farm lease

September 1 calendar
By: Peggy Kirk Hall, Wednesday, August 24th, 2022

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.

By: Robert Moore, Friday, May 20th, 2022

Legal GroundworkBy 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.

 

Purchase Terms

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.

 

Summary

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.

Photo of Ohio Statehouse in Columbus, Ohio
By: Peggy Kirk Hall, Friday, April 08th, 2022

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.

By: Caty Daniels, Wednesday, January 15th, 2014

Author: Peggy Kirk Hall, Asst. Professor, Agricultural & Resource Law

A farm lease is a valuable transaction for landowners and farm operators alike, so it is important to ensure that the lease conforms to Ohio’s legal requirements. Here’s what Ohio law requires for creating a legally enforceable lease:
 
The lease must be in writing. Enforcing a verbal farm lease is very difficult in Ohio due to our “Statute of Frauds.” The statute states that a lease of land must be in writing to be legally enforceable in Ohio. Despite this law, many verbal farm leases do exist. If a problem arises under a verbal farm lease, the law would not uphold the verbal lease unless a party could prove that the court should grant an exception from the Statute of Frauds writing requirement. This is a risky position and forces a party to go to court simply to try to prove that there is a valid lease.
 
The lease must identify the land. Include the legal description, address and acreage of the land parcel.
 
Both parties should sign the lease. Ohio law requires that the landowner must sign the lease, and Ohio’s Statute of Frauds states that a lease agreement is not enforceable against a party who did not sign the lease. So that the lease is enforceable against both landlord and operator, both should sign the lease.
 
The lease must properly name the parties and all owners. Be sure to list all owners, using the proper legal names or business names. In the case of joint landowners, such as a married couple or partnership, both owners must sign the lease. If an LLC or similar business entity owns the land, the business entity should be the named party entering into the lease, and the individual who signs
the lease on behalf of the entity must have legal authority to do so.
 
A lease over three years must be acknowledged. Parties to a lease of more than three years must have their signatures acknowledged and certified by a notary public or local official such as a judge, mayor or clerk of court.
 
The parties should file a memorandum of lease. Ohio law requires that the lease transaction be filed with the county recorder in the county where the land exists, which gives notice of the lease arrangement to potential purchasers and others. Rather than requiring the parties to divulge all details of the lease, the law allows the parties to file a shortened “memorandum of lease” that must include names and addresses of each party, a legal description of the land, the lease period and rights of renewal.
 
The terms of a farmland lease are also important. For information on terms and other lease issues, refer to our other resources on farmland leasing.
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Tags: farm lease, farmland lease, enforceable lease
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