When is a farm not a farm? Guidance from the Court of Appeal

A radical experiment by the NSW legislature in the form of the Farm Debts Mediation Act to force creditors and farmers to mediate is now 12 years old. The New South Wales Court of Appeal, has recently given a new twist to what constitutes a farm debt for the purposes of the Act holding that a fish hatchery which grows fish for pet shops is not a farm for the purposes of the Act but leaving open the question of whether a fish hatchery which grows fish for human consumption is a farm.

 

27 February 2007

The Farms Debts Mediation Act 1994 is of great concern to lenders operating in NSW. The Act was designed to prevent heart-rending scenes whereby farmers who have been on a property for several generations are evicted amid scuffles with the Sheriff and with news cameras rolling. The object is that before the lender can enforce its contractual rights there must first of all be a mediation between the farmer and the lender. This not only slows the enforcement juggernaught down but also hopefully brings to the farmer’s attention the fact that there is a serious problem to be dealt with. A common outcome of mediation is that the lender agrees to allow the farmer time to either refinance or sells part or all of the farm property. The legislation was copied from similar legislation in the state of Iowa in the United States. During parliamentary debates on its passage the then Minister for Agriculture, in opposing the Bill, pointed out that publications from the Iowa State University Press indicated the only effect of the legislation was that healthy borrowers now paid a premium for borrowed funds over their city borrowers.

Typically the mediation process (if the farmer chooses to participate) can take anywhere between 3 to 6 months. Thus lenders need to factor in the applicability of the Act when underwriting farm loans and where necessary reducing the Loan to Value Ratio or charge an increased interest rate in order to compensate for the longer enforcement cycle. Lenders must be very wary of the Act because under section 6 any enforcement taken in contravention of the Act is void and the farmer will be entitled to costs against the lender. Accordingly whether or not a debt is covered by the Act is serious and topical question.

In Lawloan Mortgages Pty Ltd v Hancock1, the court held that a company engaged in running a riding school fell outside the definition of “farming operations”. In Liberty Funding Pty Ltd v Ivosevich2, the judge considered a case where the borrower operated a small market garden while also engaging in other occupations including as a computer consultant, finance broker, property developer, mercantile agent, cleaner and private investigator. In the loan application form the borrower described himself as a “computer programmer” with a second job as a “computer specialist”. The borrower, however, gave evidence that his other jobs occupied only two to three days per week, and often only at night, whilst the balance of his time was occupied in attending to horticultural matters. This evidence was accepted as the mortgagee did not lead any significant evidence to the contrary and did not cross-examine the borrower. The result was that the Act was found to apply, the mortgagee’s judgement was set aside, the writ of possession was stayed, and the mortgagee was ordered to pay the mortgagor’s costs of the proceedings.

On 13 February 2007 The Court of Appeal in Craigie & Anor v Champion Mortgage Services Pty Ltd3 upheld a finding by a trial judge that a fish hatchery which raised fish for pet shops was not a farm for the purposes of the Farm Debts Mediation Act. In a unanimous decision the Court cited with approval the trial judges reasoning that:

In my view …‘farming operations” covered by the FDM Act ought be confined to traditional agricultural pursuits …

However the Court of Appeal went on to leave open the possibility that fish raised for human consumption might be caught:

In my opinion… a fish hatchery operation for the purpose of supplying fish for pet shops and aquariums is not in the meaning of farming operation … There may be more difficult questions in determining whether …raising fish for the purpose of human consumption fall within that meaning.

The Court of Appeal also held the trial judge did not err in having regard to United States legislation and case law.

[2001] NSWSC 4105

[2002) NSWSC714

[2007] NSWCA 15

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