farm leases

By: Robert Moore, Thursday, December 01st, 2022

Legal Groundwork

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:

  1. Tenant and Landlord shall mutually agree upon the contractor to install the drainage

  2. Tenant and Landowner shall, by mutual consent, determine the placement of the tile, design of the tile system and materials to be installed

  3. The drainage shall be installed on or before (date).

  4. Tenant and Landowner shall share in the costs of the new drainage installation.  Costs shall include all labor, material and any other related costs.

  5. Tenant shall be responsible for ___% and Landlord shall be responsible for ____% of the total costs.

  6. 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.

Posted In: Property
Tags: farm leases, drainage improvements
Comments: 0
Ohio Farmland Leasing Update webinar
By: Peggy Kirk Hall, Tuesday, July 26th, 2022

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: Peggy Kirk Hall, Wednesday, December 18th, 2019

Christmas is a good time to make wishes for the peace and well-being of others.  One of our top wishes this year does that:  we hope for all Ohio farmers to have written farmland leases.  It’s an odd wish, we know.  But putting leases in writing can help landowners and farm tenants live in peace, and we like that.

Farm leases have always been prone to being verbal agreements, sealed with a handshake.  Simplicity and trust are two plausible reasons we’ve done business that way.  But a written farm lease can be simple, and using one doesn’t have to mean that the parties don’t trust each another.  Instead, a lease can keep distrust from arising between the parties by anticipating needs and foreclosing uncertainties and disagreements.

One of the strongest disagreements we hear about verbal farm leases is whether one party can terminate the lease without giving the other much notice of that termination.  For example, if Riley has rented land from Dale every year for the past ten years, can Dale terminate the lease for the 2020 planting season in February of 2020?  What if Riley has already purchased inputs, added nutrients, or planted a cover crop?  Or perhaps Dale passes away at the end of the year.  Will Riley lose the lease if Dale’s children sell the land before planting season begins?  These are the uncertainties that can lead to fighting, distrust, and sometimes, costly and difficult litigation.

A written farmland lease can prevent these uncertainties that can arise with verbal leases.  A written lease can state how much notice is required in order for one party to terminate the lease.  It can address other potentially problematic issues, such as who repairs drainage tiles, fences and access points, how to address new subsurface drainage and soil fertility needs, and whether and how to adjust annual lease rental rates.  When an issue or question about the arrangement develops, the written farm lease can provide the already agreed-upon answer or solution. 

When it comes to the peace and well-being of farmers, written farmland leases are a good thing to wish for.  So let’s keep the Grinch of uncertainty from showing up in 2020, and put those farmland leases in writing.   For our resources on what to include in a written farm lease, how to create an enforceable lease, and other farm lease needs, please visit this page

Posted In: Crop Issues, Property
Tags: farm leases
Comments: 0
By: Peggy Kirk Hall, Tuesday, January 13th, 2015

Ohio State University Extension will offer four Farmland Leasing Workshops throughout Ohio this February.

The three hour workshops will include topics of interest to both landowners and farm operators, such as factors affecting leasing options and rental rates, analyzing rent survey data and legal requirements and provisions for farm leases.  The speakers will help attendees consider how to use data in negotiations and to apply legal information to leasing practices.

Workshop presenters include Barry Ward, Assistant Professor, OSU Extension and Leader, Production Business Management and Peggy Hall, Assistant Professor, OSU Extension and Director of OSU's Agricultural & Resource Law Program.  

Topics included in the workshop are:

  • Factors affecting leasing options and rates
  • Evaluating cash rent survey data
  • Farmland leasing options:  fixed and flexible cash leases
  • Creating a legally enforceable lease
  • Legal provisions in farmland leases
  • Analyzing good and bad leasing practices

Dates and Locations of Farmland Leasing Workshops:

February 4, 2015, 9:00 am—12:00 pm
Fairfield County Ag Center, Lancaster  
Registration:  Call OSU Extension at 740-653-5419.  A program on the Farm Bill will follow the Farmland Leasing Workshop. $10 registration fee for both programs.
 
February 6, 2015, 1:00–4:00 pm
Kent State University Tuscarawas, New Philadelphia
Registration:  Call OSU Extension at 330-339-2337.  $15 registration fee.  

February 11, 6:00–9:00 pm
Paulding County Extension Office, Paulding
Registration:  Call OSU Extension at  419-399-8225.  $20 registration fee if registered by February 4.

February 20, 9:00 am—12:00 pm
Greene County Career Center,  Xenia
Registration:  Call OSU Extension at 937-372-9972, x114.  Call by February 16 for free registration.

Check the events calendar at https://farmoffice.osu.edu for workshop details.
 

Posted In: Business and Financial, Crop Issues
Tags: farm leases
Comments: 0

Peggy Kirk Hall, Asst. Professor, OSU Extension Agricultural & Resource Law Program

A written lease is a valuable tool to use in a farm lease situation, but many farm lease arrangements never progress beyond a conversation and a handshake.    A written lease brings certainty to the farming arrangement by laying out important terms such as lease duration, notice of termination, payment provisions and conservation practices. Verbal farm leases are risky; problems can arise with legal enforceability and disputes over rights and obligations.  For those dealing with a verbal lease agreement, here are a few strategies for protecting interests in the verbal farm lease situation.

Put the verbal lease in writing.  The first recommendation is no surprise; attorneys have long encouraged farmers to use written farmland leases rather than relying on verbal agreements.  But many landowners and tenants are uncomfortable using a written lease, for a variety of reasons.  Consider the following concerns and recommendations for addressing them:

  • “We’ve always operated on a verbal agreement and a handshake.”  Transitioning from a long-time verbal agreement to a written lease can be awkward and uncomfortable, and the landowner or tenant farmer who wishes to make the change may be uncertain about how to introduce the change.  To address an awkward transition, consider using a third party to “intervene” and facilitate the process of converting to a written agreement.  Have a farm manager, attorney or accountant explain the reasons for moving to a written agreement and begin the process of discussing lease terms.  Provide the other party with ample time to respond and to consider its own concerns and suggested lease terms.
  • “We don’t want everyone to know the terms of our lease.”  Landowners and tenants often express concern that a written farm lease must be recorded in the county recorder’s office, thus revealing private terms such as the price paid for the lease.  In this case, the parties may utilize a provision under Ohio law referred to as the “memorandum of lease.”  Ohio Revised Code section 5301.251 allows the parties to record a shortened form of the farmland lease.  The only provisions the parties must include in a recorded memorandum of lease are the names and addresses of the landowner and tenant, the date of executing the agreement, a description of the leased property, the starting date and duration of the lease and any rights of renewal or extension.   With the recorded memorandum of lease, there is public notice that the lease exists but key terms remain confidential between the landowner and tenant.  The parties can include a term in the written lease verifying their agreement to execute and record a memorandum of lease rather than recording the entire lease.
  • “A written lease is overwhelming or too much detail.”  It is true that farmland leases can be lengthy and detailed, although attorneys usually have sound reasons for drafting detailed leases.   Note that the parties can make a gradual transition.  Even a simple lease or a checklist can bring certainty to the relationship by outlining key obligations or providing resolutions if problems arise in the future.  Additionally, there are many good resources that simplify and explain farm lease provisions, and a few good “model” leases for reference.  For helpful resources, visit the website http://aglease101.org .

Pay attention to lease payments and possession.  If the parties can’t convert a verbal lease to a written lease, be aware that one problem with a verbal lease is that it’s not clear when the lease agreement actually begins.  In the event of a dispute, Ohio courts often look to factors such as possession and lease payments to determine the term of the lease.  Two indicators that a farm lease agreement is in place are possession of the property by the tenant coupled with acquiescence by the landowner, or a lease payment made by the tenant and accepted by the landowner.  Both parties should be mindful of these important actions and should maintain records to document these occurrences.

Address financial fairness.  Determining the payment amount for a farm lease is a challenging task, particularly when the farm economy is in flux.  Disagreement over the lease price can quickly end a verbal farm lease relationship.   Thorough research and equitable approaches can maintain the lease relationship by ensuring a financial arrangement that is responsive to the market and fair to both parties.   OSU’s Farm Management website at http://aede.osu.edu/programs-and-research/osu-farm-management contains data on farmland values and cash rental rates.  Consider a flexible cash lease to accommodate economic changes; information on flexible cash leases is also available through OSU’s Farm Management website and at http://www.aglease101.org.

Maintain records of the lease relationship.  Good records that document the leasing history can help establish a “course of dealing” between the parties.  While a written farm lease is preferable, a record of how the parties managed the lease or handled issues in the past can be a useful point of reference for ensuring consistency in the relationship.  If there is litigation over the lease, a court might rely on proof of the parties’ course of dealing to help resolve an issue.  Both parties should maintain thorough records of payments, agreements, farm management practices, soil sampling, nutrient applications, improvements and any other facts or data that establish the details of the leasing relationship.

Maintain communication.   Don’t underestimate the power of good communication between the leasing parties.  A landowner can provide a tenant with valuable certainty by keeping the tenant informed on potential changes with land ownership or financial management.  Tenants can keep a landowner apprised of the condition of the farm property by providing reports on a regular basis, especially in the case of an absentee landowner or a crop share lease.  A report that includes pictures and a brief summary of improvements made,  management practices adopted or crop share calculations may go a long way toward ensuring a solid leasing relationship.

A written and comprehensive farm lease is a valuable tool for farmland owners and tenant farmers alike; those who still rely on verbal farm leases should carefully consider making a transition to a written lease.  Parties that continue to use a verbal farm lease face legal and financial risks, but can adopt some practices to help protect the verbal farm lease situation.  For resources and examples of written farm leases, see http://aglease101.org.

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