Q: I want to sell farmland to my nephew. He doesn’t have money for a down payment and can’t get a mortgage. I am thinking of letting him buy the land over time, and wondered what are advantages or risks in doing it this way.
A: The obvious advantage to your nephew in buying the land this way is that he does not have to come up with the usual down payment and can simply make payments to you over time. The advantage to you is that you can make some additional interest in this way by, in effect, acting as the bank for him.
But there are serious cautions you should keep in mind. As the seller, the arrangement might not be as simple as it seems on the surface. Because you are entering into a contract for the purchase of land, it is covered by legislation governing such transactions. In Saskatchewan, the Land Contracts Actions Act covers agreements for sale where land is purchased over time, as well as mortgages. So if the agreement for sale between you and your nephew goes sour and has to be cancelled (most often that happens when the payments aren’t being made) you will have to apply to the court to cancel the contract similar to how a bank applies to foreclose on a mortgage. This legislation applies, unless your nephew is incorporated, whether you want it to or not: an individual debtor can’t opt out of it and it is for the debtor’s protection.
Other matters you have to deal with include who pays the taxes on the land, hail insurance and fire insurance on buildings.
What about farming practices? Do you as the seller still have a say over cropping and weed control? All these matters should be discussed and put in your agreement.
The obvious risk to your nephew is that, although he is putting money into that land and farming it, his name doesn’t get onto the title until he finally pays all the money. He will be advised to have an interest (formerly known as a caveat) registered against title to the land he is buying, to make sure his agreement for sale and the equity he is building up in that land are apparent to anybody who might want to buy the land.
This method of land purchase is often used today. It is important that the services of a lawyer are used to draw up the agreement for sale and to make sure that the interest is properly registered to protect the buyer. The seller will want to make sure the buyer is financially stable enough to make payments and both parties need to be ready for the long- term relationship this sort of agreement entails.