It is well known among Ohio farmers that installing subsurface drainage in poorly drained soil is a good investment. However, some landowners are not aware of the value of drainage or may not share the same level of commitment to improve the land. Furthermore, even if landowners do understand the benefit of subsurface drainage, they may not be willing to pay the substantial cost of installing drainage. To overcome this obstacle, tenant farmers will sometimes offer to install and/or pay for the drainage tile rather than imposing the cost on the landowner. This strategy can be a good way to improve the land without burdening the landowner with the entire cost. If this strategy is used, the lease between the landowner and tenant becomes critical to protect the interests of both parties.
There are three potential strategies for landowners and tenants to implement when installing drainage tile. The strategies are:
- Landowner pays entire cost
- Tenant pays entire cost
- Landowner and Tenant share costs
In the following discussion, the legal implications of each strategy will be analyzed as well as provisions to include in a written lease to protect both parties’ legal interests.
Landowner Pays Entire Cost
As noted above, some landowners are reluctant to pay the entire cost for subsurface drainage. However, there are landowners who will choose to pay for subsurface drainage. Before deciding upon paying for the tile, the landowner may want to negotiate a higher lease payment with the tenant. The higher lease payment can be justified by the newly drained farmland being more productive. The lease should clearly state that the tenant will agree to pay a higher lease payment provided the landowner installs drainage. An example term to include in the lease could be something similar to:
In the event Landowner installs systematic drainage tile in the leased property, the annual lease rate shall be increased by $______. The systematic drainage tile shall be installed by a contractor approved by both Landowner and Tenant.
Including a provision like the one above will ensure that the tenant is aware that they will be required to pay a higher lease rate due to the installation of the drainage system. Also, by having a say in the contractor selected, the tenant can have some assurance that the drainage system will be well designed and properly installed. Because of the high demand for leased land, it is probably not necessary for the landowner to enter into a long-term lease. If a tenant opts out of the lease, the landowner will likely have no problem in finding another tenant.
Tenant Pays Full Cost of Drainage Improvement
A more common strategy for drainage improvements on leased land is for the tenant to pay the entire cost. When the tenant pays for the entire drainage improvement, the tenant should insist on including terms in the lease to protect their investment. These terms should create a long-term lease and provide for a means for the tenant to recoup their investment outlay for the drainage improvement should the landowner terminates the lease early.
The length of the lease should be long enough that the tenant recovers their investment in the drainage. Lease terms of 10-15 years are often used when the tenants pays the entire cost but the term can be longer or shorter depending on the situation. The tenant should calculate the increased revenue expected from installation of new drainage to determine the term of lease needed.
For example, Tenant agrees to pay for a new systematic subsurface drainage system. Tenant expects the new drainage to increase revenue by $100/acre. The drainage will cost $1,000/acre. Tenant should be sure to have at least a 10-year lease to recoup their investment. Perhaps the Tenant should ask for a 12 or 15-year lease to not only recoup costs but to enjoy some of the windfall from the installed drainage.
A provision should be included in the lease that requires the landowner to pay for at least some of the drainage tile in the event the lease is terminated early by the landowner. An example term could be something similar to:
In the event this Lease is terminated prior to the scheduled termination date, for any reason other than due to Tenant’s breach of terms of this Lease, Landowner shall compensate Tenant the pro-rata cost of the tile paid for by Tenant. The pro-rata share of the tile cost shall be calculated as follows: (length of lease - number of years installed)/length of lease.
As an example, let’s assume Landowner and Tenant enter into a 10-year lease and the drainage costs $1,000/acre. Landowner terminates the lease in year 4 to put the land in a solar project. Using the above formula in the lease provision, Landowner would be required to pay $600/acre to Tenant.
In the example, the Tenant will no doubt be disappointed that the lease is being terminated early, but at least they will recoup their remaining investment in the drainage. Without such a provision, an early termination of the lease could lead to a Landowner refusing to compensate the Tenant for the drainage or causing a dispute between the parties as to how much is owed the Tenant.
Note: In this example, Landlord will also likely owe Tenant for lost profits on the remaining 6 years of the lease as well as compensation for fertilizer applied and field operations performed in anticipation of continuing the lease through its full term.
Landowner and Tenant Share Cost
It is possible for the tenant and the landowner to share the cost of new drainage. Sharing the cost might be particularly applicable in a share lease arrangement where the tenant and landowner are already accustomed to sharing costs. In this scenario, the most important issue for the tenant and landowner to agree upon is how much each party will pay towards the drainage improvement. The share of the cost is important not only for payment of the initial cost but also to determine what expensing or depreciation is available to the landowner and landowner.
An example provision to include in this lease could be something similar to:
Tenant and Landlord agree to cooperate on the installation of new subsurface drainage on the Property subject to the following conditions:
Tenant and Landlord shall mutually agree upon the contractor to install the drainage
Tenant and Landowner shall, by mutual consent, determine the placement of the tile, design of the tile system and materials to be installed
The drainage shall be installed on or before (date).
Tenant and Landowner shall share in the costs of the new drainage installation. Costs shall include all labor, material and any other related costs.
Tenant shall be responsible for ___% and Landlord shall be responsible for ____% of the total costs.
Each party shall be entitled to expense or depreciate their share of the cost
Again, the tenant should require a long-term lease to be sure they gain the benefit of their investment. The lease should also include a provision to protect the tenant in the event of an early termination as discussed in the previous example.
Maintenance and Repair
Regardless of who is responsible for the costs of installing drainage systems, the lease should clearly state who is responsible for maintenance and repair of drainage systems. There are many ways to address this issue. In some cases, the landowner may be entirely responsible for maintenance while in other situations the tenant may be solely responsible. Additionally, the landowner and tenant can agree to share in the maintenance costs. Establishing who is responsible for maintenance and repair will help alleviate potential conflicts between the landowner and tenant.
Seek Legal Counsel
Attorneys with experience in agricultural leases can be a good source of ideas to incorporate into a lease. Additionally, an attorney can ensure that the lease is drafted and executed properly to protect both tenant and landowner. A small investment of time and money with an attorney can avoid conflicts and unwanted surprises.
Tags: farm leases, drainage improvements