Contribution and Profit: Farms and Rural Land

For farm properties owned by more than one person, a common dispute is who is responsible for expenses and who is entitled to profits.  With family farms, it is common that one member of the family is primarily responsible for working the farm, while others may own but have moved away for other employment.  If profit is made on the harvest, who is entitled to a share? If expenses are incurred for equipment, who must pay the expense? If there is not agreement about the answer, litigation may be needed to sort out issues of contribution and profit.  

Disputes most often arise where there are joint tenants or tenants in common.  This often arises where a farm is passed down through more than one generation without a will.  The basic law is that if there is not a will, the property is passed intestate under statute. In such a case, the property goes to the spouse (50%) and any surviving children (50% total).   If there are no children, then the spouse and parents of the person that died, or to siblings if there are no children. If there are no living relatives, the property goes to the state.

So what happens if the uncle takes over the farm but the grandchildren receive a 1/16th interest?  This can cause resentment if the grandchildren think the uncle is “getting rich” on “their” farm. Or if the uncle is “losing money” paying to maintain the farm and the grandchildren think they should be receiving income.  

This is where two issues dealing with joint tenants or tenants in common come in to play.  The Uncle is entitled to contribution from the other owners for expenses for the betterment of the property such as buildings, fences, repairs, etc.  The other owners are entitled to a portion of profit if the farm makes money.  

If a dispute breaks out, it is common for the tenant in possession to seek partition and also contribution for the expenses he/she has put out to make the property economically viable.  The other owners may counterclaim for profit and seek a portion of the income from the farm.  This dispute can be resolved in the context of a suit for partition (https://baylawllc.com/partition-actions-farms-rural-land/).

Bottom line: if a working farm property is owned by more than one party, eventually there will be a dispute about investments to the property or profits from the property.  Be prepared.

Dirk Schwenk is a Maryland Real Estate, Property, Civil Litigation and Maritime Lawyer from Annapolis, Maryland.  He provides civil litigation services in real estate issues, contract disputes, environmental and zoning issues, adverse possession and boundary disputes.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.

Partition Actions: Farms and Rural Land

“My grandparents had a farm.  They died without a will and had four children.  I was the youngest, and two of my siblings died with children and without a will.  What do I do?” This is how a new client talk starts when the subject is partition actions about a farm in Maryland.  With rural properties, family farms are passed down generations without legal planning, leaving the next generation to unwind ownership without the benefit of proper probate.  It is easy to have dozens of heirs after two generations, with some working the property day to day, and some so not even be known if they are still alive.  Usually, this means a partition action is necessary.

When ownership is split, two bad things happen.  First, no one feels responsible to pay the taxes on the property, and it is lost to tax sale and foreclosure.  Second, one person in the family sells their interest to a determined (and perhaps unscrupulous) investor, and that person uses their purchase to steamroll everyone else.  

For me (Dirk Schwenk), it is always a thrill to represent a member of a farm family in reuniting the farm property, or at least locking down a part of the farm for themselves and future generations.   How is this done? A combination of negotiation and use of the partition process to compel owners to make difficult decisions. I previously wrote about partition of property in this article: https://baylawllc.com/maryland-partition-actions/.  

Maryland law provides that one owner of a property can compel other owners to either split the property up, or to sell the property instead of dividing it.  Most rural and farm properties can be divided in a way that is fair to the parties. Under the law, “A circuit court may decree a partition of any property….  If it appears that the property cannot be divided without loss or injury to the parties interested, the court may decree its sale and divide the money” § 14-107.  

Resolution

In partition, a Court divides the property (or the receipts of the sale) according to the interests of the parties.  For large families with several generations, one owner to have a 50% interest, while everyone else has a small fraction.  This creates possibilities for resolution. A suit for partition will bring everyone to the table, and smaller interests may find it beneficial to be bought out instead of fighting for a small part of the whole.  Alternatively, if there is a space for small lots to be carved out, those lots may be exchanged for resolution of ownership on the main farm property. Either result is better than questionable ownership with the possibility of a claim for profits or contribution.

Bottom line: someone has to take control of a farm property under split ownership.  If it isn’t a member of the family, it may be the State (after tax sale) or an outsider that purchased a minority interest.  The party that gets organized, knows their rights, and takes action will be the most likely to succeed.

Dirk Schwenk is a Maryland Real Estate and Property Lawyer from Annapolis, Maryland.  He provides civil litigation in real estate issues, contract disputes, environmental and zoning issues, adverse possession and boundary disputes.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.

There are many marinas in Maryland, ranging from large commercial ones the size of small towns to “informal” (or illegal) ones with a few slips and a ramp.  The purchase or sale of a marina property has all of the financial elements of a regular commercial property, but with highly specialized business, riparian rights, zoning, and environmental concerns.  There are many risks to purchasers, and they pose very interesting questions for the real estate lawyer that knows about waterfront and marine businesses.

I was recently hired by a cash buyer to review a potential marina purchase in Baltimore County.  Intellectually, this was an exciting opportunity, since it meant that it was up to me to do the due diligence that is often handled by the lending bank, and it gave me the freedom (and responsibility) to know all aspects of the deal.  Here are some of the things that I looked at.

Purchase/Sale Contract: No matter how familiar one might be with a property, the devil isn’t in the details – ITS THE DETAILS IN THE PAPERS.  If a judge has to later review and enforce a contract for purchase or sale of a marina, that judge is going to read the words on the page.  They may never even see the piers, slips, office or workshop.  The only thing that matters is whether you received what the paper says that you are due.  There are lots of attorneys that can read a purchase contract for a commercial property – there are a lot less than can determine whether the contract adequately describes the property and business that comprises a working marina.

Zoning and Development Restrictions: This property was in a very specialized and highly restrictive zoning category, and some face to face discussions with the zoning office revealed that prior sales had fallen through because the property had been considered as having the ability to convert to residential condominiums, when that was not possible under current zoning.  These restrictions limited the upside potential of the property significantly.

Piers and Riparian Rights: The possibility of expansion of the existing marina was an intriguing aspect of the purchase.  Careful review, however, revealed that the marina was already built out to the maximum side-lot restrictions and out to the harbor line, which prevented further expansion.  The slips could potentially be reconfigured, but expansion was not possible.

Lease Agreements and Tenant Relations: The seller provided all of the lease agreements with current tenants for review.  These were professionally done, transferable, and enforceable, but during the course of the review it came to light that one of the tenants was unlikely to continue at the expiration of the lease in a few months.  Even more concerning, the largest tenant (who made up nearly half the revenue) appeared to be teetering on the edge of default, and had recently requested that the rent be renegotiated.

Environmental Review and Survey: With marinas, it is crucially important to be sure that there are no significant environmental concerns — especially buried or leaking hazardous materials.  Also key is the question of whether there are easements across the property or other issues that might materially limit the access to and control of the waterfront.  With this property, those reviews did not reveal any issues.

Revenue and Business Concerns: The seller in this instance was a well established commercial business with a known history and other similar properties.  There were no concerns about its ability to deliver good title or to demonstrate that it had the authority to sell the property.  The business concerns in this case were with the revenues generated by the property and whether they supported the investment.  Secondarily, whether there might be future appreciation (or depreciation) with the property or upside from redevelopment.  In this case, current revenues were good, but deviated from historical norms, and were also highly dependent on the largest tenant, who did not look sustainable.  We ran numbers for return on investment based on historical norms and accounting for the possible loss of tenants — these made the property look riskier than it had initially appeared based on revenues.  The difficulty redeveloping the site, in light of the restrictive zoning in place, also limited upside potential and future appreciation.

J. Dirk Schwenk is a Maryland lawyer in Real Estate law, Waterfront Property, Civil Litigation and Maritime Law from Annapolis, Maryland.  He graduated cum laude (with honors) from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.