With just over a week left until echoes of “Hang on Sloopy” and chants of “O-H” and “I-O” can be heard from Buckeye faithful across the nation, we thought we would provide you with some light reading to hold you over until that long awaited 3:30 kick off. In this edition of our Ag Law Harvest, we focus on three recent Ohio Supreme Court cases that could potentially impact business owners, Northern Ohio landowners, and Ohio taxpayers.
Assault and Battery: Is it Covered Under an Insurance Policy?
A victim of a stabbing at an Ohio adult care facility is unable to collect judgment from the facility’s insurance company after a recent decision by the Ohio Supreme Court. The victim was living at the facility when another resident stabbed him. The perpetrator was later indicted on criminal charges but found not guilty by reason of insanity.
The victim then filed a civil lawsuit against the perpetrator and the facility to recover for damages resulting from the stabbing injuries. The victim ultimately dropped his lawsuit against the perpetrator and entered into a settlement agreement with the facility. As part of the settlement agreement, the victim agreed not to pursue the judgment against the facility, and instead, sought to collect his judgment from the facility’s insurance company.
At the time of the stabbing, the adult care facility had a commercial general liability policy. When the victim sought judgment from the facility’s insurance company, the insurance company refused to provide coverage. The insurance company explained that the insurance policy contained a provision that specifically excluded coverage for any bodily injury resulting from an assault or battery. The specific provision at issue stated:
The victim argued that because the perpetrator was found to be not guilty by reason of insanity in the criminal trial, the exclusion provision was nullified because the perpetrator lacked the subjective intent to commit any assault or battery.
The Ohio Supreme Court disagreed. The Court explained that the plain language of the exclusion provision of the insurance policy at issue is clear – there is no intent requirement included in the exclusion language. Therefore, the Court held that coverage did not exist for the willful assault on the victim. The Court sympathized with the victim but ultimately could not interpret the insurance policy language to include a subjective intent requirement where none existed.
This case demonstrates the importance of reading and understanding your business insurance policy. Insurance policies are, at the core, contracts between two parties and the language contained within the policy will usually govern that contractual relationship. What you assume is covered under your policy may not necessarily be the case. Furthermore, not all insurance policies are the same. We have seen Ohio cases where an insurance policy does require the presence of some subjective intent in order for an assault and battery exclusion to apply. Speak with your insurance agent and/or attorney to make sure you understand when and where coverage exists, knowing this can be critical to protecting you, your farm, and/or your business.
Ohio Supreme Court Approves Northern Ohio Wind Farm.
Residents of Huron and Erie Counties along with Black Swamp Bird Conservatory (the “Plaintiffs”) recently lost their battle in court to prevent the construction of a new wind farm in Northern Ohio. The Plaintiffs argued that the Ohio Power Siting Board (the “Board”) failed to satisfy Ohio law before granting the new wind farm its certificate of environmental compatibility and public need. Specifically, the Plaintiffs assert that the wind farm could “disrupt the area’s water supply, create excessive noise and ‘shadow flicker’ for residents near the wind farm, and kill bald eagles and migrating birds.”
The Ohio Supreme Court found otherwise. The Court concluded that the Plaintiffs failed to establish that the Board’s granting of the certificate was unlawful or unreasonable. As approved, the new wind farm will consist of up to 71 turbines and cover 32,000 acres of leased land. To read more about the Ohio Supreme Court’s decision visit: In re Application of Firelands Winds, L.L.C.
Ohio Supreme Court Sets New Precedent on Interpreting Ohio Tax Law.
In Ohio, most retail sales are subject to sales tax unless a certain exemption applies. Ohio law does have a sales tax exemption for equipment used directly in the production of oil and gas. A fracking business recently challenged a decision by Ohio’s Tax Commissioner and Board of Tax Appeals that levied the sales tax on certain equipment purchased by the business. The fracking equipment at issue included: a data van, blenders, sand kings, t-belts, hydration units, and chemical-additive units.
The Tax Commissioner concluded that the fracking equipment was not used directly in the extraction of oil and gas, only indirectly, and therefore, did not qualify for the tax exemption. The Ohio Supreme Court felt differently.
The Court found that all the equipment, except the data van, is used in unison to expose the oil and gas. Because the equipment is used to expose the oil and gas – a necessary part of fracking – the Court had little difficulty concluding that the equipment is being used directly in the production of oil and gas.
In addition to the equipment’s direct use in the production of oil and gas, the Court also recognized that the fracking equipment may also have a storage or delivery function/purpose. However, the Court reasoned that a piece of equipment’s function must be viewed through the “primary purpose” lens. For example, the Court held that although the blender equipment in this case performs a holding function, the primary use of the blender is to mix “the critical ingredients in the fracking recipe seconds before the mixture is inserted into the well.” Therefore, the Court found that the blender’s holding function did not disqualify it from Ohio’s sales tax exemption.
Additionally, in this case, the Court also issued an opinion on how Ohio courts should interpret tax law moving forward. Normally, courts use the ever-important legal principal of stare decisis to help it decide on new cases. Stare decisis is the principal that courts and judges should honor the decisions, rulings, and opinions from prior cases when ruling on new cases. Here, the Court took its opportunity to acknowledge that in the past the Court interpreted tax exemptions against the taxpayer, favoring tax collection. But the Court made clear that from here on out, the Court “will apply the same rules of construction to tax statutes that [it applies] to all other statutes” without a slant toward one side or the other. The Court concluded that its task “is not to make tax policy but to provide a fair reading of what the legislature has enacted: one that is based on the plain language of the [law].”
To read the Ohio Supreme Court’s decision visit: Stingray Pressure Pumping, L.L.C. v. Harris
It’s getting hot! And we are here to bring you even more heat. This month’s Ag Law Harvest takes you across the country and even across our northern border as we highlight some interesting court cases, a petition to the USDA, and some legislation coming across the desks of Governors from Maine to Oregon.
Ohio Court Determines That Dairy Farm Did Not Intentionally Harm Employee.
In 2019, a dairy farm employee sustained serious injuries after getting caught in a PTO shaft while operating a sand spreader. After his injury, the employee filed a lawsuit against his employer for failing to repair or replace the missing safety guards on the PTO shaft and sand spreader. In his lawsuit, the employee alleged that the dairy farm’s failure to repair or replace the missing safety guards amounted to a “deliberate removal” of the equipment’s safety features making the dairy farm liable for an intentional tort. In other words, the employee was accusing his employer of intentionally causing him harm. Normally, workplace injuries are adjudicated under Ohio’s workers’ compensation laws, unless an employee can prove that an employer acted intentionally to cause the employee harm.
For an employer to be held liable for an intentional tort under Ohio law, an employee must prove that the employer acted with the specific intent to injure an employee. An employee can prove an employer’s intent in one of two ways: (1) with direct evidence of the employer’s intent; or (2) by proving that the employer “deliberately removed” equipment safety guards and/or deliberately misrepresented a toxic or hazardous substance. Because there was no direct evidence to prove the dairy farm’s intent, the employee could only try his case under the theory that the dairy farm deliberately removed the safety guards, intentionally causing him harm.
The case went to trial and the jury found the dairy farm liable and ordered it to pay over $1.9 million in damages. The dairy farm appealed to the Twelfth District Court of Appeals arguing that its failure to repair or replace does not amount to a “deliberate removal” of the safety guards from the PTO shaft and sand spreader. The appellate court agreed.
The Twelfth District decided to apply a narrow interpretation of the term “deliberate removal.” The court held that a “deliberate removal” is defined as the “deliberate decision to lift, push aside, take off, or otherwise eliminate.” The evidence presented at trial showed that the shaft guard may have simply broken off because of ordinary wear and tear. Additionally, the evidence could not establish who removed the connector guard or if the connector guard did not also break off due to ordinary wear and tear. Thus, the Twelfth District found that the evidence presented at trial did not support a finding that the dairy farm made “a careful and thorough decision to get rid of or eliminate” the safety guards. Furthermore, the Twelfth District reasoned that an employer’s “failure to repair or replace a safety guard is akin to permitting a hazardous condition to exist” and that the “mere knowledge of a hazardous condition is insufficient to show intent to injure. . .” The Twelfth District vacated and reversed the $1.9 million judgment and entered summary judgment on the dairy farm’s behalf.
USDA Receives Petition Over “Climate-friendly” Claims.
The Environmental Working Group (EWG) has petitioned the U.S. Department of Agriculture (“USDA”), asking the USDA to: (1) prohibit “climate-friendly” claims or similar claims on beef products; (2) require third-party verification for “climate-friendly” and similar claims; and (3) require a numerical on-pack carbon disclosure when such claims are made. The core legal issue is whether such “climate-friendly” labels and numerical carbon disclosures are protected and/or prohibited by the legal doctrine of commercial speech, which is protected under the First Amendment of the U.S. Constitution. EWG argues that the USDA has the authority to regulate such speech because commercial speech is only protected if it is not misleading. Additionally, EWG claims that requiring numerical carbon disclosures advances a substantial governmental interest by protecting consumers from fraud and deception. Although EWG has the legal right to petition the USDA, the USDA does not have to grant EWG’s petition, it must only consider the petition and respond within a reasonable time.
Maine Governor Vetoes Ag Wage Bill.
Earlier this month Maine Governor, Janet Mills, vetoed Legislative Document 398 (“LD 398”) which required agricultural employers to pay their employees a minimum wage of $13.80 and overtime pay. Governor Mills stated that she supports the concept of LD 398 but was concerned about some of the bill’s language. The Maine legislature had the opportunity to override the Governor’s veto but failed to do so. After the legislature sustained her veto, Governor Mills signed an executive order establishing a formal stakeholder group to develop legislation that will establish a minimum wage for agricultural workers while also addressing the impacts the future legislation will have on Maine’s agriculture industry.
A Big Thumbs Up!
A Canadian judge recently found that a “thumbs-up” emoji is just as valid as a signature to a contract. In a recent case, a grain buyer, South West Terminal Ltd. (“SWT”), sent through text message, a deferred grain contract to a farming corporation owned and operated by Chris Achter (“Achter”). The contract stated that Achter was to sell 86 metric tonnes of flax to SWT at a price of $17 per bushel. SWT signed the contract, took a picture of the contract, and sent the picture to Achter along with a text message: “Please confirm flax contract”. Achter texted back a “thumbs-up” emoji. When the delivery date came and passed, Achter failed to deliver the flax to SWT which prompted SWT to file a lawsuit for breach of contract. SWT argued that Achter’s “thumbs-up” meant acceptance of the contract. Achter, on the other hand, claimed that the use of the emoji only conveyed his receipt of the contract.
The Canadian court ultimately ruled in favor of SWT. The court relied on evidence that Achter and SWT had a pattern of entering into binding contracts through text message. In all previous occurrences, SWT would text the terms of the contract to Achter and Achter would usually respond with a “looks good”, “ok”, or “yup”. This time, Achter only responded with a “thumbs-up” emoji and the court concluded that an objective person would take that emoji to mean acceptance of the contract terms. Achter was ordered to pay over C$82,000 ($61,442) for the unfulfilled flax delivery. As the old saying goes: “a picture is worth a thousand words or tens of thousands of dollars.”
Oregon Governor Signs Agriculture Worker Suicide Prevention Bill into Law.
Earlier this month, Oregon Governor Tina Kotek signed a bill that creates a new suicide prevention hotline for agricultural producers and workers into law. Senate Bill 955 (“SB 955”) provides $300,000 to establish an endowment to fund an AgriStress Helpline in Oregon. Proponents of the bill believe the AgriStress Helpline will be able to specifically address the needs of agricultural producers and workers which “[s]tatistically . . . have one of the highest suicide rates of any occupation.” Oregon becomes the 7th state to establish an AgriStress Hotline joining Connecticut, Missouri, Pennsylvania, Texas, Virginia, and Wyoming.
Happy last day of June! We close out the month with another Ag Law Harvest, which brings you two interesting court cases, one about an Ohio man asserting his right to give away free gravel, and another which could decide the constitutionality of “Ag-Gag” laws once and for all. We also provide a few federal policy updates and announcements.
Ohio Department of Agriculture Prohibited from Fining a Landowner for Charging to Load Free Gravel. In May of 2020, Paul Gross began selling gravel and topsoil (collectively “gravel”) that he had accumulated from excavating a pond on his property. Gross charged $5 per ton of gravel, which was weighed at a scale three miles from his property. After receiving a complaint of the gravel sales, the Madison County Auditor sent a Weights and Measures Inspector to investigate Gross’s gravel sales. The Inspector informed Gross that the gravel sales violated Ohio Administrative Code 901:6-7-03(BB) (the “Rule”) because the gravel was not being weighed at the loading site. Under the Rule, “[s]and, rock, gravel, stone, paving stone, and similar materials kept, offered, or exposed for sale in bulk must be sold . . . by cubic meter or cubic yard or by weight.” As explained by the Inspector, Gross’s problem was that he was selling gravel by inaccurate weight measurements because the trucks hauling the gravel lose fuel weight when traveling the three miles to the scale.
Instead of installing scales on his property, Gross decided to start giving away the gravel for free. However, Gross did charge a flat rate fee of $50 to any customer that requested Gross’s help in loading the gravel. According to Gross, this $50 fee was to cover the cost of his equipment, employees, and other resources used to help customers load the gravel. Unsatisfied with the structure of this transaction, the Ohio Department of Agriculture (“ODA”) decided to investigate further and eventually determined that even though Gross was giving away the gravel for free, the flat fee for Gross’s services represented a commercial sale of the gravel and, therefore, Gross was in continued violation of the Rule.
For the alleged violation, the ODA intended to impose a $500 civil penalty on Gross, who requested an administrative hearing. The hearing officer recommended imposing the penalty and the Franklin County Court of Common Pleas agreed. Gross appealed the decision to the Tenth District Court of Appeals, which found that Gross was not in violation of the Rule.
The Tenth District reasoned that customers were paying for the service of moving the gravel, not for the gravel itself. The court explained that the purpose of the Rule is to protect consumers by ensuring transparent pricing of materials like gravel. Since Gross was not in the business of selling gravel and the transaction was primarily for services, the court concluded that the ODA’s fine was impermissible.
North Carolina Asks U.S. Supreme Court to Review “Ag-Gag Law.” In 2015, the North Carolina Legislature passed the North Carolina Property Protection Act, allowing employers to sue any employee who “without authorization records images or sound occurring within” nonpublic areas of the employer’s property “and uses the recording to breach the [employee’s] duty of loyalty to the employer.” After the act’s passage several food-safety and animal-welfare groups, including the People for the Ethical Treatment of Animals (“PETA”), challenged the Property Protection Act in an effort to prevent North Carolina from enforcing the law.
A federal district court in North Carolina struck down the law, finding it to be a content-based restriction on speech in violation of the First Amendment of the United States Constitution. The 4th Circuit Court of Appeals upheld the district court’s ruling also reasoning that the law’s broad prohibitions restrict speech in a manner inconsistent with the First Amendment. Now, the North Carolina Attorney General, Josh Stein, has petitioned the Supreme Court of the United States (“SCOTUS”), asking the Court to reverse the 4th Circuit’s decision. If SCOTUS decides to hear the case, the justices will be tasked with determining “[w]hether the First Amendment prohibits applying state tort law against double-agent employees who gather information, including by secretly recording, in the nonpublic areas of an employer’s property and who use that information to breach their duty of loyalty to the employer.”
We have reported on several Ag-Gag laws and the court challenges that have followed. If SCOTUS decides to take up the case, we may finally have a definitive answer as to whether Ag-Gag laws are constitutional or not.
Lab-grown Chicken Given the Green Light by the USDA. The United States Department of Agriculture’s (“USDA”) Food Safety and Inspection Service granted its first approvals to produce and sell lab-grown chicken to consumers. Upside Foods and Good Meat, the two entities given the green light by the USDA, plan on initially providing their “cell-cultivated” or “cultured” chicken to patrons of restaurants in the San Francisco and Washington D.C. areas. However, the timeline for such products showing up in your local grocery store has yet to be determined.
USDA Suspends Livestock Risk Protection 60-Day Ownership Requirement. The USDA’s Risk Management Agency issued a bulletin suspending the 60-day ownership requirement for the Livestock Risk Protection (“LRP”) program. Normally under the LRP, covered livestock must be owned by the producer within the last 60 days of the specified coverage endorsement period for coverage to apply. According to the bulletin, “[d]ue to the continuing severe drought conditions impacting many parts of the nation, producers are struggling to find adequate supplies of feed or forage, causing them to market their livestock sooner than anticipated.” In response, the USDA is allowing producers to apply to waive the 60-day ownership requirement, subject to verification of proof of ownership of the livestock. The USDA hopes this waiver will allow producers to market their livestock as necessary while dealing with the current drought effects. Producers will be able to apply for the waiver until December 31, 2024.
USDA Announces Tool to Help Small Businesses and Individuals Identify Contracting Opportunities. Earlier this month, the USDA announced a new tool “to assist industry and small disadvantaged entities in identifying potential opportunities for selling their products and services to USDA.” USDA’s Procurement Forecast tool lists potential contracting or subcontracting opportunities with the USDA. Until now, businesses could only access procurement opportunities through the federal-wide System for Award Management (“SAM”). The USDA hopes the Procurement Forecast tool will provide greater transparency and maximize opportunity for small and underserved businesses.
As farm machinery has become more complex and reliant on computer software, the right-to-repair issue has become a prominent issue in the farm community. Farmers are sometimes prevented from repairing their own equipment because they do not have access to needed diagnostic tools or are otherwise barred due to embedded software. Farmers have voiced their criticism of manufacturers as right-to-repair has become a prominent issue in the agricultural community.
In an effort to address the right-to-repair issue, the American Farm Bureau Federation (AFBF) and John Deere recently entered into a memorandum of understanding (MOU) in which Deere agrees to provide access to documentation, data and diagnostic tools used by the company’s authorized dealers. This development was likely a response to pressure that Deere and other manufactures were under to allow right-to-repair. New York recently passed a right-to-repair law and Senator Tester introduced right-to-repair legislation in the U.S. Senate earlier this year.
Software User License
The issue of right-to-repair is related to a user’s license. The term “license” has a specific meaning under the law. Someone who holds a license for a product is allowed to use the product but does not own the product. In 2016, Deere began using a user’s license for the software in its machines. Essentially, when a customer would buy a machine from Deere, the buyer had ownership of the steel but did not own the software that makes the machine operate.
Software licensing has its roots in 1980’s software. The burgeoning consumer software industry initially sold its software to customers and retained no rights to the software. These software developers began to see purchasers of their software reverse engineer the software and development slightly different software that resulted in the same functionality. In essence, a person could buy the software, make a change to the software to potentially avoid copyright infringement, but end up with software that did the same thing as the originally purchased software. This process essentially allowed for the stealing of intellectual property from the software developer, but the developers had little legal recourse.
To overcome this loss of intellectual property, software developers began selling a license to use the software. The software license allowed the purchaser to use the software, but the software developer retained ownership. The license agreement expressly prohibited reverse engineering or using the software in other ways that jeopardized the software developer’s intellectual property. By keeping ownership, software developers could take legal action against people who tried to copy and resell the software.
The software license worked reasonably well for many years. The vast majority of software users were oblivious to the license agreement and continued using the software as they always had. The licensing arrangement help protect the software developers’ intellectual property. However, in the last twenty years or so, software began to be embedded in electronic devices blurring the lines between the software and the hardware. A new tractor seems to be as much a computer running software as it does a power unit pulling implements.
The integration of software into farm machines came to light in 2016 when John Deere implemented a software user license agreement to presumably protect its intellectual property. Its licensing agreement clearly stated that reverse engineering or copying of the software is prohibited. However, Deere seems to have taken it one step further. Farmers and independent repair shops were prohibited from having the diagnostic tools and manuals required to make repairs. This denial of diagnostic tools effectively made it impossible for farmers and independent mechanics to make repairs on some John Deere equipment. Many people in the farm community expressed their concern about the license agreement and saw it as scheme to keep the repairs, and the fees from those repairs, all within the John Deere dealer network. Farmers wanted to be able to repair their own equipment, or use other independent third parties, to potentially save money and to have more timely service, especially during busy times like planting and harvest.
Due to pressure from a combination of the new legislation in New York, the right-to-repair legislation introduced in the Senate and dissatisfaction expressed by farmers, John Deere likely felt it was best to make some concessions with farmers while keeping ownership of the software. This speculation is supported by the fact that AFBF agreed to “refrain from introducing, promoting, or supporting federal or state "Right to Repair" legislation that imposes obligations beyond the commitments in this MOU.” So, it seems AFBF agreed not to pursue right-to-repair legislation in exchange for Deere loosening its prohibitions of right-to-repair.
While it is impossible to foresee all the future implications for an agreement like the one between AFBF and Deere, it does seem that it is a reasonable compromise. Farmers can now have access to diagnostic tools to allow for self-repairs while Deere keeps ownership of its software. Critics argue the agreement does not go far enough and Deere still has too much control over self-repairs. We will see over the next few years if the agreement is, in fact, a reasonable compromise.
Memorandum of Understanding
It is noteworthy that the agreement between AFBF and John Deere is memorialized within a Memorandum of Understanding. For those not familiar with an MOU, there may be some curiosity as to its legal context. MOUs are most often used at the beginning of a negotiation to ensure that both parties are starting with the same understanding of their current positions, to make clear what each party is seeking from the negotiation and that it is worthwhile for both parties to move forward. Unlike a contract, an MOU is generally not legally enforceable. Because the agreement is an MOU, neither AFBF nor Deere is legally bound to its terms. Neither party has legal recourse if the other party does not honor its commitments as outlined in the MOU. If either party reneges on its commitments, the party at fault will likely receive criticism in the public opinion realm but will likely have no legal liability.
The John Deere software licensing issue is a good example of how new technology can require new strategies and concepts in the law. Prior to the 1980’s, copyright law had worked just fine for books and movies but it did not work well for the new medium of software. So, the concept of software licenses was developed to address the threats to the software industry. Twenty years later when the line between software and hardware began to blur, software licenses were again modified to protect the developer of the software. In the case of John Deere, perhaps they went a bit too far in enforcing their licenses. The threat of unfavorable legislation and criticism from customers probably caused John Deere to walk back their stance on prohibition of diagnostic tools to allow self-repairs. Hopefully, the agreement between John Deere and AFBF has found a reasonable middle ground that benefits all parties.
Solar and wind energy development is thriving in Ohio, and most of that development will occur on leased farmland. Programs in the newly enacted federal Inflation Reduction Act might amplify renewable energy development even more. The decision to lease land for wind and solar development is an important one for a farmland owner, and one that remains with a farm for decades. It’s also a very controversial issue in Ohio today, with farmers and community residents lining up on both sides of the controversy. For these reasons, when a landowner receives a “letter of intent” for wind or solar energy development, we recommend taking a careful course of action. Here are a few considerations that might help.
Purpose and legal effect of a letter of intent. Typically, a letter of intent for renewable energy development purposes is not a binding contract, but it might be. The purposes of the letter of intent are usually to provide initial information about a potential solar lease and confirm a landowner’s interest in discussing the possibility of a solar lease. Unless there is compensation or a similar benefit provided to the landowner and the letter states that it’s a binding contract, signing a letter of intent wouldn’t have the legal effect of committing the landowner to a solar lease. But the actual language in the letter of intent would determine its legal effect, and it is possible that the letter would offer a payment and contain terms that bind a landowner to a leasing situation.
Attorney review is critical. To ensure a clear understanding of the legal effect and terms of the letter of intent, a landowner should review the letter with an attorney. An attorney can explain the significance of terms in the letter, which might include an “exclusivity” provision preventing the landowner from negotiating with any other solar developer for a certain period of time, “confidentiality” terms that prohibit a landowner from sharing information about the letter with anyone other than professional advisors, “assignment” terms that allow the other party to assign the rights to another company, and initial details about the proposed project and lease such as location, timeline, and payments. Working through the letter with an attorney won’t require a great deal of time or cost but will remove uncertainties about the legal effect and terms of the letter of intent.
Negotiating an Option and Lease would be the next steps. If a landowner signs a letter of intent, the next steps will be to negotiate an Option and a Lease. It’s typical for a letter of intent to summarize the major terms the developer intends to include in the Option and Lease, which can provide a helpful “heads up” on location, payments and length of the lease. As with the letter of intent, including an attorney in the review and negotiation of the Option and Lease is a necessary practice for a landowner. We also recommend a full consideration of other issues at this point, such as the effect on the farmland, farm business, family, taxes, estate plans, other legal interests, and neighbor relations. Read more in our “Farmland Owner’s Guide to Solar Leasing” and “Farmland Owner’s Solar Leasing Checklist”.
New laws in Ohio might prohibit the development. A new law effective in October of 2021 gives counties in Ohio new powers to restrict or reject wind and solar facilities that are 50 MW or more in size. A county can designate “restricted areas” where large-scale developments cannot locate and can reject a specific project when it’s presented to the county. The new law also allows citizens to organize a referendum on a restricted area designation and submit the designation to a public vote. Smaller facilities under 5-MW are not subject to the new law. Several counties have acted on their new authorities under the law in response to community concerns and opposition to wind and solar facilities. Community opposition and whether a county has or will prohibit large-scale wind and solar development are additional factors landowners should make when considering a letter of intent. Learn more about these new laws in our Energy Law Library.
It's okay to slow it down. A common reaction to receiving a letter of intent is that the landowner must act quickly or could lose the opportunity. Or perhaps the document itself states a deadline for responding. A landowner shouldn’t let those fears prevent a thorough assessment of the letter of intent. If an attorney can’t meet until after the deadline, for example, a landowner should consider contacting the development and advising that the letter is under review but meeting the deadline isn’t possible. That’s a much preferred course of action to signing the letter without a review just to meet an actual or perceived deadline.
For more information about energy leases in Ohio, refer to our Energy Law Library on the Farm Office website at https://farmoffice.osu.edu/our-library/energy-law.
September 1 is fast approaching, and this year it’s an especially important date for landowners leasing cropland under an existing lease that doesn’t address when or how the lease terminates. In those situations, September 1 is the new deadline established in Ohio law for a landowner to notify a tenant that the landowner wants to terminate the lease. If the landowner does not provide notice by September 1, the lease continues for another lease term.
This September 1 deadline only applies to verbal or written leases that don’t have a termination date or a deadline for giving notice of termination. If a crop lease already includes a termination date or a deadline for giving notice of termination, those provisions are unchanged by the new law. The new September 1 termination date also only affects leases of land for agricultural crops. It does not apply to leases for pasture, timber, farm buildings, horticultural buildings, or leases solely for equipment.
To meet the new legal requirements, a landowner must give the notice of termination in writing and deliver it to the tenant operator by hand, mail, fax, or email on or before September 1. While the law does not specify what the termination must say, we recommend including the date of the notice, the identity of the lease property being terminated, and the date the lease terminates, which the law states will be the earlier of the end of harvest or December 31, unless the parties agree otherwise.
Tenant operators are not subject to the new September 1 termination deadline—the law applies only to the landowner. Even so, it’s important for tenant operators to understand the new law because it protects a tenant if a landowner attempts to terminate a lease after September 1. In those instances, the law allows the tenant to continue the lease for another term because the termination notice was late.
A lesson this new law teaches is the importance of having a written farm lease that includes termination provisions. The parties can agree in advance when the lease will terminate or can set a deadline for notifying the other party of the intent to terminate the lease. Such terms provide certainty and reduce the risk of conflict and litigation over a “late” termination.
Read the new “termination of agricultural leases” law in Section 5301.71 of the Ohio Revised Code.
Is it time to start thinking about your farmland lease for next year? We think so! There are new legal issues and updated economic information to consider for the upcoming crop year. That’s why we’ve scheduled our next Ohio Farmland Leasing Update for Thursday, August 11 at 8 a.m. Join the Farm Office team of Barry Ward, Robert Moore and Peggy Hall for an early morning webinar discussion of the latest economic and legal farmland leasing information for Ohio.
Here are the topics we’ll cover:
- Ohio’s new statutory termination law for verbal farmland leases
- Using a Memorandum of Lease and other lease practice tips
- Economic outlook for Ohio row crops
- New Ohio cropland values and cash rents survey results
- Rental market outlook
There’s no cost to attend the Zoom webinar, but registration is necessary. Visit https://go.osu.edu/farmlandleasingupdate for registration. And if you’re already thinking about your next farmland lease, also be sure to use our farmland leasing resources on https://farmoffice.osu.edu.
By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
The relationship between farmland owner and tenant often goes beyond just a business transaction. It is common for the tenant to lease the same farmland for many years or for the tenant/landowner relationship to span several generations. The relationship between the parties may evolve into one of great trust and respect – the landowner knowing that the tenant will treat the land like their own and the tenant knowing the landlord will always be fair with them.
Sometimes, when the landowner knows that their heirs do not have interest in owning the land, they will promise to give the tenant the first chance to buy the farm at landowner’s death. Tenants will always appreciate this gesture so that they do not have to outbid their neighbors at a public auction when the landowner dies. However, a mere promise is not enough. To protect the tenant’s right to purchase the farm, the landowner must take proactive measures.
Under Ohio law, and every other state, verbal promises regarding real estate are rarely enforceable. Because real estate is such an important asset, courts do not want to have to guess as to what a buyer and seller may have agreed upon. So, in most situations, if it is not in writing, a court will not enforce verbal promises regarding real estate.
Example. Landowner has leased her land to Tenant for 25 years and verbally promised that when she dies Tenant will get to buy her farm. Upon her death, her heirs do not want to sell to Tenant because they think they will get more at auction. Because Landlord’s promise was only verbal, the heirs can ignore Tenant and sell at auction.
So, what can be done to ensure that a landlord’s desire for a tenant to buy the farm is enforceable? The following are options available to Landlord and Tenant.
Will or Trust
The landlord can include a provision in their will or trust giving the tenant the right to buy the farm. Upon landlord’s death, the trustee or executor will be obligated to sell the land to the tenant. This is an easy solution to give the tenant a chance to buy the farm. However, it is not a perfect solution.
Wills and trusts can be changed at any time. The tenant has no guarantee that a landlord will not change their will or trust and remove the purchase provision. For as long as the landowner has mental capacity, they can change their will or trust anytime they wish. So, while putting the purchase option in the will or trust is better than a verbal promise, it is not a guarantee the tenant will have a chance to buy the farm.
Practice Pointer. When giving a tenant the right to purchase a farm, consider also providing them with a small amount of money from the estate/trust. By giving them even $100, the tenant becomes a beneficiary of the estate/trust and is entitled to be informed of all aspects of the administration. There could be some dispute as to whether the tenant is a beneficiary of the estate/trust if they only have purchase rights. A beneficiary of an estate/trust has certain rights that a mere buyer would not have.
Right of First Refusal
For the tenant, a better strategy may be to enter into a Right of First Refusal (ROFR) with the landowner. A ROFR is an agreement that gives the tenant the chance to buy land at the landowner’s death or before the landowner can transfer it. The ROFR includes a provision that makes it binding upon the landowner and their heirs so that the ROFR survives the landowner’s death. Upon the landowner's death and before the land can be transferred to heirs, the ROFR is triggered and tenant can decide if they wish to buy the land. The ROFR should be signed by both parties, notarized and recorded.
Example. Landowner wants to ensure that Tenant has a chance to buy her farm when she passes away. Landowner and Tenant execute a ROFR that states upon Landowner’s death, Tenant will have a chance to buy the land at appraised value. The ROFR is made binding upon the Landowner’s heirs and recorded. When Landowner dies, the purchase provision in the ROFR will be triggered and Tenant will have an opportunity to buy the land.
The disadvantage of the ROFR for the landowner is that it cannot be changed. The ROFR is a contract and once signed cannot be changed without the tenant’s consent. If the landowner wants to keep the option to change their mind regarding the sale of the farm, they should not enter into a ROFR but opt for the will/trust strategy instead.
Regardless of which of the aforementioned strategies are used, time and effort should be spent specifying the purchase terms. The will/trust or ROFR should include specific language addressing the following:
- Identify the Property. Use parcel numbers, legal descriptions, FSA farm numbers and/or acreage to specify what land is being offered for sale. Do not leave any room for misunderstandings of what land is being offered to the tenant. Avoid using only farm names to identify (i.e. “Smith Farm”)
- Purchase Price. Clearly state how the purchase price is determined. If by appraisal, consider using a licensed, certified appraiser to avoid any perception that the appraiser favors one party or the other. Also consider including a three-step appraisal process allowing either party to get their own appraisal if they dispute the original appraisal. A flat price can be used for the purchase price but the parties risk the flat price not adjusting to market conditions. The landowner may also include a discount % on the purchase price to help the tenant.
- Deadlines. The purchase terms should give the tenant a specific number of days to decide if they want to purchase the farm. This term should begin to run after the purchase price has been established. The tenant should be required to exercise their purchase option by giving written notice to the estate/trust. A closing date should also be set, usually a specific number of days after the tenant has provided the written notice to purchase.
- Other Purchase Terms. Include any other purchase terms like title insurance and transaction costs.
Landowners and tenants should not rely on verbal promises for the purchase of the farm at landowner’s death. Using either a will/trust or ROFR can ensure that a tenant will have a legally enforceable right to purchase the farm. When drafting the will/trust or ROFR, include specific purchase terms to avoid conflict between the tenant and the landowner’s heirs. The parties should seek legal counsel to assist in drafting the documents to be sure that all legal requirements are met.
One of the core principles of the American legal system is that people are free to enter into contracts and negotiate those terms as they see fit. But sometimes the law prohibits certain rights from being “signed away.” The interplay between state and federal law and the ability to contract freely can be a complex and overlapping web of regulations, laws, precedent, and even morals. Recently, the Ohio Supreme Court ruled on a case that demonstrates the complex relationship between Ohio law and the ability of parties to negotiate certain terms within an oil and gas lease.
The Background. Ascent Resources-Utica, L.L.C. (“Defendant”) acquired leases to the oil and gas rights of farmland located in Jefferson County, Ohio allowing it to physically occupy the land which included the right to explore the land for oil and gas, construct wells, erect telephone lines, powerlines, and pipelines, and to build roads. The leases also had a primary and secondary term language that specified that the leases would terminate after five years unless a well is producing oil or gas or unless Defendant had commenced drilling operations within 90 days of the expiration of the five-year term.
After five years had passed, the owners of the farmland in Jefferson County (“Plaintiffs”) filed a lawsuit for declaratory judgment asking the Jefferson County Court of Common Pleas to find that the oil and gas leases had expired because of Defendant’s failure to produce oil or gas or to commence drilling within 90 days. Defendant counterclaimed that the leases had not expired because it had obtained permits to drill wells on the land and had begun constructing those wells before the expiration of the leases. Defendant also moved to stay the lawsuit, asserting that arbitration was the proper mechanism to determine whether the leases had expired, not a court.
What is Arbitration and is it Legal? Arbitration is a method of resolving disputes, outside of the court system, in which two contracting parties agree to settle a dispute using an independent, impartial third party (the “arbitrator”). Arbitration usually involves presenting evidence and arguments to the arbitrator, who will then decide how the dispute should be settled. Arbitration can be a quicker, less burdensome method of resolving a dispute. Because of this, parties to a contract will often agree to forgo their right to sue in a court of law, and instead, abide by any arbitration decision.
Ohio law also recognizes the rights of parties to agree to use arbitration, rather than a court, to settle a dispute. Ohio Revised Code § 2711.01(A) provides that “[a] provision in any written contract, except as provided in [§ 2711.01(B)], to settle by arbitration . . . shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.” What this means is that Ohio will enforce arbitration clauses contained within a contract, except in limited circumstances. One of those limited circumstances arises in Ohio Revised Code § 2711.01(B). § 2711.01(B)(1) provides that “[s]ections 2711.01 to 2711.16 . . . do not apply to controversies involving the title to or the possession of real estate . . .” Because land and real estate are so precious, Ohio will not enforce an arbitration clause when the controversy involves the title to or possession of land or other real estate.
To be or not to be? After considering the above provisions of the Ohio Revised Code, the Jefferson County Court of Common Pleas denied Defendant’s request to stay the proceedings pending arbitration. The Common Pleas Court concluded that Plaintiffs’ claims involved the title to or possession of land and therefore was exempt from arbitration under Ohio law. However, the Seventh District Court of Appeals disagreed with the Jefferson County court. The Seventh District reasoned that the controversy was not about title to land or possession of land, rather it was about the termination of a lease, and therefore should be subject to the arbitration provisions within the leases.
The case eventually made its way to the Ohio Supreme Court, which was tasked with answering one single question: is an action seeking to determine that an oil and gas lease has expired by its own terms the type of controversy “involving the title to or the possession of real estate” so that the action is exempt from arbitration under Ohio Revised Code § 2711.01(B)(1)?
The Ohio Supreme Court determined that yes, under Ohio law, an action seeking to determine whether an oil and gas lease has expired by its own terms is not subject to arbitration. The Ohio Supreme Court reasoned that an oil and gas lease grants the lessee a property interest in the land and constitutes a title transaction because it affects title to real estate. Additionally, the Ohio Supreme Court found that an oil and gas lease affects the possession of land because a lessee has a vested right to the possession of the land to the extent reasonably necessary to carry out the terms of the lease. Lastly, the Ohio Supreme Court provided that if the conditions of the primary term or secondary term of an oil and gas lease are not met, then the lease terminates, and the property interest created by the oil and gas lease reverts back to the owner/lessor.
In reaching its holding, the Ohio Supreme Court concluded that Plaintiffs’ lawsuit is exactly the type of controversy that involves the title to or the possession of real estate. If Plaintiffs are successful, then it will quiet title to the farmland, remove the leases as encumbrances to the property, and restore the possession of the land to the Plaintiffs. If Plaintiffs are unsuccessful, then title to the land will remain subject to the terms of the leases which affects the transferability of the land. Additionally, the Ohio Supreme Court concluded that if Plaintiffs were unsuccessful then Defendant would have the continued right to possess and occupy the land. Therefore, the Ohio Supreme Court found that Plaintiffs’ controversy regarding the termination of oil and gas leases is the type of controversy that is exempt from arbitration clauses under § 2711.01(B)(1).
Conclusion. Although Ohio recognizes the ability of parties to freely negotiate and enter into contracts, there are cases when the law will step in to override provisions of a contract. The determination of title to and possession of real property is one of those instances. Such a determination can have drastic and long-lasting effects on the property rights of individuals. Therefore, as evidenced by this Ohio Supreme Court ruling, Ohio courts will not enforce an arbitration provision when the controversy is whether or not oil and gas leases have terminated. To read more of the Ohio Supreme Court’s Opinion visit: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2022/2022-Ohio-869.pdf.
UPDATE: Governor DeWine signed H.B. 95, the Beginning Farmer bill, on April 18, 2022. The effective date for the new law is July 18, 2022. The Governor signed the Statutory Lease Termination bill, H.B. 397, on April 21, and its effective date is July 21, 2022.
Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week. Predictions are that the Governor will sign both measures.
Statutory termination requirements for farm leases – H.B. 397
Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination. The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations by landowners. It will change how landowners conduct their farmland leasing arrangements, and will hopefull encourage written farmland leases that clearly address how to terminate the leasing arrangement.
The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1. The termination would be effective either upon completion of harvest or December 31, whichever is earlier. Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement. A lease that addresses how and when termination of the leasing arrangement may occur would also be unaffected by the new provisions.
The beginning farmer bill – H.B. 95
A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville). It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.
The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.” A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income. The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement. It also allows a carry-forward of excess credit up to 7 years. Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.
The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program. The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State. The farmer may carry the tax credit forward for up to three succeeding tax years.
Who is a certified beginning farmer? The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture. One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers. Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset.
An individual can become certified as a beginning farmer if he or she:
- Intends to farm or has been farming for less than ten years in Ohio.
- Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
- Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
- Provides the majority of day-to-day labor and management of the farm.
- Has adequate knowledge or farming experience in the type of farming involved.
- Submits projected earnings statements and demonstrates a profit potential.
- Demonstrates that farming will be a significant source of income.
- Participates in a financial management program approved by the Department of Agriculture.
- Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.
We’ll provide further details about these new laws as they become effective. Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here. Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.