Legal E: Don't Promise The Farm

By Andrew Goode, Partner, Mellor Olsson

A recent 2014 High Court has considered  the legal effect of promises in relation to the future transfer of land.

This High Court decision, while not dealing directly with family succession, highlighted important legal principles relevant to succession planning for family businesses.

The Facts

Mr S (the defendant) and his wife owned a 32 hectare rural property.  The plaintiff Mrs V was married to Mr S’s brother in law.  In 1996 Mrs V and her husband moved into a cottage on Mr S’s property.  They paid rent to Mr S’s wife.

Mr S and Mrs V began a relationship with each other.  During the course of their relationship Mr S said to Mrs V “I love you and I can tell you love me too.  I want you to have a home here with me.  I am planning to divide the farm and I will make sure the cottage is put into your name”.  Mr S was alleged to have also said “You need a home of your own to raise (your child) in.  I can provide it”.

Mrs V’s husband found out about the relationship, and in 1998 the couple separated and later divorced.  When Mrs V told Mr S that she needed to find a lawyer to assist with her divorce and property settlement Mr S said words to the effect “You have the cottage, you do not need a settlement from him”.  There was no property settlement between Mrs V and her husband. 

Mrs V continued to live in the cottage and paid rent at less than the market rate.

Mrs V also carried out unpaid work in relation to the maintenance and renovations of the cottage, the main homestead, and an adjoining rural property.  She was also actively involved in attempts to subdivide the farm into two parcels.

In July 2006 Mrs V left the farm and the relationship between her and Mr S came to an end.  Mr S and his wife failed to subdivide the property or convey the cottage to Mrs V.

Mrs V issued proceedings against Mr S based on the representations made by him.  Mrs V gave evidence that in reliance on the representations she had acted to her detriment, which included a lost opportunity to earn wages as a park ranger, and was only employed part time on the farm.

The Decision 

The trial judge rejected her claim, however on appeal to the NSW Appeal Court the trial judge’s decision was overturned and Mr S was ordered to pay monetary compensation to Mrs V.  The court ordered monetary compensation rather than a transfer of land because the land had not been sub-divided.

Mr S appealed to the High Court who confirmed the decision of the Appeal Court.  The High Court found that Mrs V had been induced by Mr S’s assurances to remain on the farm, and to continue to work for Mr S and his wife to her detriment.  The High Court said that it was unconscionable that Mr S be now allowed to “resile from his assurances”.

The Implications 

The legal principles considered in this case have implications for farms and other family businesses.

The High Court case has now been cited in other judgments where the claimants have sought land and/or compensation from their families because of promises made to them.

In a recent Queensland case, decided after the High Court decision, a daughter in law brought a successful claim against her former husband and his parents.  The daughter in law argued that she was induced by her in-laws into working for the family farm business and that representations were made by them that she and her former husband would one day inherit the farm and associated family businesses.  She was awarded $405,000.00.

The Court based its decision not only on representations made to the daughter in law, but also on the conduct of the defendants, that induced her to live and work on the farm. 

The Victorian County Court has also awarded a foster son $850,000.00 based on representations made by his foster parents, on which he had relied.  The representations included that he would one day inherit the farm and a family trucking business if he worked in the family businesses.

Parents need to be aware, when they encourage or persuade family members to work for the family business, rather than pursue an alternative career, in the belief their parents (or in laws) will one day pass control of the business, that they cannot change their minds down the track.  If they do, their son or daughter (or in law) may seek to claim an entitlement to the land or business, or significant compensation, for any detriment suffered because of his/her reliance on the parents’ promises.

Family advisers need to be aware of these potential rights and would be very unwise to try and resolve a potential family settlement without making it clear which family members they represent.  In many cases the children will have substantial legal entitlements which their parents may not recognise, and which need to be considered in any succession plan.

For more information contact: 

Andrew Goode, Partner 

Mellor Olsson 

08 8414 3411

agoode@mellorolsson.com.au

or visit www.mellorolsson.com.au

Practice Area: Wills & Estates , Farm Law

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