Contracts have become an everyday part of life for farmers and livestock producers. From mortgages and promissory notes to pasture leases and bill of sales, legal documents have permeated the agricultural world. A general understanding of these legal documents has become important in order to both protect yourself and know what rights and interests you are giving up or assigning to others. This section focuses on secured transactions and the Uniform Commercial Code, bill of sales, pasture and farm leases, and production contracts.
Secured transactions and the Uniform Commercial Code
Farmers and livestock producers have become increasing dependent on creditors as a primary means of financing their land, machinery, crops, and livestock. For this reason, it is very important to have a basic knowledge of how these transactions work and of the rules that govern them. When loaning money to a farmer or livestock producer, the creditor will frequently take a security interest in something that the farmer owns. This security interest may be in the land, home, farm equipment and implements, livestock, crops, or any other property in which the farmer has an ownership interest. A secured transaction occurs when a creditor grants credit and in return is given a security agreement that grants a security interest in property of the obligated party. The creditor who receives the benefit of the security agreement is the secured party and the party giving the interest is the obligor. The property in which the security interest attaches is referred to as collateral. If the obligor defaults on the loan and security agreement, the secured party may take possession of the collateral. If the obligor becomes bankrupt, the secured party may receive the collateral through the bankruptcy estate rather than receive only a portion of the estate after it is divided among all the obligor’s creditors.
A secured transaction has two primary stages: attachment and perfection. Attachment occurs at the point in time when the security interest becomes enforceable against the obligor. This happens when value is given by the secured party to the obligor and the obligor has signed and delivered a security agreement to the secured party containing a detailed description of the collateral. Attachment can also occur if the secured party is given or takes physical possession of the collateral. Attachment does not require any additional steps such as the filing of the security agreement. Attachment happens instantly at the point value is exchanged for the security agreement.
The second stage is the perfection of the security interest. Perfection occurs at the point in time when 3 things have occurred: 1) the obligor signs a security agreement or the lender has collateral, 2) the obligor owns the collateral, and 3) value is exchanged. These can occur in any order. To have a perfected security interest under the Uniform Commercial Code (UCC), the secured party must file a UCC Financing Statement detailing the nature of the security interest and describing the collateral or the secured party must have physical possession of the collateral.
The basic rules concerning secured transactions are found in Article 9 of the Uniform Commercial Code. This section of the Uniform Commercial Code has been adopted by all fifty states and the District of Columbia. Though each state designates where the UCC Financing Statement should be filed, the basic form of the filing is uniform among the states. Each state has designated a central filing office so as not to have financing statements spread out across each of the counties or parishes of the state. Many states have designated that the Secretary of State shall be the office responsible for recording UCC Financing Statements. Other states have designated offices such as the Corporation Commission or the County Clerk in a central county as the office responsible for recording UCC Financing Statements.
Article 9 of the Uniform Commercial Code places the responsibility of determining the proper form of the filing and the proper place of filing of a security interest with the party filing the document. Article 9 states that a filing office may refuse to accept a record for filing only for certain specified reasons. The fact that a record is accepted for filing does not necessarily mean that the filing is effective for the purpose intended by the filer. If you have any questions regarding the filing of a UCC Financing Statement, you should seek legal advice to determine what should be filed and where it should be filed. Attachment A is a sample copy of a UCC Financing Statement. This form can also be found on-line in both PDF and document formats by searching for “UCC1 Financing Statement.”
Bill of sale
A properly executed bill of sale is a legal document establishing the transfer of ownership of personal property, whether tangible or intangible, from one person or party to another. A bill of sale is a useful document because it evidences that value was given in exchange for the specific piece or pieces of personal property listed on the Bill of Sale better than a simple receipt. A bill of sale should include the legal names of both the buyer and the seller, the purchase price of goods sold, and the effective date of the sale. A bill of sale should be signed by the seller and generally should be notarized by a Notary Public. Though there is no uniform bill of sale, it is recommended that a bill of sale should include language verifying that the grantors are the lawful owners of the goods being sold, a detailed description of the property being sold, and an acknowledgment that there are no outstanding liens against the property.
A properly executed bill of sale will establish the effective date of the legal transfer of ownership of personal property listed in the document. This is important because it does not matter who has physical custody of the goods once the bill of sale is signed and executed. A bill of sale does not need to be filed or recorded with any government agency to be valid. The signing and execution of a bill of sale is prima facie evidence, meaning valid on its face, that money has been paid and that ownership of the property has been transferred.
A bill of sale protects both the buyer and the seller by setting out in detail the terms of the transaction. Without a bill of sale there is no documentation or legal proof as to specifically what, if any, goods were sold and the agreed price of those goods. A bill of sale should be executed when purchasing or selling, especially to a private party, of farm equipment, animals, implements, crops, etc. Further, a bill of sale should always be used when buying or selling livestock. A bill of sale for livestock that is registered, or that potentially can be registered, with a specific registry should include the specific information or registration number for each animal being sold. Many registries will require a bill of sale in order to show a transfer of ownership in their records. When purchasing registered animals you should contact the registry and determine whether there is any specific form they require for a bill of sale. A sample bill of sale is found in Attachment B.
Goat registration
The subject of the registration of goats is difficult to address because there is no industry wide standard for registration. Instead, registration of specific breeds is governed by various associations which generally deal with a specific goat breed. Goat registration is strictly done on a voluntary basis and is not required by state or federal law. Though not mandatory, goat registration is of importance to those involved in the goat industry as a means of keeping track of breed bloodlines as well as keeping a central database of breeders and owners within the breed. In addition, registration gives an owner a means of identifying members of his herd in case they are lost or stolen. Each association has its own standards and procedures for registering animals with their association. Some associations recognize the registration of herds as well as individual goats. Most associations require information including registration number of the sire and dam as well as information about the person registering the animal. For information about registration of a specific breed, please contact the association regarding standards and procedures, as well as costs, of registering your animals.
Pasture and farm leases
Pasture and farm leases can be a very useful tool when beginning a farming or livestock operation. The leasing of farm and pasture land can also be a useful way for existing farming and livestock operations to increase their size and production without having the capital necessary to purchase new land outright. When leasing real property, first make sure that all terms of the lease are in writing. Though most states recognize that oral leases for land less than one year in length are legally enforceable, without the terms of the lease being in writing a court has no way of knowing the exact terms of the lease. The focus of this section will be on those clauses that are generally necessary for a fully detailed and legally enforceable lease. It is important to remember that contract law varies from state to state and that the following is only an informational overview and should not be relied upon to be legally enforceable in your state.
The first issue when negotiating a farm or pasture lease is the duration of the lease. A farming operation that is relying on the continued use of the leased land needs to find land where a multi-year lease can be agreed upon. The lease agreement should state an exact period of time that the lease is valid. The lease should have an identifiable ending point so as to avoid any confusion as to when it expires. Further, you might want to negotiate extensions to the lease. An example of a lease extension is to state that the lessor shall have the option at the end of the lease period to renew the lease for a specified period. It is common when negotiating lease extensions to also negotiate the future price for each extension of the lease. The critical issue is not to become dependent on leased land only to lose the land because the lease signed did not adequately protect your needs. By negotiating these issues up front, you can avoid leasing land where you will only be able to negotiate a short term lease if your intent is to lease for a long term.
The second item when negotiating a lease is the issue of compensation to be paid to the landowner. A little research about land values and lease prices before entering into negotiations will help you settle on a price that is fair and reasonable to both parties. Lease prices can be affected based on land location, lease duration, and availability of land in the area. In some circumstances the lease price can be tied to the production or crop yield of the leased land. This type of lease protects the person leasing the land by shielding them from loss in case of a bad production year. In addition to negotiating the amount of compensation for the land, you must also determine how that compensation will be paid. Pasture and farm leases can be paid annually, monthly, or any other way that is mutually agreeable to both parties. Many farmers and livestock producers prefer to set up the lease payments on an annual basis since their income is based on a production season instead of a regular monthly income.
An issue that does not legally affect the validity of the lease but which is important none the less is that of “leasehold improvements.” Leasehold improvements are improvements to the land made by the tenant for the benefit of the tenant during the term of his or her lease of the property. Common examples of leasehold improvements include barns, fences, corrals, wells, and other permanent fixtures to the land which cannot easily be removed from the land when the lease term is over. Improvements that are not fixed to the land, such as portable stalls, above ground water distribution systems, trailer homes, and electric fence systems, do not become attached to the land and remain the property of the tenant. Leasehold improvements, as a general rule, remain with the land at the end of the lease and become the property of the landowner. The time to discuss leasehold improvements with your landlord is during the initial negotiations and not after the signing of the lease. It is often in the best interest of a tenant to negotiate a long term lease for property where major leasehold improvements will be required in order to receive the anticipated benefit from the leased land. Additionally, it may be possible to negotiate a better lease price for the land if the landowner knows in advance that you intend to make significant improvements to his/her property.
Another issue that should be dealt with in negotiation is the issue of termination. Both parties should agree as to when and how the lease should be terminated and the requirements for notice of termination. Further, issues such as any acts of the tenant that would constitute a breach of lease, i.e., abandonment or failure to make lease payments in a timely fashion, should be discussed as well as the tenant’s rights if the property should be transferred or condemned during the lease period. It is important to remember that the more issues that can be settled prior to the preparation and signing of the lease the easier a working tenant/landlord relationship can be established.
Once the negotiation of the lease terms is completed, either party can be charged with the responsibility of drawing up the lease. The lease must positively identify each party to the lease and include the legal description of the land subject to the lease. The lease must include all of the negotiated terms of the lease including duration, compensation, and any other terms that are relevant to the lease such as who is responsible for insuring the property. A more thorough and detailed lease will lead to less misunderstanding and confusion and less likelihood of the disputed issue ending up in court. A sample Pasture Lease can be found in Attachment C.
Production contracts
Production contracts are a legally binding contract between a producer and processor by which a producer agrees to acquire, feed, and care for livestock until such time that the livestock is transported to the processor in exchange for a payment that has been set out in the production contract. Production contracts can be beneficial to both parties involved. A production contract is a way for a processor to insure a steady supply of goods or livestock of a consistent quality. It also allows a processor to be able to accurately budget the expense of the product or livestock being purchased and neutralize any negative consequences associated with the shifting market prices of the contracted product. Production contracts give a producer a guaranteed market for a specified amount of product or livestock. This allows a producer to more accurately budget the costs associated with the care and/or breeding of livestock in order to determine profitability and create an operating budget. One of the drawbacks to the producer is that he gives up a level of control in the operation of his business. The downside of production contracts for both parties is the loss of any advantage that could be received from favorable market price trends.
Production contracts are subject to strict legal requirements due to the fact that, like any contract, they can be written to disproportionally favor one party over the other. Generally, the processor enters into the negotiation process with the upper hand because it is the larger and more financially secure party to the production contract. It is for this reason that the Farm Security and Rural Investment Act of 2002 prohibits or negates production contract confidentiality clauses in certain instances for livestock and poultry producers. The act allows producers to discuss the details and terms of a production contract with legal advisers, state and federal agencies, accountants, lenders, or anybody else the producer chooses despite the existence of a confidentiality clause.
Though production contracts can be a valuable asset for livestock producers, it is of vital importance to understand each and every term of the production contract. Despite the fact that the laws surrounding production contracts are geared to even the playing field, it is still up to the individual producer to be familiar with the terms of the contract and not sign a contract that he/she is either not able to fulfill or that is written to favor the processor. The best way to determine if the contract is fair is to seek out legal advice before signing any production contracts.
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