Looking at cash flow projections for 2016, ag bankers and other farm lenders are nervous. With today's low corn and soybean prices expected to continue as a result of big crops projected to be harvested this fall, lenders are telling borrowers who are renting land at high cash rental rates to talk to their landlords now. "In many cases the lenders are forcing the tenant operator's hand," observes Steve Bruere, president of People's Company, a farmland management and investment firm based in Des Moines. "The lenders are telling their borrowers to ask the landlord to lower the rent for 2016."
Farmland rents, on average, are about 50% higher than seven years ago. About half of the state's 24 million farmland acres are rented. The situation is prompting an increase in the number of farmland lease terminations this month. "Many tenants and landlords should be terminating leases in order to assure that they won't be obligated to pay the same cash rental rate in 2016 that they paid in 2015," says Steve Johnson, an Iowa State University Extension farm management specialist.
Farmland lease termination notice must be given by Sept. 1
In Iowa, farmers and tenants must notify each other by September 1 if they wish to break an existing lease. That's because under Iowa law, a farm lease automatically continues from year to year unless a notice of termination is given by either party, notes Johnson. The lease termination notice must be properly served by September 1, prior to the end of the lease year.
Kristine Tidgren, staff attorney at the Center for Agricultural Law and Taxation at Iowa State University, says the notice must fix the termination of the tenancy to take place on the following March 1. If notice is not served by Sept. 1, the lease continues for another crop year on the same terms as the original lease. However, if it is mutually acceptable to all parties concerned, a lease can be terminated or modified at any time.
How to properly serve a termination notice
While many leases will be negotiated after Sept. 1, the act of legally terminating the lease is very important for both parties, she explains. In Iowa, one party to the lease may properly serve a written notice of termination on the other party in any one of the following ways:
•By delivering a notice of termination to the other party and obtaining from that party an acceptance of service signature on or before Sept. 1.
•By serving the other party in the same manner as you would initiate a lawsuit (by hiring a sheriff or a process server and obtaining an affidavit of service). If personal service is tried and cannot be achieved, a notice by publication can be made.
•By mailing the notice before Sept. 1 by certified mail. Notice served by certified mail is made and completed when the notice is enclosed in a sealed envelope, with the proper postage on the envelope, addressed to the party or a successor of the party at the last known mailing address, and deposited in a mail box provided by the U.S. Postal Service.
Certified mail is required in Iowa
"Iowa courts have allowed no wriggle room as to these legal requirements," says Tidgren. "Certified mail means certified mail. If a party attempts to provide a notice of termination through regular mail, the notice is insufficient, even if the other party admits to having received and read the notice prior to Sept. 1. If a proper notice of termination is not served by Sept. 1, the lease automatically renews for another year, and a landlord or tenant can do nothing to unilaterally terminate such a lease, absent a material breach by the other party."
If a written lease outlines the procedures the parties must take to terminate the lease, those provisions will likely not override stricter statutory provisions, she says. It is likely, however, that if this lease contains provisions that are more restrictive than the law provides, those provisions would be enforced.
For example, if a written lease states that written notice of termination must be served by Aug. 1, a court would likely enforce that requirement. On the other hand, if the lease states that written notice of termination must be served by Oct. 1, a court would likely not enforce that provision, says Tidgren. Parties may not waive their rights to statutory notice in a written lease. They are protected by the statute whether they choose to be or not.
An agreement to terminate your lease
It is usually advisable to send a notice of termination yearly to safeguard your future options, she says. Although the notice of termination is the most common way to end a lease, the law does allow parties to enter into a separate mutual agreement to terminate their lease at any time. Such an agreement, however, should always be in writing.
That's true, she says, even though the Iowa Court of Appeals recently upheld (contrary to existing Iowa law) an oral termination agreement. "Generally, a court is unlikely to enforce an oral agreement given the difficulties of proof if one party denies its existence. Avoiding these types of battles is the intent of the strictly construed statutory notice requirements," says Tidgren.
Best advice is to "Get it in writing"
Iowa law recognizes the validity of both oral and written leases. Although a written lease is always advisable, a lease for a term of more than one year must be in writing to be enforceable, she notes. It's also important to remember that Iowa law requires landowners to record all leases with five-year duration or more (with renewals) in the county where the land is located. This must be completed within 180 days of the date of the lease to avoid a criminal penalty.
This article allows for only a summary of several legal requirements. Tidgren suggests you visit the CALT website for a more complete overview of Iowa's farm lease law at calt.iastate.edu/article/iowa-farm-leases-legal-economic-and-tax considerations.
A form titled "Notice of Termination of Farm Tenancy" is an example of a form used to terminate leases. It is available in the leasing section of ISU's Ag Decision Maker website.
For farm management information and analysis visit ISU's Ag Decision Maker site at extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson's site is at extension.iastate.edu/polk/farm-management.