Anumber of recent economic developments will likely impact the negotiation of farmland leases following the 2022 crop year. For example, landlords may want to increase rent because commodity prices are generally rising, and farmland values are going up across the Midwest. On the other hand, tenants may be reluctant to pay more rent because many input costs have dramatically increased. Thus, it seems likely that both farmland landlords and tenants will want to review and renegotiate their current leases when they expire. This article aims to provide a “refresher” regarding some of the basic requirements and essential terms of a standard farm lease. There are certain considerations that individuals should be mindful of when negotiating and drafting any farmland lease.
- Reduce Your Rental Agreement to Writing. Non-written, “oral” leases can be enforceable on a year-to-year basis, but it is certainly a “best practice” to memorialize a rental agreement with a written lease that is signed by the landlord and tenant. This reduces the likelihood of misunderstandings between the parties and provides the parties with express written terms that will control a rental relationship. Further, pursuant to Minn. Stat. § 513.05, if landlords and tenants want to establish an enforceable rental agreement covering a period longer than one year, then a written lease – or some note or memorandum thereof – is required.
- Include the Purpose. It is good practice to include a “purpose” statement in a lease. For example, a purpose statement can delineate whether the lease is for crop production only, or whether it may be used for other purposes (e.g., hunting, crop storage, etc.).
- Identify the Proper Parties to the Lease. The names and contact information of the proper parties should be included in the lease. For example, if the landlord is “John Doe, as Trustee of the John Doe Trust, dated May 1, 2022,” then the lease should specifically identify this landlord as such and the landlord should sign the lease as “John Doe, as Trustee of the John Doe Trust, dated May 1, 2022.” Sometimes, the parties to the lease sign in their individual capacities instead of, as in the above hypothetical, the relevant trustee of a trust. This can potentially cause problems down the road.
- Real Estate Description. The lease should be specific enough to identify the land subject to the lease. It is generally advisable to use a formal legal description for the leased farmland, but it is not required. That said, if a legal description is not used the parties should consider using the applicable parcel ID number(s) and/or attaching a map depicting the leased land. It is also a good idea to specify whether the real estate being leased is all acres of a given parcel or only the tillable acres thereof.
- Lease Term/Renewal. A provision in the lease should specifically state the exact term of the lease and how renewals, if any, will be handled. With respect to lease renewals, the lease should spell out whether the lease will automatically renew after its initial term, and if so for how long, along with an additional provision providing for how the parties can terminate a lease.
- Rental Amount and Method of Payment. The lease should clearly identify the rental amounts and payment terms for the farmland being rented. This part of the lease should delineate whether the lease is for “cash rent,” a “crop share” arrangement, or some sort of “flexible cash rent.” The lease should also state the specific date(s) on which any rent payments are due.
- Allowed/Prohibited Uses. Both the landlord and the tenant should desire provisions outlining allowed and prohibited uses of the farmland subject to the lease (e.g., permitted and prohibited herbicide and pesticide applications, prohibitions on farming CRP acres, etc.).
- Transfer of a Tenant’s Interest. Most landowners will want a lease to restrict his or her tenant from assigning the tenant’s interest in the real estate without the landlord’s prior, written consent. Absent such a provision, a landlord may not be able to prevent an unreliable tenant from renting the farmland for the remaining term of a lease.
- Remedies Upon Default. Finally, some of the most critical terms in a farmland lease – and any lease for that matter – are provisions that specifically identify the parties’ respective remedies in case of a default (e.g., nonpayment of rent, a failure to plowback the farmland in the fall, etc.). These possible remedies include the landlord’s right to re-enter the property without causing forfeiture of tenant’s obligation to pay rent; the landlord’s right to re-enter the property to care for and harvest the crops; and the right of a landlord to sue a tenant and collect the landlord’s attorneys’ fees incurred in enforcing the lease, etc.
In closing, given the changing agricultural economy, in the upcoming months landlords and tenants may be interested in reassessing their current rental arrangements to determine what changes, if any, may be appropriate moving forward. Admittedly most, if not all, of the above-referenced lease terms are probably familiar to experienced landlords and tenants. And certain provisions will be given more priority in the lease negotiation process than others (i.e., rental amounts, payment terms, and default remedies are generally the highest priority for landlords and tenants). Nonetheless, when evaluating whether or not to continue a current lease or enter into a new one, landlords and tenants should carefully consider what lease terms should be included (or omitted) from their leases to maximize profits, continue or develop favorable rental arrangements, and successfully navigate our ever-changing agricultural economy.