lease termination
A farmland lease is one of the most important legal agreements a farmer and landowner will sign. It establishes the rights and responsibilities of both the tenant and landowner, protects their interests, and provides a roadmap for resolving disputes. But even a carefully negotiated lease may not be enforceable if it fails to meet Ohio's legal requirements.
Ohio law sets out several basic requirements for creating an enforceable lease. In addition to those legal requirements, a well-drafted lease should clearly address the business terms of the farming arrangement to reduce misunderstandings and avoid future disputes. Landowners and tenants should review their lease to be sure it contains these essential elements:
1. Put the lease in writing.
Ohio law generally requires a lease involving an interest in land to be in writing. While verbal farm leases remain common, relying on an oral agreement can make it difficult, and sometimes impossible, to enforce the lease if a dispute arises. A written lease provides certainty for both the landowner and the tenant.
2. Clearly identify the farmland.
A lease should accurately describe the property being rented. Include the legal description, property address, and acreage. A clear description eliminates uncertainty about what land is covered by the agreement.
Just as important as identifying the land that is included in the lease, be sure to identify any portion of the property that is not included in the lease. It is normal to omit woods, buildings and facilities from the lease.
3. Identify all parties correctly.
Every landowner should be listed in the lease using the correct legal name. If the property is owned by spouses or multiple family members, each owner should be included. When a business entity is a party to the lease, the individual signing on behalf of the entity should have legal authority to do so.
A common oversight with identifying parties involves land in trusts. Many owners forget that their land is in trust and sign as an individual, not as the trustee of the trust. Failing to sign the lease in the trustee's capacity on behalf of the trust could make the lease unenforceable against the trust.
It is a good idea for the tenant to check the ownership on the county Auditor’s website. Look up the specific parcel being leased to determine who is identified as the legal owner. Then, make sure the names on the lease match the names on the Auditor’s site.
4. Make sure everyone signs the lease.
A lease generally cannot be enforced against someone who did not sign it. Every party to the agreement should sign the lease before it becomes effective.
5. Follow the additional requirements for long term leases.
If the lease is for more than three years, Ohio law requires the parties' signatures to be notarized. Not notarizing a long-term lease causes the lease to be treated as a year-to-year lease by Ohio law.
6. Record long-term leases or a memorandum of lease.
Recording a lease, or a memorandum of lease, with the county recorder helps protect the tenant's interest against future purchasers of the property. A recorded memorandum provides notice of the lease without disclosing all of its terms. It is good practice to record long-term leases to ensure the lease remains in effect even if the landowner sells or transfers the land to another person.
Including these terms is only part of creating a good farm lease. A well-drafted lease should also clearly address important business conditions such as the rental amount, payment dates, lease term, responsibilities for repairs and improvements, conservation practices, insurance requirements, termination procedures, and other provisions that fit the needs of the parties. Spending time to develop a thorough written lease can help prevent disputes and provide certainty throughout the leasing relationship.
Several resources are available to assist with drafting farm leases at ohiofarmlaw.com. The publications Creating an Enforceable Farm Lease and What’s in Your Farmland Lease? A Checklist of Farmland Lease Provisions explain the terms and conditions that should be in a farm lease. Farm lease templates can be found at aglease101.org, a resource provided by the North Central Farm Management Extension Committee.
Remember the September 1 Deadline for Verbal Farm Leases
As harvest approaches, Ohio landowners and tenants should also keep an important legal deadline in mind. Under Ohio law, a year-to-year verbal farm lease, or a written lease with no termination provision, automatically renews unless the landlord gives notice of termination by September 1. If notice is not provided by that date, the lease continues for another year. Landowners and tenants who are considering changes to their leasing arrangements should review their current agreements well before September 1 and provide timely notice if they intend to end a verbal lease.
For more information about farmland leasing and other agricultural law topics, visit the Farm Office at farmoffice.osu.edu.
Tags: Lease, lease termination, lease terms
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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.
Tags: farm lease, verbal farm leases, lease termination, HB 397, beginning farmers, tax credits, HB 95
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