By Seth Baker
For 20 years, Nathan farmed his neighbors’ 160-acre Class A farm on a handshake. Two years ago, Nathan convinced those neighbors that their farm could use some new tile to improve the productivity and value. He agreed to pay for the tile project with the agreement that he could rent the farm for $200 per acre for the next seven years. In every way, it was a fair deal, and all parties agreed to it.
You likely can guess where this is going.
Unexpectedly, both of Nathan’s neighbors passed away within six months of each other and gave their farmland to their niece, an attorney in Chicago. The niece, after hearing about $400-plus-per-acre cash rent, felt that Nathan had taken advantage of her aunt and uncle. Knowing her rights, the niece terminated Nathan from the farm and sought out the high bidders for her new farm.
With no written agreement, Nathan is out the money spent on the tile — and he’ll likely lose the farm if he decides not to pay top-dollar rent.
It’s a tough situation in 2018, when many leases are still confirmed on a handshake and verbal agreement. No matter the situation, this can be a dangerous method. Whether family member to family member, neighbor to neighbor, crop share or cash rent — getting the agreed terms in writing is important for both parties. A written lease will provide clarification if issues arise, and will provide direction to others if the original parties are no longer available.
Here are the key components of a written lease:
• Parties involved. Who is responsible for executing the lease terms? Both landowners and farming operations come is many forms, including partnerships, limited liability companies, S or C corporations, or more. It is important to know who exactly is responsible to meet the terms of the lease.
• Legal description. What property is being leased? Is it all the land owned by a landowner? Does it include the timber on the back side of the farm? Getting the correct description of the property can decrease issues and limit liability.
• Time frame. How long does the lease run? Per Illinois law, verbal leases are limited to one year. If you want a longer lease term, it must be in writing.
• Rent. How much is due and when? The terms of how the landowner will be compensated are necessary to avoid possible frustrations. A crop share lease should include how the crop will be split, while a cash rent lease should include the rental rate and due dates for payments. Even if no rent is due, it should be in writing to avoid concerns from others in the future.
• Expenses. Who is responsible to pay for expenses? Crop expenses can be easy, depending on the type of lease. But what about real estate taxes, tile repairs, building repairs, liability insurance? Limestone and soils are also two expenses that can be a point of contention.
• Uses. How can the property be used and by whom? Seems simple, right? The tenant has the right to farm the property. However, hunting or other recreational use rights may also need to be negotiated. The owner and/or tenant may want to hunt on the property after the crops are harvested. Knowing who has these rights can avoid issues down the road.
An owner may want to dictate farming practices such as non-GMO, organic, no-till, etc. Does an owner have the right to control what happens on land they are renting? The answer is yes, but only if it is in writing. Once a lease is signed, the owner’s right to dictate farming practices will be limited to the agreement in place.
A written lease is a good idea for both the landowner and the tenant, and is part of the good communication necessary for a successful owner-tenant relationship. A clear understanding — in writing — of the responsibility of each party can prevent the kind of problems mentioned earlier, and it provides a framework to ensure everyone’s goals are met.
Baker is a certified appraiser and owns Field Level Agriculture, Mount Zion, Ill. He is a member of the Illinois Society of Professional Farm Managers and Rural Appraisers, whose members regularly contribute to this column. Email farm management questions to Carroll Merry at [email protected].