consider putting a Warranty in the Offer to Purchase that the property is classed in the Farmlands Property Class and will stay as such for the balance of the calendar year, with the stipulation that if it is not, there shall be a reduction in the purchase price.

Purchase Price
There are at least 4 issues having to do with the purchase price.

The first issue is how the purchase price was arrived at? Often the price is so much per acre (or per hectare). This can be broken down into "workable acres" or "tile drained acres."

Sometimes the number of acres (or hectares) is very important to the Purchaser, particularly if the farmer needs a certain amount of land for the number of livestock units the farmer is planning to have. Maybe the farmer needs the land to dispose of the manure. This concept is similar to a developer needing a certain amount of land for a prescribed number of parking spaces which are required for an apartment or condominium complex.

Tile drained land is also more valuable than land which is not tiled.

Therefore, if the number or type of acres (or hectares) is of particular concern, you may want a clause in the Offer to Purchase stipulating what the price is per acre and that the Vendor and Purchaser acknowledge that there are X [tiled] acres being purchased at the rate of $ A per acre and Y [non-tiled] acres being purchased at the rate of $ B per acre. You may even want to provide for a survey to be done, in which case you will have to negotiate who pays for the survey. You will then want to allow for an increase or an abatement in the purchase price depending upon what a survey discloses in terms of acreage, or what the tile drain maps and plans show as to how many acres are tiled.

The second issue having to do with the price is the allocation of the purchase price to the various assets being purchased. The allocation needs to be done for various tax purposes, being the Income Tax Act, the Land Transfer Tax Act, the Excise Tax Act and the Retail Sales Tax Act. The prices for the various assets being purchased need to be included in the Offer. It is not sufficient to think that the Vendor and the Purchaser will agree on this allocation later. The Parties may want different amounts for the various items. For example, under the Income Tax Act, the Vendor will want to keep the price for the machinery as low as possible to avoid a recapture of the depreciation already claimed, whereas the Purchaser will want that price as high as possible for future depreciation purposes. Land Transfer Tax applies only to the land, fixtures and goodwill, whereas Retail Sales Tax applies to various tangible assets.

The third issue having to do with the purchase price involves purchases of livestock. The Agreement of Purchase and Sale may specify, for example, 25 cows and 5 calves. Consider what is to happen if the number of calves has increased to 8 by the Closing. Who is entitled to those additional calves on Closing? If the Purchaser is to own them, is there to be an adjustment in the purchase price? If so, how is the adjustment to be calculated? What if the Purchaser had not budgeted for the additional livestock units and cannot afford them? What if there are fewer numbers of livestock at the date of Closing? All of these matters need to be addressed in the Offer to Purchase.

Fourthly, if it is a dairy operation that is being acquired, consider what is to happen if the production of milk drops between the time of the Offer and the time of the Closing? That issue needs to be addressed in the Agreement of Purchase and Sale.
Purchaser - Taking Title
When advising the Purchaser on how to take title to the agricultural real estate, here are some things to consider:
1. Does the Purchaser already own any abutting land? Remember that these are not lots in a plan of subdivision.
2. Does the ownership of other assets, such as a marketing board quota, require that the real estate be owned in the same name(s)?
3. Who is going to operate the business?
4. Who is going to claim the farm profits for income tax purposes?
5. Is there a way of splitting income with the Purchaser's spouse and/or children?
6. Would the Purchaser be wise to incorporate a company to own the farm?

Before finalizing how title to the real property is taken, the Purchaser should be obtaining the advice of an accountant who is knowledgable in farm businesses.

If the Purchaser is taking title in any name other than how it is shown on the Agreement of Purchase and Sale, the Vendor needs to insist on receiving from the Purchaser on Closing a Direction regarding title. The Direction should be signed both by the Purchaser who signed the Agreement of Purchase and Sale and by the person in whose name title is to be taken.

In the absence of a stipulation to the contrary, the Purchaser has the right to assign his, her or its interest in the Agreement of Purchase and Sale. If you are acting for the Vendor, you need to decide whether you want the Purchaser to have that right, and, if so, whether you want the Purchaser to have to first obtain the approval of the Vendor. This issue becomes important if the transaction does not close, if the Vendor has agreed to take back a mortgage or hold a promissory note or if there may be a need for adjustments to the purchase price after Closing.

Quotas and Marketing Boards - Transfer
Some farm operations depend upon a quota from a Marketing Board. Examples include dairy, chicken, turkey and tobacco. These quotas often represent the most valuable single asset in the transaction. Therefore, you want to make sure that the quota can be transferred from the Vendor to the Purchaser without any problems.

Robert A. Wilson presented an excellent paper entitled "Marketing Boards, Quotas and Related Matters" at a Canadian Bar Association - Ontario (now Ontario Bar Association) Seminar on September 23, 1993, entitled "Farms: A Bumper Crop of Legal Issues." I commend his paper to you. (The names of some of the Marketing Boards have changed. For example, the Ontario Milk Marketing Board and the Ontario Cream Producers' Marketing Board merged in 1995 to form the Dairy Farmers of Ontario.)

Each Marketing Board has its own requirements and forms for transferring quota. If you are unsure of what is needed to complete the transfer, do not hesitate to contact the Marketing Board in question or, in the case of the Dairy Farmers of Ontario, the local field representative - whose name and phone number is on every milk cheque. The staff at the various Marketing Boards are more than willing to provide assistance to complete the quota transfer.

Usually transfers of quota are accomplished by the Marketing Board cancelling the quota of the "transferor" and issuing quota of a similar amount to the "transferee."

The Dairy Farmers of Ontario used to levy a "transfer assessment" which meant that a Producer could only sell 85 % of the quota to a new Purchaser, with the remaining 15 % being surrendered to the Dairy Farmers of Ontario. However, that practice was stopped in 1996. Now a dairy producer can transfer 100 % of the quota to the new Purchaser.

Some quotas, such as those issued by the Chicken Farmers of Ontario, cannot be sold without the transfer of the land. Other quotas, such as those governed by the Ontario Flue-Cured Tobacco Growers' Marketing Board, may be sold separately from the land.

In the case of a Chicken Farmers of Ontario quota, the application to cancel the Vendor's quota and to issue quota to the Purchaser is not made until after the transaction has been completed in the Land Registry Office. The Chicken Farmers of Ontario want to see proof that the land is registered in the name of the person to whom the quota is to be issued.

On the other hand, the paperwork to transfer milk quota needs to be in the hands of the Dairy Farmers of Ontario by no later than the 7th day of the month in order to be effective on the 1st day of the next month (which presumably will be the day of closing or the day after - if you close on the last day of the month). If the paperwork is not sent in until the middle of October, for example, you will not be able to have your milk quota transfer take place until the 1st day of December.

The time that it takes to complete the transfer of the quota (as far as the Marketing Boards are concerned) can vary. A chicken quota, for example, can usually be finalized within 2 weeks of the application being received by the Chicken Farmers of Ontario - although sometimes it could take a month. A tobacco quota, on the other hand, will normally take one month to have the transfer completed - although sometimes it could take up to two months (depending upon when the papers are received by the Tobacco Board and when the Board meets).

After the quota is transferred, sometimes the Purchaser of the quota is assessed penalties that were actually incurred by the Vendor of the quota. This is because there are time delays in reporting and monitoring production.

For example, in the case of chicken, the Vendor may have marketed more chicken than the Vendor was allowed. The Purchaser is liable for the Vendor's over-marketing. It could take up to 1 year after the closing of the farm sale to sort out the over-marketing. When chicken quota is involved, usually the Vendor and the Purchaser will arrange for compensation to be paid because of this over- (or under-) marketing in the past by the Vendor.

The Offer to Purchase should refer to the following:
1. The transfer of the quota. Be sure to provide as much detail about the quota as possible.
2. The Vendor will provide authorization to the Purchaser's lawyer to obtain information from the particular Marketing Board. (Without such authorization, the Board will usually only release information from its files to the producer Vendor.)
3. The Vendor will execute all the documentation necessary for the transfer of the quota.
4. The Purchaser will execute all of the documentation necessary to complete the transfer of the quota.
5. The Purchaser will want to have part of the purchase funds held in escrow or as a holdback until the quota transfer is complete.
6. The Purchaser will want to obtain assurances from the Vendor that the Vendor has not violated any of the rules and requirements of the Marketing Board, with appropriate safeguards in the event that penalties are imposed subsequent to Closing.
7. Even though the quota cannot be subject to a lien in the eyes of the Marketing Boards, the Purchaser should still insist that the Vendor provide a Warranty on Closing that there are no mortgages, liens, charges or encumbrances of any nature whatsoever encumbering the quota.

There may be penalties against the quota that have been levied by the specific Marketing Board. Therefore, the Purchaser's lawyer needs to inquire about the existence of any such penalties. However, because Marketing Boards do not recognize any 3rd Party liens or encumbrances that might otherwise be on a quota, the Purchaser's lawyer does not need to ask the Marketing Board if there are any liens or encumbrances on the quota.

Depending upon the type of quota with which you are dealing, you need to address the issue of who is entitled to the proceeds of the product on the day of Closing. For example, unlike some types of businesses, you cannot shut down a dairy farm on the day of Closing. While most dairy herds are milked twice each day, some herds are milked three times a day. At least one - and maybe two - of those milkings will take place on the Closing date before the transaction is actually completed.

When a Marketing Board quota forms part of the assets, be careful if you are buying the shares of a corporate farm. Any change in ownership of the shares is often treated the same way for quota transfer purposes as if the farm was owned by a non-corporation and was sold. For example, the Dairy Farmers of Ontario require a new licence to be issued any time that the information on the current licence changes. Thus, if the parents want to add a son or daughter to the quota, that change must be approved by the Dairy Farmers of Ontario. Likewise, if the parents are the sole shareholders of a family farming corporation and they want to transfer some or all of the shares in the company to a child, the Dairy Farmers of Ontario must approve that transfer and issue a new licence.

Quotas and Marketing Boards - Security
Quota is not personal property within the meaning of the Personal Property Security Act. If the Purchaser is financing the purchase of the farm, including the quota, either through a financial institution or by giving a mortgage back to the Vendor, or both, how can the creditor obtain security over the quota? This issue has been addressed in several cases, including:
1. Re National Trust Co. and Bouckhuyt (1987), 61 O.R. (2d) 640 (Court of Appeal) - tobacco quota.
2. Canadian Imperial Bank of Commerce v. Hallahan (1990), 69 D.L.R. (4th) 499 (Ontario Court of Appeal); leave to appeal to the Supreme Court of Canada refused (see [1990] S.C.C.A. No. 372) - milk quota.
3. Bank of Montreal v. Bale (1991), 5 O.R. (3d) 155 (General Division); affirmed by the Ontario Court of Appeal (see [1992] O.J. 2395); leave to appeal to Supreme Court of Canada dismissed (see [1993] S.C.C.A. No. 2) - milk quota.
4. Ontario Dairy Cow Leasing Ltd. v. Ontario Milk Marketing Board, [1993] O.J. No. 464 (Court of Appeal), overruling [1990] O.J. No. 1864 - milk quota.
5. Bank of Montreal v. Bale (1994), 19 O.R. (3d) 187 (General Division) - milk quota.
6. Tuboly v. Kalocsai, [1995] O.J. No. 1138 (General Division) - chicken quota.

The end result of the above cases appears to be as follows:

1. Do not include the quota in a chattel mortgage. Quota is not personal property within the meaning of the Personal Property Security Act and cannot be secured under a chattel mortgage.
2. Include the quota in a General Security Agreement.
3. Define "collateral" in the General Security Agreement to include:
a) all collateral described in the Schedules attached;
b) all statutory licences, quotas and other transferable rights, including an equitable right in the collateral assigned or charged under the Security Agreement which might otherwise at law be incapable of being collateral creating a security interest.
4. Make sure that the quota is specifically referred to in the Schedule of things assigned, transferred and set over to the Lender.
5. Make sure that the General Security Agreement stipulates that the Borrower agrees that he, she or it will not in the ordinary course of business or otherwise, without the prior written consent of the Lender, sell or dispose of any of the collateral referred to in the Schedule.
6. Include a specific clause in the General Security Agreement that the Borrower shall not sell, transfer, surrender, encumber (other than by this General Security Agreement) or otherwise dispose of the [milk] quota, or any portion thereof, without the prior written consent of the Lender.
7. Make sure that the General Security Agreement also stipulates that the Borrower assigns, transfers and sets over to the Lender all of the Borrower's present and future intangibles, including the Borrower's chattel paper, contract rights and other choses in action of every kind or nature.
8. In the General Security Agreement have the Borrower grant a floating charge in favour of the Lender in all of the Borrower's property and assets, real and personal, moveable or immoveable, of whatsoever nature and kind, both present and future other than assets validly assigned or subject to a specific mortgage and charge under the Security Agreement.
9. Include in the General Security Agreement an assignment of all proceeds payable to the Borrower arising from the quota or licence.
10. Register the General Security Agreement pursuant to the provisions of the Personal Property Security Act.
11. In the Financing Statement consider providing some detail when completing the "General Collateral Description" on lines 13, 14 & 15.
12. Also consider including reference to the quota in the land mortgage with wording such as:
"The Chargor covenants, promises and agrees that so long as any monies secured by this [land] Mortgage remain unpaid, the quota is deemed for mortgage purposes to be affixed to and to run with and to form part and parcel of the land hereby mortgaged and the quota shall be maintained by the Chargor in good standing and the Chargor shall not apply to the [specify the Marketing] Board for permission to sell, transfer or otherwise dispose of or cancel all or any part of the quota without first obtaining the written consent of the Chargee."
13. Notify the subject Marketing Board of the security interest of the Lender in the quota, including the Notice of the Assignment and the fact that the Borrower/Producer has agreed to not sell, transfer or otherwise dispose of the quota, or any portion thereof, without the prior written consent of the Lender. If this is done, sometimes the Marketing Board will advise the Lender if the Producer applies to transfer the quota. Some Marketing Boards, such as the Chicken Farmers of Ontario, will also require the Consent of the Lender before the transfer can become effective, if the Board has been notified of this provision.
14. Notice of such Assignment should also be given to any other 3rd party who is expected to make payment to the debtor by reason of the quota.

If the Lender is the Vendor, reference to the above clauses will have to be included in the Agreement of Purchase and Sale.

Reporting Letter
While you will have the usual items to deal with when you report to your client, each reporting letter will be a little different. By reviewing the various topics in this paper, you can tailor your reporting letter to your situation.
When acting for the Purchaser and commenting on the Property Taxes:
1. Remind your client to apply to the Ontario Ministry of Agriculture and Food to have the property classed in the Farmland Property Class so that the land is taxed at the reduced rate for property taxes. There is a deadline for the Purchaser to send in the application. If that deadline is missed, the Purchaser will be required to pay the full property tax for the following year.
2. If the land that your client is buying has a substantial woodlot on it, you can refer your client to the Ontario Woodlot Association for information on how he or she may be able to obtain a property tax rebate.
 

Requisitions - Other
 Here is a list of some of the requisitions that did not fit under one of the other headings

- Compliance with the Family Law Act
- Declaration of Possession from the Vendor
- Warranty that premises are not insulated with and do not contain urea formaldehyde foam insulation - UFFI
- Vacant possession
- All keys for the buildings and the equipment
- All Manuals and Warranty cards for the assets being purchased

Retail Sales Tax
Provided that they are used exclusively in the business of farming by a farmer, the Retail Sales Tax Act, R.S.O. 1990, c. R.31, exempts from retail sales tax the following:

1. farm implements,
2. farm machinery,
3. farm equipment,
4. farm supplies,
5. livestock,
6. crops,
7. agricultural products, and
8. agricultural feed.

- see Section 7 (1) (13) and Section 7 (1) (15) of the Retail Sales Tax Act.
However, in order to receive the exemption, the Purchaser's lawyer needs to complete an Exemption Certificate. This Certificate is then presented to the Land Registrar at the same time that the Transfer/Deed is presented.
When the Bulk Sales Act applies, the Vendor must also comply with Section 6 of the Retail Sales Tax Act, R.S.O. 1990, c. R.31.
Road Allowances and Closures
Your title search may reveal that a portion of the rural property is on part of an original road allowance which has been closed. You must make sure that the road allowance was properly closed and conveyed to the Vendor or the Vendor's predecessor in title. The procedure is set out Sections 297 to 317 of the present Municipal Act, R.S.O. 1990, c. M.45. The new Municipal Act, S.O. 2001, c. 25, (which comes into effect on January 1, 2003) will deal with the closing of roads in Sections 37, 38, 66, 67, 68 and 268.

Section 24 (3) of the Public Transportation and Highway Improvement Act, R.S.O. 1990, c. P.50, requires the consent of the Minister of Transportation before a road which gives access to a provincial highway can be closed.

You cannot obtain possessory title of a road - even after 60 years.
Searches
When you are acting for the Purchaser of agricultural and other rural property, here are some of the searches that you need to perform:
1. Title search - either in the Land Registry Office or online - be sure to give yourself lots of time after the removal of all of the conditions to complete the title search
2. Abutting Land search
3. Execution search
4. Property Taxes
5. Building and Zoning search
6.

Drainage Act Assessment 

7. Tile Drainage Loan 
8. Line Fences Proceedings or Awards 
9. Highway Access
10. Unregistered Hydro Easements 
11. Corporate search 
12. Water Quality and Quantity 
13. Septic System search 
14. Conservation Authority 
15.

Ministry of the Environment

16.

Personal Property Security Act

17. Bank Act
18. Normal Farm Practices Protection Board
19. Mining Act inquiries
20. Managed Forests
21. Public Lands Act

 

Securing the Farm Loan
The value of farms today usually makes it imperative that the Purchaser will have to borrow money to complete the transaction. Therefore, you want the Agreement of Purchase and Sale conditional on the Purchaser being able to arrange satisfactory financing on terms and conditions that are acceptable to the Purchaser.

When we talk about Lenders, they can be a 3rd party such as a bank or the Vendor farmer. The security can include a land mortgage, a chattel mortgage, a promissory note and a general security agreement. For a discussion on using quotas as security.

Bank Act

The federal Bank Act, S.C. 1991, c. 46, allows for registration of a lien against certain farm assets. Section 427 security can include livestock, crops, equipment (which are items affixed to real property) and implements (which are tools and machines generally and are not affixed to real property). (Section 425 is the definition section.)

Thus, if your purchase includes any equipment, implements, livestock or crops, you will need to do a Bank Act search. The easiest way is to use a search service such as Dye and Durham.

Insurance

Whether you are acting for the Lender or the Purchaser, you will want to make sure that the Purchaser has adequate insurance (including liability) on all of the assets being acquired in the transaction. You may also want to have the Purchaser obtain life insurance for the duration of the loan.

Land Mortgage or Charge

There are very few farm purchases today that do not involve a mortgage or charge of the land being purchased. If the Lender is a financial institution, it will provide you with the special terms that it wants to include in the mortgage. If the Vendor is taking back a mortgage, the terms of that mortgage need to be specified in the Agreement of Purchase and Sale.

Leased Land

If any of the security, such as crops, is located on leased land, the Lender will require a waiver from the landlord to ensure that the Lender can enter the land to harvest the crops and do whatever else is necessary.

Personal Property Security Act - PPSA

This is not a paper on the Personal Property Security Act. There have been many excellent papers presented on the subject. I just want to point out some things that you should keep in mind.

The Offer should direct the Vendor, after all of the conditions have been removed, to provide the Purchaser with a copy of the Vendor's birth certificate so that the Purchaser can conduct a proper search under the Personal Property Security Act.

When preparing your chattel mortgage, make sure that you describe the collateral with as much clarity as possible. Failure to use the correct description of the collateral has been challenged several times in the Courts.

As I have said under "Crops," don't just say "all crops." Describe the crops by their kind and the legal description of the property upon which the crops are being grown. However, be aware that a farmer may grow one type of crop this year and another type next year. When the collateral includes crops, you can register a Notice of Security Interest in the Land Registry Office, pursuant to Section 54 of the Personal Property Security Act.

You also want to keep in mind Section 12 of the Personal Property Security Act when crops are involved in the transaction. Section 12 (2) (a) states in part:

"No security interest attaches under an after-acquired property clause in a security agreement to crops that become such more than one year after the security agreement has been executed, except that a security interest in crops that is given in conjunction with a … mortgage of land may, if so agreed, attach to crops to be grown on the land concerned during the term of such … mortgage."

Describe the animals by their breed, markings and registrations. Farm machinery and tools should be described by the manufacturer, make, model and serial number together with the appropriate description of all of the attachments.

As I have already said under "Fixtures", your transaction may include some substantial fixtures such as prefabricated silos erected on concrete pads, feeding and watering systems and milking systems. If you are acting for the Lender, it is prudent to protect the interests of the Lender in these fixtures either by way of a mortgage or, at least, by way of the filing of a fixtures notice against title to the land in the time and manner provided for in Sections 34 and 54 of the Personal Property Security Act.

Sewage System
Most rural lands have a private sewage system for the disposal of human sewage.

Prior to April 6, 1998, all sewage systems on farms and other rural properties were regulated by Part VIII of the Environmental Protection Act, R.S.O. 1990, c. E.19. Section 78 of that Act stated that a permit was required for any sewage system installed or altered after April 15, 1974. To check for a permit, you most likely would have written to your local Public Health Office. Part VIII was repealed effective April 6, 1998. However, Section 28 of the Environmental Protection Act provides for the remaining in force of permits which had been issued pursuant to Section 78.

On April 6, 1998, the Services Improvement Act transferred most of the regulation for small on-site septic systems - those handling less than 10,000 litres a day - from the Environmental Protection Act to the Building Code Act. Municipalities are now responsible for inspecting and approving septic systems.

The legislation allows a municipality to delegate the inspecting and approving of septic systems to someone else in certain cases. So where do you do your search now to make sure that a valid septic system permit has been issued for the property that your client is buying? The practice varies from municipality to municipality. In Huron County, for example, some municipalities do the inspections and approvals themselves, whereas others delegate those tasks to the Huron County Health Unit (who had been doing them under the old legislation). Therefore, you are going to have to find out what the practice is in the municipality where the subject property is located.

You need to find out from the Vendor when the sewage system was installed. Was it pre-April 15, 1974 or post? If it was pre-April 15, 1974, then you need to ask if there has been any work done on the system since April 15, 1974.

You will have to write to whomever is responsible for inspecting and approving private sewage systems in the municipality in which the subject land is located, and ask them the following:
1. Does that body have the sewage system records dating back to April 15, 1974?
2. If they don't have the records pre-April 6, 1998, ask them who does.
3. Ask for a copy of all of the permits that were issued for the system at any time.
4. Ask if there are any outstanding work orders for the system.

Include a provision in the Offer to Purchase which allows the Purchaser to have a qualified person attend the property prior to Closing to conduct an independent inspection of the septic system.

The Purchaser can also phone the person who last pumped the system and ask questions about the condition of the tank and the system.

You will want the Vendor to provide you with the following Warranties on Closing - at least to the best of the Vendor's knowledge and belief, regardless of when the system was installed:

1. The age of the sewage system;
2. A copy of any permits that were issued after April 15, 1974;
3. Copies of any other paperwork that the Vendor has concerning the system;
4. That the sewage system is in good working order, has been in good working order for the past 12 months and will be in good working order at the day of Closing;
5. That there are no outstanding work orders regarding any part of the sewage system; and
6. When the septic tank was last pumped and by whom.

Of course, if the Purchaser intends to build a residence on the property, the Agreement of Purchase and Sale should be conditional upon the Purchaser obtaining prior to Closing a Septic System Certificate of Approval so that the Purchaser can install a septic system after Closing.

Statement of Adjustments
The Statement of Adjustments will include some or all of the following items:
1. Deposit
2. Charge/Mortgage back to the Vendor
3. Balance owing on Charge/Mortgage - if one is being assumed by the Purchaser
4. Adjustment for property taxes
5. Adjustment for municipal drain
6. Adjustment for tile loan - if it is being assumed by the Purchaser
7. Insurance - if it is being assumed by the Purchaser
8. Oil - if heating done by oil
9. Propane - if heating done by propane
10. Money paid or to be paid by or to a third party for rent of any of the land being purchased or for the continuation of the rental of any land that the Vendor had been using and which lease will be continued by the Purchaser
11. Prepaid rent or rent still to be paid under any oil and gas lease
12. Diesel fuel on hand
13. Gasoline fuel on hand
14. GST - if it is to be collected

 

Survey
It is not very common to find a survey of a farm already in existence. Some lawyers routinely want a survey. Other lawyers rarely ask for one. Whether you want a survey will depend on a number of factors, including:

1. does an old survey already exist;
2. amount of land being purchased;
3. how the boundaries are defined;
4. how long the Vendor has owned the land;
5. what the use of the property will be;
6. whether you need a precise number of acres (or hectares);
7. the dollars being spent; and
8. the requirements of the lender.

If the Purchaser wants or needs an up-to-date survey, consideration should be given before the Offer to Purchase is prepared as to who will pay for the survey and the appropriate wording included in the Offer.

Use of Property
What use will be made of the property being purchased? There is a strong tendency to preserve agricultural usage of property. It is becoming harder and harder to obtain severances for non-agricultural uses.
You will need to look at and be familiar with the following documents of the municipality in which the property is located:
1. The Official Plan.
2. The Secondary Plan.
3. The Zoning Bylaws.
When you contact the municipality, you will want to inquire about the following:

1. Verify that the Purchaser's proposed use of the property complies with the zoning bylaw;
2. Whether there are any known infractions of the present zoning bylaw;
3. Ask if a new zoning bylaw is being worked on;
4. Are there any outstanding work orders; and
5. Whether there has been compliance with all other bylaws.

On May 11, 1998, the Farming and Food Production Protection Act, S.O. 1998 came into force.
That Act recognizes that agricultural activities may include intensive operations that may cause discomfort and inconvenience to those on adjacent lands. There is provision in the Act for a hearing before the Normal Farm Practices Protection Board. Therefore, early in the transaction the Purchaser will want information from the Vendor about any Notices served or Hearings scheduled pursuant to this Act, with a Warranty on Closing that none are pending.

When talking about the use of property, Ontario farmers (and their lawyers) also need to be aware of:

1. Guide to Agricultural Land Use (formerly known as the Agricultural Code of Practice). This document, is issued by the Ministry of Agriculture and Food.
2. The Nutrient Management Act, which is expected to take effect in the Spring of 2003.

 

Warranties
Throughout this paper, I have mentioned Warranties. When you are acting for the Purchaser, you want to obtain the best Warranties for your client that you can. On the other hand, when you are acting for the Vendor, you want to have your client give as few Warranties as possible.
Water Supply
Most rural land obtains its drinking water from a well. Therefore, the Purchaser will want to ensure a safe and adequate water supply.

On the issue of safe water, include a condition in the Offer to Purchase that the water is safe for consumption by humans and by whatever the livestock is that will be on the property. In order to verify the safety of the water, you will want to do all of the following:
1. Include a provision in the Offer which allows the Purchaser or his or her agent to obtain suitable water samples for testing. The reason I say the "Purchaser" is because I once had a situation where someone on behalf of the Vendor obtained a water sample from a well on a different parcel of land altogether!
2. Provide for the taking of several samples on different dates prior to the Closing.
3. Obtain a Certificate from a qualified laboratory certifying that the existing water supply from the well on the subject property is fit for human consumption.
To address the issue of adequacy, make the Offer to Purchase conditional on there being a sufficient pumping and flowing capacity to supply the water needed for the farming operation. In order to verify the adequacy of the water supply, you will want to do one of the following:
1. include a provision in the Offer which allows the Purchaser to have a qualified person attend the property to check this out. A well driller's certificate can certify that there is an adequate flow of water; or
2. put a clause in the Offer that the Vendor will provide to the Purchaser on or before the Closing date a Well Driller's Certificate dated subsequent to the acceptance of the Offer certifying that the existing well is capable of delivering a minimum of X gallons (or litres) per minute.
On Closing, the Purchaser will want Warranties from the Vendor which cover:
1. The quality of the water supply;
2. The quantity of the water supply; and
3. The fact that all of the components of the equipment which deliver the water are in good working order.
Provincial licences are required by those persons who construct and work on wells and install pumps. At the present time in Ontario, it is not necessary to obtain a permit to dig or drill a well. However, that may change in the future with the changes that are coming regarding drinking water in Ontario.
For more information on water and wells, please refer to:
1. The Ministry of the Environment's Water web site.
2. The Ministry of Agriculture and Food's Water web site.
 
Waterways
Section 1 of the Beds of Navigable Waters Act, R.S.O. 1990, c. B.4 states in part:
"Where land … borders on a navigable body of water or stream, … or through which a navigable body of water or stream flows, … it shall be deemed, in the absence of an express grant of it, that the bed of such body of water was not intended to pass and did not pass to the grantee."

Hence, if the waterway is navigable, the Crown (in the absence of an express grant) still owns the bed of the water. In that situation, you do not have abutting land, even if the landowner owns land on both sides of the navigable waterway. In other words, you have a natural severance.

But what is a "navigable waterway"? This issue has been addressed in several Ontario cases, including:
1. Casselman v. Ontario (Ministry of Natural Resources), [1994] O.J. 2180
2. Canoe Ontario v. Reed, (1989), 69 O.R. (2d) 494
3. Re Coleman and Attorney-General for Ontario, (1983), 143 D.L.R. (3d) 608
The criteria in Ontario as to what is "navigable" seem to be as follows:
1. A stream is navigable in law if it is navigable in fact.
2. A stream must be capable in its natural state of being traversed at least by small craft, such as canoes, kayaks or rafts.
3. Navigable also means "floatable" in the sense that the river or stream is used or is capable of use for floating logs, log rafts or booms.
4. A stream does not have to be used for navigation so long as it is realistically capable of being so used.
5. The test of navigability does not require that the stream be capable of navigation in the furtherance of trade and commerce.
6. The essence of the test of navigability in law is that a stream be a public water highway used or capable of being used by the public.
7. A stream is not navigable if it is used only for the private purposes of the owner.
8. Navigation need not be continuous, but may fluctuate seasonally, provided that the use is regular and has practical value.
9. A stream may be navigable over part of its course and not navigable over other parts; it will depend on the facts of a particular situation.
10. Interruptions to navigation of a natural kind, such as rapids, which may, by improvements, be readily circumvented, do not render the stream non-navigable.

If the river is not navigable, there is a presumption that a conveyance to the water's edge includes title to the centerline of the bed of the river. In other words, the beds of non-navigable waters are owned by the persons who have title to the abutting lands. Therefore, a non-navigable waterway does not sever a farm or other rural property. - Derro v. Dube et al, [1948] O.R. 52, affirmed on appeal at [1948] O.W.N. 758

 
Woodlots
Sometimes a farm or other rural property contains a substantial forest. Private landowners in Ontario have the right to manage their forests as they see fit. However, there are incentives for practising ecologically sound forest management.

One of these incentives is the Managed Forest Tax Incentive Program - MFTIP. It is a voluntary program that provides lower property taxes to participating landowners. The Ministry of Natural Resources is responsible for landowner eligibility under this program. Qualifying forest land is taxed at 25 % of the residential tax rate.
If the conditions of the managed forest plan are not followed, the forest will lose the preferential property tax treatment. Therefore, the Purchaser's lawyer needs to make inquiries about the existence of any forest management agreements. The Purchaser can then decide whether to continue with the agreement or to terminate it. If the agreement is terminated, there may have to be compensation or reimbursement to the Ministry for services provided to date. Therefore, this issue needs to be dealt with in the Offer to Purchase.

The Forestry Act, R.S.O. 1990, c. F.26, provides for forestry management agreements. Some earlier agreements with the Ministry of Natural Resources were made pursuant to the Woodlands Improvement Act (which was repealed effective December 18, 1998). Section 4 of the Forestry Act deems agreements that were made under the Woodlands Improvement Act to be agreements under Section 2 of the Forestry Act. Section 3 of the Forestry Act allows for registration in the Land Registry Office of Section 2 agreements.

If you find that the subject land appears to have a reservation for Crown Timber, you want to make sure that the reservation is still valid. Therefore, you need to look at Section 58 of the Public Lands Act, R.S.O. 1990, c. P.43. If you decide that the reservation is still valid, there are 3 options for the landowner:
1. The landowner can decide not to do anything.
2. The landowner can contact the local office of the Ministry of Natural Resources and request that the reservation be released pursuant to the provisions of the Public Lands Act. The landowner will have to pay the Ontario Government the present net value of the timber.
3. The landowner can contact the local Ministry of Natural Resources office and request a licence to harvest the trees. This request is provided for in Section 29 of Ontario Regulation 167/95 which is made pursuant to the Crown Forest Sustainability Act, S.O. 1994, c. 25.

For more information about the Managed Forest Tax Incentive Program or other woodlot information, you can refer to the following web sites:

- Ontario Woodlot Association
- Ontario Ministry of Natural Resources

Conclusion
Whether you are the Vendor or the Purchaser, there is a great deal of work and skill required to negotiate and complete a farm transaction.

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