farmland leases and pasture leases.
There are two main types of leases with subcategories within them: farmland leases and pasture leases. There are overarching rules and guidelines for both, but there are differences as well. Let’s discuss approaches for satisfying goals to consider and the advantages of having a written lease.
Structural considerations for leases start with the parties. Commonly, the lease has the landlord and tenant in their individual capacity or as an entity. The problem here is that upon the death of either party, the lease most likely lapses, unless it is enforceable or optionally enforceable by the heirs of the deceased party. The best way to avoid any issue of lapsing is to have a perpetual entity, such as an LLC, be the landlord and/or tenant. If an entity like an LLC is the landlord or tenant, death of a member or operator in the LLC does not impact the life of the lease (assuming it is not a single-member LLC).
Another important part of a lease can include a first right of refusal. The first right of refusal acts as a mechanism for the tenant to be given the first chance to buy the leased property in the event the landlord desires to sell. Coupling this concept with the entity as a part concept, the first right of refusal would also be kept from lapsing in the event of the tenant or landlord’s death. If a father and son owned LLC was the tenant under the lease and the lease contained a first right of refusal in favor of the LLC, if the father died and the landlord desired to sell the property, the landlord must first offer the property to the LLC and the son would have the first chance of buying the property by virtue of the son being a member of the LLC. This is a way to maintain a family’s chance of buying leased property even when the patriarch dies, or, at a minimum, to ensure that leased land is kept in the family farming operation even after a death in the operation.
One less commonly used tool in a lease can be a buy-sell agreement. A buy-sell agreement can be executed that sets the selling price for the leased property in the event the landlord ever does sell the leased property. The buy-sell agreement can be executed in addition to a lease and acts as a predetermined sales agreement for the property. It can set the price on the property even if the sale is to occur in the future. The benefit of a buy-sell agreement is that it is binding on the landlord and tenant and cannot be changed even if future economic forces increase or decrease the price of the land astronomically.
Most leases are oral leases which have statutory rules for notices, termination, possession, etc. However, to have the benefits of the different tools this article discusses, a written lease is necessary, and it is also necessary to update and rewrite old written leases to account for changes over time. Further, it’s also a good idea to protect yourself with a lease for a term longer than one year or to make the lease automatically renewable for a term of years. Depending on what type of lease it is and the economic climate, the length of the term is another operation-specific consideration. For example, some farmers in Iowa and Illinois signed five or even ten-year term cash rent leases at $500 or more per acre. When corn prices were upwards of $5.00 per bushel and inputs were relatively low, they could make that price work. But when the bottom dropped out on the price, those producers were still locked into those contracts. However, if you structured the lease so that the price per acre was based on average price per bushel, yield, or production history and made the price per acre variable to reflect production costs, a longer term of years would be more workable. The protection of a longer term is that all of the additional aspects included in the lease, such as a first right of refusal or accompanying buy-sell agreement, are kept alive during the term.
Written farmland and ranchland leases can account for production data such as precision farming data. Up until this point, it has not soundly been decided who owns precision data gathered from farming. Yield history, soil maps, grid sampling, irrigation and weather data, planting dates, seed variety, fertility, etc. are all extremely valuable and as equally tied to the land as the soil itself. The question is: who owns the data? Is it the farmer who purchased the equipment and technology to gather and compile it? Or is it the landowner who owns the land the data was gathered from? On one hand, the tenant who gathered it should be entitled to it because it was the fruit of their labor and investment. But on the other hand, the landlord has an interest in the data because it was their land that bore the data and that bit of data is not applicable to any other piece of land. The dispute fully arises when a landlord terminates a lease with a tenant and wants the data gathered by the outgoing tenant so that the incoming tenant can use the data and benefit from the previous tenant’s labor and investment. A properly written lease can settle this issue before it becomes a problem.
The information in this article is intended for general informational purposes only. This information is not intended to be, nor should be interpreted as, legal advice or a legal opinion. The reader should not consider this information to be an invitation to an attorney-client relationship, should not rely on the information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.