Share farming arrangements can be a valuable arrangement for a primary producer who wants assistance in growing and managing their business, or for one who wants to grow their own business but lacks the capital to acquire land of their own. However, this arrangement can result in significant costs or an inequality in the share of any profits from the mutual arrangement if improperly drafted.
What is a share farming arrangement?
A share farming arrangement can take a number of different forms. For example, it may be an agreement for the supply of the land and day-to-day operations by one person, and the supply of other essential items for the operation (such as infrastructure, machinery or livestock) by another.
The parties enter in to the arrangement for the benefit of both parties, including a share of any profit, or liability for any loss, at the end of the transaction. It is, at first glance, an ideal arrangement for primary producers without sufficient capital to acquire their own land, or investors or landowners who do not want the day-to-day management, to collaborate for their mutual benefit.
Beware of hidden costs
In negotiating the terms of any agreement, it is essential to consider and determine how profit will be shared when it is time for profits (or losses) to be distributed. While the party who has injected funds into the venture should have those funds returned, it is also important to consider what monetary value the land owner provides.
If the agreement says losses will be shared – in what proportion? We have seen agreements where, despite stating losses would be "shared", the fine print allocated full losses to only one party. That is not an arrangement that supports a purported "sharing" of risk.
Key principles of any share farming arrangement should include:
- identifying the assets or capital to be contributed by each party
- the term of the arrangement
- liability for day-to-day costs associated with the arrangement
- that any party claiming a refund on their expenses provide sufficient evidence of their expenditure, for example, by way of verifiable third-party invoices
- a clear identification of any administrative costs which may be claimed, and how these are to be calculated
- clear and transparent procedures for any sales.
Careful consideration should be given to whether a share farming arrangement is the right structure to meet the needs of both parties, or whether the arrangement would be better suited by the provision of a lease or another alternative structure.
Given the complexities that can arise when it is time to realise the proceeds from the arrangement, it is essential that both parties obtain independent advice and enter into a formal agreement which clearly sets out their rights and obligations before commencing the arrangement.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.