Good Reasons For Written Lease

Good Reasons For Written Lease

A good understanding of legal concepts gives a farmer a leg-up when entering into leasing negotiations for cropland.

It's that time of year again to start negotiating your cropland lease for the coming 2012 crop season. "There's a lot of re-negotiating going on this year. Many landlords want to terminate the 2011 lease and write a new one for 2012 with higher rental rates," says Erin Herbold-Swalwell, staff attorney for the Center for Ag Law and Taxation (CALT) at Iowa State University.

"As always, legal concerns continue to come up and we at the Center For Agricultural Law and Taxation receive numerous calls regarding the rights of landlords and tenants in leasing arrangements," she says.

Important points to ponder regarding 2012 cropland leases

A good understanding of legal concepts gives a farmer a leg up when entering into leasing negotiations, she notes. Some key points to ponder:

* Leases over a year in length must be in writing to satisfy a legal concept called the statute of frauds (a requirement that certain kinds of contracts must be in writing and signed by the parties).

* If a lease over 40 acres is not terminated by mutual agreement of the landlord and tenant or is not terminated under the terms of a written lease, a landlord must serve a termination notice (in accordance with the Iowa Code) to a tenant by September 1.

* Long-term leases (leases lasting five years or more) must be recorded at the County Recorder's office where the land is situated. Failure to record these leases within 180 days is punishable by a fine not to exceed $100 per day until the lease is recorded.

The basics. Most farmers understand that a farm lease conveys a "possessory interest" in ag property to a tenant for a specific length of time. However, it is often overlooked that a farm lease is really a contract which can be negotiated and tailored to fit the needs and expectations of both the landlord and tenant.

Since a lease is a contractual agreement, there must be an offer, acceptance of that offer or exchange of consideration. With farmland leases money or services are exchanged for a possessory interest in land. Further, each party must have the capacity to contract, meaning that they have the ability to understand the nature of their acts.

Why in writing? "I know I'm beginning to sound like a broken record when I say, 'Get it in writing,'" says Herbold-Swalwell. "Don't get me wrong, there are still many oral farm leases out there, but it is highly preferable to have a lease in writing."

Why put it in writing? She answers, "Because oral farm leases exceeding one year aren't enforceable in Iowa, reliance on the selective memories of both parties has led to a litany of legal disputes, and a written lease clarifies how the parties will deal with each other if such a dispute arises."

"If you'd like to see examples of how messy oral arrangements (particularly between family members) can get, just look on our CALT website for the summaries of farm lease disputes that have made it to the appellate court level in Iowa."

What to put in a written lease. There are several important elements to put into a written ag lease to protect the interests of landlords and tenants.

A well-drafted lease will include an accurate legal description of the land to be leased (can be found on the abstract of title), the identity of the parties and their signatures, length of the lease, kind and amount of rent, time and place of payment, responsibilities of each party, an indemnification clause (whereby tenant agrees to compensate the landlord for any loss resulting from the tenant's negligence, and vice versa) and any other special provisions the parties agree upon.

Other things to consider when negotiating a farm lease

* What is a good husbandry clause? Written farm leases will often contain a provision requiring the tenant to farm the land in a "good and husbandlike manner." If the tenant fails to do so, the lease allows the landlord to enter the property and properly care for the crops and land.

Careful drafting is important here. The parties will want to define "proper farming practices" and what is expected by the landlord. A landlord may be entitled to damages if a tenant uses improper farming methods. However, case law generally states that a tenant should be given a chance to remedy the situation before legal action is taken.

Consider environmental issues, too. It may be a good idea to include a clause requiring the tenant to comply with "all applicable environmental laws." Remember, the Iowa legislature passed HF 2380 (effective July 1, 2010) which allows a farm tenant to take any part of the above-ground crop residue until a farm tenancy is properly terminated. If this is not acceptable to the landlord, they need to specify differently in the contract.

How to ensure payment. That is another consideration to include in a lease. Landlords should take advantage of the Iowa Landlord's Lien. This is a type of statutory lien that allows a landlord to file a claim against the tenant's property for the payment of rent. To perfect this type of ag lien, a landlord must file a financing statement (UCC-1) with the Iowa Secretary of State within 20 days after the tenant takes possession.

Farm lease publication has information available online

For further details on farm leasing and related information, see CALT's publication at www.calt.iastate.edu/iowafarmleases.html. The publication includes an explanation of tax issues, farm program payment issues, and an explanation of the risk associated with crop-share and cash-rent leases.

During July and August, ISU Extension farm management specialists are presenting 50 farmland leasing informational meetings around the state. For a list of meeting dates and locations, visit www.extension.iastate.edu.

For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.

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