With corn and soybean prices increasing significantly the past several months and the rise in land values that has resulted, questions are now being raised regarding cash rental rates and lease arrangements for cropland. More landlords want to renegotiate their lease agreements with tenants and raise the amount of cash rent paid to the landlord for 2011.
This situation is stirring several questions. First and foremost, if a landlord wants to renegotiate the terms of the lease with a tenant, and both parties have previously agreed to the lease for 2011, what can the landlord do?
Second, what should farmers and landlords consider when making decisions about what is a reasonable price for cash rent? Much of the better ground in Iowa is now commanding some pretty strong cash rent going into 2011.
Manage risk, be careful and don't pay too much for rent
Steve Johnson, Iowa State University Extension farm management specialist in central Iowa, is advising landowners and tenants to "Think back to what happened in 2008 when we saw crop prices increase significantly. We saw the impact that crop price run-up had, as it increased crop input costs, raised land values and eventually raised cash rent. I think this situation really comes down to managing the risk you have for your farming operation, and every farm is a little different in the amount of risk that needs to be managed."
Farmers need to know their profit margin and be careful not to pay a cash rental rate that is too high, one that they can't afford, says Johnson. Likewise, landlords need to keep that situation in mind when they ask the tenant for more money.
Can your cropland rental agreement for 2011 be changed?
Iowa State University's annual land value survey recently reported that the statewide average value for cropland in Iowa increased nearly 16% during 2010. Most of that rise has taken place since September, after many landlords and tenants had already agreed on and accepted their cash rental rate for 2011. If you're a landlord who has already finalized your rental agreement for 2011, what can you do to change it?
"You aren't necessarily locked in for 2011," explains Johnson. Leases can be changed if both parties agree to those changes. Most cropland leases in Iowa run from March 1 of one year to March 1 of the next year. In Iowa, a state law sets September 1 as the deadline for the landlord or the tenant to notify the other party that they want to terminate the lease for the coming year.
"The September 1 deadline requires the landowner or tenant, if either of them wants to make changes to their annual rental agreement, to provide notification to the other party that they want to change something in the lease or to terminate the lease," says Johnson. "That's what the September 1 date is about. It's the date for legal termination of an existing agreement. It doesn't mean you can't adjust the cash rent after September 1. However, both parties have to agree to any change or adjustment, if there was not a legal termination of the lease on or before September 1."
What if an existing lease wasn't terminated by Sept. 1?
As a landlord renting land to a farmer, if another farmer comes along and offers you a higher amount of money to rent the land, there is certainly some incentive for you to change tenants. Can you do that now, for the 2011 crop year, according to the Iowa law?
"No, you can't, if there was not a notification served on or before Sept. 1," says Johnson. "If you are a farmer and your landlord didn't send you a notification on or before Sept. 1, 2010, you are operating in 2011 just like you operated in 2010, whether you have a written lease or just a verbal agreement. The terms of the lease stay the same. Of course, if both of you (landlord and tenant) agree to make a change in the rental agreement, you can do that now."
September 1 notification date to terminate a lease is important
In Iowa, there are many farms, especially if they are professionally managed by a farm management company, where the farm manager generally terminates all of the cash leases annually. Then the farm management company comes back in January and renegotiates the cash rent with the tenant. So there are some farmers who will see adjustments in the amount of cash rent they pay in 2011, because the lease was terminated effective March 1—either by them, their landlord or by a farm management company.
"However, without the lease being terminated on or before last September 1, then legally, both parties (the landlord and the tenant) are going to have to agree to the change if one of them now decides there is need for a change in their lease agreement for 2011," says Johnson.