Unfortunately, the death of a farmland owner can create conflict within a family. Often, transition planning by the deceased could have prevented the conflict. Such is the case in a family disagreement that ended up before Ohio’s Third District Court of Appeals. The case pitted two brothers against one another, fighting over ownership of the family farm.
When their mother passed away in 2006, the five Verhoff siblings decided to sell the family farm. Two of the brothers wanted to purchase the farm, but one of them was also the executor of the estate. The estate’s attorney advised the executor brother that he should not buy the land directly from the estate due to his fiduciary duties as executor. The attorney recommended that the executor wait and purchase one-half of the farm from the other brother after it was transferred from the estate to the other brother.
Following a series of discussions between the two brothers, the executor brother sent half of the farm’s purchase price to the other brother and issued the farm’s deed to the other brother. Over the next eight years, the two brothers shared a joint checking account used to deposit rental income from the farmland and to pay for property taxes and utilities on the property. But when the executor brother asked the other brother for a deed showing the executor brother’s half-interest in the farm, the other brother claimed that the executor brother did not have an ownership interest. The money rendered by the executor brother was a loan and not a purchase, claimed the other brother. The other brother then began withholding the farm rental payments from the joint checking account. The relationship between the two brothers broke down, and in 2016, the executor brother filed a lawsuit to assert his half-ownership of the farm and his interest in the rental payments.
At trial, a jury found that the brothers had entered into a contract that gave the executor brother half ownership of the farm upon paying half of the purchase price to the other brother. The trial court ordered the other brother to pay the executor brother half of the current value of the farm and half of the rental income that had been withheld from the executor brother. The other brother appealed the trial court’s decision. The court of appeals did not agree with any of the other brother’s arguments, and upheld the trial court’s decision that a contract existed and had been violated by the other brother. Two of the arguments on appeal raised by the other brother are most relevant: that Ohio’s statute of frauds required that the contract be in writing and that the contract was illegal because an executor cannot purchase land from an estate.
A contract for the sale of land should be in writing, but there are exceptions
Ohio’s “Statute of Frauds” provides that a contract or sale of land or an interest in land is not legally enforceable unless it is in writing and signed by the party to be charged. The other brother argued that because there was no written agreement about the ownership of the farm, the situation did not comply with the Statute of Frauds and could not be enforceable. However, the court focused on an important exception to the Statute of Frauds: the doctrine of partial performance. The doctrine removes a verbal contract from the writing requirement in the Statute of Frauds if there are unequivocal acts of performance by one party in reliance upon a verbal agreement and if failing to enforce the verbal agreement would result in fraud, injustice, or hardship to that party who had partly performed under the agreement.
Based upon evidence produced by the executor brother, the appeals court agreed with the trial court in determining that an oral contract did exist between the two brothers and that the executor brother had performed unequivocal acts in furtherance of the verbal contract. The court explained that the executor brother had endured “risks and responsibility” by giving the other brother money with the expectation that he would receive rental income from the farm and own a one-half interest in the property. An injustice would occur if the verbal contract was not enforced because of the Statute of Frauds, as the other brother would receive a windfall at the executor brother’s expense, said the court. The court concluded that because the doctrine of partial performance had been met, the writing requirement in the Statute of Frauds should be set aside.
Did the executor brother violate his fiduciary duties by purchasing the land?
The other brother also claimed that the verbal contract was illegal because the executor brother made a sale from the estate to himself. According to the other brother, the sale violated Ohio Revised Code section 2109.44, which prohibits fiduciaries from buying from or selling to themselves or having any individual dealings with an estate unless authorized by the deceased or the heirs.
The court pointed out, however, that the executor brother did not buy the farm from the estate. Instead, the executor brother purchased the farm through a side agreement with the other brother who purchased the farm from the estate. The court noted that this type of arrangement could be voidable if other heirs challenged it. But since no other heirs did so, the court determined that the executor brother had not violated his fiduciary duties to the estate and allowed the side agreement to stand.
Estate and transition planning can help prevent family disputes
Imagine the toll this case took on the family. It’s quite possible that parents can prevent these types of conflicts over what happens to the farm when they pass on. An initial step for parents is to determine which heirs want to transition into owning and managing the farm, and what their future roles with the farm might be. This often raises other tough questions parents must face: how to provide an inheritance to children who don’t want the farm when other children do want the farm? Must or can the division of assets be equal among the heirs? What about other considerations, such as children with special issues or not having heirs who do want to continue the farm? These are difficult but important questions parents can answer in order to prevent conflict and irreparable harm to the family in the future.
The good news is that there are legal tools and solutions for these and the many other situations parents encounter when deciding what to do with the farm and their assets. An attorney who works in transition planning for farmers will know those solutions and can tailor them to a family’s unique circumstances. One agricultural attorney I know promises that there’s a legal solution for every farm family’s transition planning issues. Working through the issues is difficult, but identifying tools and a detailed plan for the future can be satisfying. And it will almost certainly prevent years of litigation.
The text of the opinion in Verhoff v. Verhoff, 2019-Ohio-3836 (3rd Dist.) is HERE. For more information about farm estate and transition planning, be on the lookout for our soon-to-be released Farm Transition Matters law bulletin series or catch us at one of our Farm Transition Planning workshops this winter.
With all the rain and delayed planting that Ohio farmers have experienced this spring, signing a solar lease has been a very appealing prospect for many farmland owners. While this may be the right decision for a farm, it is very important that the farmland owner understand exactly what he or she is signing. Once an energy developer offers to pay you to enter into an agreement, and you sign that agreement, its terms will be legally binding.
In our recent blog post on solar leasing, we discussed some of the early documents that a farmland owner is likely to receive from an interested solar energy developer. Further, we gave some general advice on what farmland owners should do if an energy developer wants to discuss leasing his or her land. One of our main suggestions was to take the time to fully understand what the farmland owner is getting into, and that is where this post comes in.
In this blog post, we highlight some of the important provisions of a solar lease that you as a farmland owner should look for in your solar lease, and understand what they mean. A good solar lease will be very thorough, and include a lot of legalese. Our upcoming Ohio Farmland Owner’s Guide to Solar Leasing, due out in the next month, will go more in depth than this blog post on the terms below and more. It would also be a wise decision to consult with an attorney to ensure that your understanding of your solar lease reflects what the documents say.
For now, here are a few provisions to be on the lookout for in your solar lease:
The term. How long does this lease last? Most solar leases last for 20 to 30 years. This is the time during which solar energy is being collected and sold. Solar energy developers like this multi-decade duration because it allows them to use of the solar panels for their expected productive lifespan.
Thirty years is a long time. Many careers are retirement-eligible after that period, and many farms will transition to the next generation in that amount of time. This long of a term is not necessarily a bad thing. It just means that a farmland owner should look back and look ahead. Think back 30 years to 1989. What all has changed on your farm? What would it have looked like to not be able to use this ground for the past 30 years? Now look ahead. What do you expect your needs and those of your family to look like when this lease ends in 2049? Only you can determine if not being able to use your land for that long is a good thing.
Phases. How is this lease broken up? We just explained that most solar leases will last for 20 to 30 years, but that clock usually starts ticking once construction has started on the project. Solar energy developers will often reserve a year or two during which they can conduct their final feasibility studies and obtain necessary permits. Some leases structure this pre-construction phase as merely an option phase, meaning that the energy developer will pay a small amount of rent to keep its option alive for that one or two-year period, but it does not necessarily have to commence construction.
Further, toward the end of the term, the energy developer may have written in an option to renew for another 5 or 10 years. These renewals are often structured as a right that the energy developer may exercise merely by giving notice to the landowner. Additionally, in the middle, if there is a natural disaster that puts the operation out of service for any period of time, a solar lease may stop the clock from ticking until the project is operational again and solar energy is being collected.
The important take-away for the phases is being able to know when each phase begins and ends. When all of the different phases are combined, instead of just a 30-year lease, you could be looking at a 42-year agreement. The only way to know how long it could last is to thoroughly read the entire lease.
A description of the premises. Every solar lease will contain a description of the premises. If an entire parcel is being leased, then this part is fairly easy. However, if only a portion of the parcel is being lease, the farmland owner will want to make sure that the lease provides an adequate description so that the leased portion can be easily determined on the ground. Often, this will include a survey and maps. Knowing the boundaries is important because these leases are often exclusive, such that the farmland owner has little or no use or access of the leased land throughout the term.
Easements. What rights are being granted to the solar energy developer? Solar leases include a series of easements that give the solar energy developer the right to use your land. Some of the common easements include a:
- Construction easement: a right to cross over portions of the farmland owner’s property in order to construct the solar facility
- Access easement: a right to cross over portions of the farmland owner’s property to reach the solar facility
- Transmission easement: a right to install power lines, poles, and other equipment to transmit the energy produced by the solar panels to the grid
- Solar easement: a right to unobstructed access to the sun without interference from structures or other improvements
- Catch-all easement: a general right to do whatever is necessary for the benefit of the project
Solar energy developers want their easements to be as broad and generous as possible in order to maximize their flexibility with the project. This is not always to the advantage of the farmland owner. If the lease is general enough to allow the solar energy developer to sub-lease to another entity such as a telecommunications company, the landowner will have a difficult time preventing the solar energy developer from doing so. The farmland owner wants to make sure that the easements being granted are specific enough to not result in any surprises.
Landowner obligations and rights. What does the lease require of you as the farmland owner? Usually private solar energy developers include a non-interference provision, a quiet enjoyment provision, and an exclusivity provision. All combined, these provisions are a promise by the farmland owner to not enter the solar facilities without prior permission, not interfere with the solar facilities, and not allow anyone else to do so for the duration of the term.
Further, solar leases often include a confidentiality provision that courts will enforce as legally binding. These provisions allow the solar energy developer to control the flow of its proprietary information, and also prevent landowners from talking with one another about topics such as rent rates. It is important to understand:
- What information is protected
- If there are any exceptions
- When consent might be granted
- If specific penalties apply
- How long confidentiality lasts
The solar lease may also include a provision about farmland owner improvements. These explain if and when the landowner needs to obtain prior approval of the solar energy developer in order to build a structure or plant something that may interfere with the solar project.
Property maintenance. Who is going to mow? Ohio landowners have a legal duty to cut noxious weeds, and a well drafted lease will cover which party to the lease bears responsibility for keeping the leased land clear. Usually, the solar energy developer will take this responsibility, but it helps to have this in writing.
Cleanup terms. Cleanup involves a lot of questions. Does the solar lease require the solar energy developer to restore the land to its previous state? If so, how is this measured? Will all stakes and foundations be removed? Will all improvements, like roadways, be removed? How will the solar energy developer guarantee that it will be able to pay for this cleanup in 30 years? Does it post a security, and if so, when? A thorough lease will answer these questions.
Tax and conservation penalties. Tax and conservation also involves a lot of questions because constructing and operating a solar facility will make the property ineligible for the full benefits of CAUV and most conservation programs. Does the lease require the solar energy developer to cover real estate taxes? Does the lease require the solar energy developer to cover the three-year lookback penalty for removing land from CAUV? What will the solar energy developer do toward the end of the lease so that the land can be put back into production and made CAUV eligible again? Similar questions must be asked for conservation programs.
Compensation. It’s not that we saved the fun and best part for last. We just wanted to make sure that compensation is not the first and only thing considered when deciding whether or not to enter into a solar lease. While it certainly is important, some of the issues discussed above must be just as carefully understood.
The solar leases that we have seen involve cash rent that increases over time based upon a fixed escalator. The escalator is a percent increase. If the escalator increases at a rate greater than inflation, then the farmland owner will receive more bang for his or her land. However, if the escalator increases at a rate lower than long-term inflation, then the solar energy developer will have to pay less over time.
Another point of compensation to consider is how damages will be calculated for harm to property and crops. When the solar energy developer decides it is time to start construction, its option and easements grant it the right to begin construction even if there is a crop already in the ground. This makes it in a farmland owner’s best interest to have this issue addressed up front. These damages will often be calculated my multiplying the number of acres by the average county yield for that crop by that crop’s commodity future price with the Chicago Board of Trade for a given date. This provides an objective calculation for damages.
Verbal promises. A note of caution: if the solar energy developer makes you a verbal promise, ask for that promise to be included in the written lease. If there is a conflict between what a representative of the solar energy developer tells you and what is written in the lease, the terms in the written lease are likely to prevail.
The activity we are seeing across Ohio right now with solar reminds us of the early stages of the recent wind and shale energy booms. Some of the biggest regrets that we hear about are from landowners who thought they were getting a better deal than they actually did. Reading through, understanding, and thinking about the lease is an essential part of calculating whether or not the lease being offered is actually a good deal for a farmland owner and his or her family. Don’t be afraid to reach out to your team of professionals in this process. Your attorney, tax professional, extension educator, and others can be a great resource.
We haven’t seen much sun in Ohio lately, but that hasn’t stopped the growth of solar energy development. In the past two years, the Ohio Power Siting Board has approved six large scale solar projects with generating capacities of 50MW or more, and three more projects are pending approval. These “solar farms” require a large land base, and in Ohio that land base is predominantly farmland. The nine solar energy facilities noted on this map will cover about 16,500 acres in Brown, Clermont, Hardin, Highland and Vinton counties. About 12,300 of those acres were previously used for agriculture.
We’re hearing that solar energy developers are on the lookout for more land in these and several other counties across the state. As the markets fluctuate and weather continues to prevent planting, leasing farmland to a solar energy developer might look pretty appealing. But we always urge caution and due diligence for any leasing situation, and solar energy is no exception.
What should you do if an energy developer wants to discuss leasing your farmland for a large scale solar energy facility? Our best advice is not to jump too quickly. Instead, take the time to fully understand what you’re getting into. A typical solar lease can last for 30 years and thus can have long term legal, financial and social implications for a farmland owner. An important initial question is how does this type of land use fit into your future vision for your land, your farm operation, and your family? If you don’t yet know much about large scale solar development and what it means for your land, give a listen to this webinar from our partner, the National Agricultural Law Center.
In this post, we’ll focus on the beginning of the solar leasing legal process. The large scale solar projects in Ohio range from 600 to 3,300 acres of land, so a developer first has to assemble the land base once it identifies an area for a solar development project. Leasing the land is the typical mechanism used for the solar projects in Ohio. If a developer is interested in leasing your land, the first documents you may receive from the developer are a letter of intent and/or an option to lease. These documents are the precursors to a solar lease but, like a lease, are written in favor of the developer and establish legal rights for the developer. Careful review is critical, as these documents can tie up the land and the landowner for several years or more.
The letter of intent. Some developers use a written letter of intent to notify a landowner of the developer’s interest in a parcel of land. The purpose of the letter is to begin the process of considering the land for a long term solar lease. Note, however, that a letter of intent might also contain a confidentiality clause that would prevent the landowner from talking with other developers about the land or sharing details of the developer’s interest with anyone. Be aware that courts will generally enforce a signed letter of intent as a legally binding contract if the developer has offered the landowner a payment or similar benefit for signing the letter. By signing confidentiality provisions in a letter of intent, a landowner can be foreclosed from considering other solar leasing opportunities.
The option to lease. More commonly, the first document a solar developer will ask a landowner to sign is an option to lease. Don’t be fooled by the name of this document and think that it’s not a legally binding agreement. While an option is not the same as a lease, it can have the same legal effect of tying up the land for a certain period of time and might also dictate many of the terms of the lease if the developer decides to move forward on the project.
An option to lease grants the solar developer rights to explore the possibility of using the land for a solar project, but the developer may choose not to lease the land or develop the project. The option period, typically up to five years, gives the developer time to conduct due diligence on the property, assemble other land parcels, secure financing, and obtain government approval for the project. At the end of the option period, the developer should decide whether or not to proceed with the project. An option also can give the developer the right to terminate and back out of the option at any time prior to the end of the option period.
On the other hand, a landowner doesn’t have an option to back out once he or she signs an option to lease. The landowner is bound for the entire option period. Like a letter of intent, an option can contain confidentiality and “exclusive dealing” provisions that prevent the landowner from sharing details or entering into leasing opportunities with other developers during the option period. The option might also require the landowner to cooperate with the developer’s due diligence and help the developer obtain approvals and permits. Many options also include language that allows the developer to assign the option to another solar developer.
Be aware that an option can also contain significant leasing terms that carry over if the developer proceeds with the project. For example, in addition to allowing the developer to consider the land for a project, the option to lease could also include provisions for the period of the actual long term solar lease, the lease payment amount, easement rights, and landowner obligations. Landowners might think that such terms could be negotiable later if the parties sign an “official” solar lease, but the option language may bind the landowner to the leasing terms that are presented in the option. Sometimes, the option itself becomes the lease. The net effect: a landowner who thinks he or she is just signing a five year option agreement might also be committing to a 30 year solar lease and a predetermined lease payment.
What about crop production during the option period? An option might contain language stating that the landowner may continue managing and operating the property in the same way after agreeing to the option. But the option might also allow the developer to enter the property and proceed with the project at any time, including when crops are in the ground, although the option might not provide the landowner payment for the lost production. In that case, the landowner simply loses out on the crop if the option doesn’t contain provisions for lost production.
As for payment for the option, a landowner usually receives an initial payment for signing the option, perhaps several thousand dollars or more. During the option period, the landowner also typically receives an annual payment that is based on number of acres, perhaps $20 dollars per acre or more.
Should you have an attorney review an option to lease? Yes. Option language can vary and we surely haven’t addressed all potential issues in this post. A close examination by an attorney shouldn’t take much time or cost a lot and will ensure that you fully understand the legal implications of entering into the option to lease.
Are the terms of an option negotiable? That’s up to the landowner and the developer, but don’t assume that the developer won’t negotiate. If you’re faced with an option to lease and don’t like the terms, try negotiating. An attorney can be helpful here, also.
In our next solar leasing post, we’ll review the terms of a solar lease and consider how the lease can impact agricultural landowners over the typical 30 year lease period. Watch also for our upcoming Ohio Farmland Owner’s Guide to Solar Leasing, due out in the next month, which will provide a detailed examination of the solar leasing process.