Environmental due diligence – buying or selling a farm

Monday, July 11, 2022

Farms are significant assets, so when it comes to buying or selling a farm extra care should be taken to ensure that you get the best value for money.

This article sets out some of the key considerations for buyers and sellers of farming operations. Whether you are looking at a small or large-scale operation this article will provide a good framework to help you avoid common pitfalls when it comes time to buy or sell.

Purchasing a farm

As a purchaser, you must undertake thorough due diligence before purchasing any asset. Due diligence is particularly important for farms, where there are strict environmental requirements imposed by regional councils and the Resource Management Act 1991 (the Act).

In addition to usual due diligence investigations (like reviewing the legal title to a property, the terms of the purchase agreement or the Land Information Memorandum), purchasers should also consider the following:

  • Resource consents – land use, water take and discharge and nutrient discharge
  • Ecological overlays
  • Waterways and wetlands

Each farm is different and has its unique challenges so the above is not an exhaustive list.

Resource consents

Vendors should hold all necessary resource consents for the farming operation so that the land can be used for its intended purpose – there is no point in purchasing a farm if you cannot farm the land.

Vendors should also hold water permits and nutrient discharge consents and provide copies of all resource consent to you to assist with your due diligence investigations. Adequate irrigation is vital for any farming operation and close review of all water permits is paramount.

If no water permits held by the vendor, the property may be authorised to take water under an irrigation scheme. If that is the case, it is important to check the volume take entitlement under the shareholding to make sure it is sufficient for your intended purposes. Some irrigation schemes require board approval before the transfer of shares, so extra conditions of timings of due diligence conditions may need to taken into account.

For all resource consents it is important to make sure they are not expired, or up for renewal.

If the farm is not complying with its resource consents, or if the Vendor does not hold resource consents for its operation then it is important to discuss this with your lawyer and rural advisor.

Ecological overlays

Ecological overlays are intended to protect the environment, and can restrict ploughing, direct drilling or cultivation of land. These restrictions can significantly hinder farming operations so if the farm is within an ecological overlay, we recommend you check the location and extent of the overlay and consider how it will impact the productivity of your operations.

Waterways and wetlands

Waterways and wetlands are increasingly protected by law and are often regulated by regional council land and water plans.[1] If waterways or wetlands are located at the property it is important to check how onerous the protections are on the Vendor and whether the Vendor is complying with the protections afforded in the relevant District Plan, resource consents or ecological overlays. Failure to adhere to these regulations can result in prosecution by the local regional council.

Selling a farm

To get the best value out of your farm it is important to ensure that there are no breaches of your resource consents and that your farming assets are in good condition before placing the property on the market. It is worth your while working through these aspects months before you list the property with an agent to ensure that you get the best value for your farm. Vendors should consider the following aspects when preparing their farm for sale:

  • Resource consents
  • Contamination
  • Vendor warranties

The sale of dairy farms, orchards and pig farms each bring their own considerations and should be discussed with your lawyer and rural advisor before you go to the market.

Resource consent

If you have breached your resource consents it is important to remedy those breaches as soon as possible and to discuss the extent of the breaches/remediation work with your agent and lawyer. Your agent and lawyer will be able to guide you on how best to address any breaches and remediation in marketing the property.

It is also important to ensure that all resource consents are in the name of the selling entity and relate to the land that is being sold. Failure on these technical aspects could prevent resource consents being transferrable which will affect price.

Contamination

If the property has been flagged as containing hazardous materials (as recorded on the Hazardous Activities and Industries List), or if there are any clean up obligations under resource consents that you hold, you will need to ensure that all contamination will be remedied prior to settlement. The time involved in clean-up will depend on the extent and nature of the works, so we recommend that this be dealt with early to avoid any delays or disgruntled purchasers.

Vendor warranties
Vendor warranties will be contained in the agreement for sale and purchase of the farm and it is important to ensure that you can uphold these. If there are any warranties that you cannot provide i.e. you do not hold the necessary consents, or building work has not been obtained for certain works, then we recommend that you disclose this to your solicitor as soon as possible so that they can vary the agreement to mitigate exposure under the contract.

Final thoughts

If you are purchasing a farm, we encourage you to undertake thorough due diligence on any transaction to mitigate long term issues and costs. The penalties for breaching environmental requirements can be hefty (under the Act certain breaches can carry fines of up to $600,000 for a company or $300,000 or 2 years imprisonment for a natural person), so it is vital that environmental factors are considered when purchasing or selling a farm.

If you are selling a farm, we encourage you to discuss the sale with your agent and lawyer early to ensure the farm is compliant and presented in the best possible light when it goes to market.

For further information, please contact Sarah Mathews.

 

Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

[1] National Policy Statement for Freshwater Management 2020 and the Resource Management (National Environmental Standards for Freshwater) Regulations 2020

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