Terminate Leases the Right Way

Landowners considering a property sale or a lease renegotiation need to properly end the current lease.

As fall approaches, so does the annual rite of passage for landowners and tenants: lease negotiation – or renegotiation.

And according to Doug Hensley of the Loranda Group, there are certain things landowners need to keep in mind as they head into this negotiation season.

"We have talked with many landowners over the past nine months who are considering either the sale of their farm in order to capitalize on record-high land prices, or a change in their lease terms to adjust for higher commodity prices," Hensley says. "In either case, before a sale can take place or a lease adjustment can be made, the existing lease agreement must be properly terminated."

And although different states have different laws regarding lease termination, most, including Illinois, require that the termination be in writing and be delivered by certified mail with a return receipt. Illinois law also requires that lease termination occur 120 days before the lease expiration. Historically, that date has been February 28, though many modern leases now run with the calendar year and expire on December 31.

For landowners thinking of selling their farm before spring planting, Hensley recommends that they correctly terminate the existing agreement. "In the case of a farm sale, terminating the lease ensures that all potential buyers, especially neighboring farmers, will be interested bidders.

"And farmer buyers want to actually farm the land they buy – they don't want to be a landlord for another farmer," he adds. "This could ultimately lower the sale price by 10 to 15%."

And in the case of a lease renegotiation – i.e., a landowner would like to change terms to reflect higher market prices – Hensley says that if the landowner does not terminate the existing agreement, the tenant is under no obligation to agree to a change in terms for next year.

And while landowners desire to capture extra rent income due to higher commodity prices, Purdue Ag Economist Alan Miller says cost of production will also be sharply higher in 2008. "We're looking at a 15% or more increase in the cost of growing corn or soybeans," he says.

For help in drawing up a lease termination, or for further information on lease agreements, check out the legal section of the University of Illinois' farmdoc Web site.

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