Happy Friday! Last week, I stumbled across Rusty Rumley’s powerpoint presentation on “Agricultural Contracts and the Leasing of Land.” Rusty does a great job giving an overview of the building blocks. He’s a great teacher — he was one of my instructors in this agriculture law course last year— and I suggest looking at his presentation along with other useful information from the National Agriculture Law Center. In his presentation, Rusty lays the groundwork in farm leases by briefly discussing contract formation, basic vocabulary, and types of leases including cash rent leases, crop-share leases, and hybrid leases.
In summary, Rusty describes these three types of leases as follows:
Cash-Rent Lease: This is where the tenant usually pays a fixed dollar amount in rent (either on a per acre or whole farm basis). These types of leases may be modified depending on crop yield (i.e., increase in good years and decrease in bad years). In this scenario, the landlord is not as involved in crop production giving the tenant more autonomy. However, as a caveat, because the landlord is not “actively engaged in farming” he/she may not be able to participate in some federal programs. Furthermore, the income is not subject to self employment tax and is not considered to be earned income for the purposes of determining how social security may be modified if the farmer has previously retired.
Crop-Share Lease: Typically, in these arrangements, the landlord will share input costs (including but not limited to seed, fertilizer, fuel) while the tenant provides all of the labor and remaining input costs. Once harvested, proceeds will be divided according to the agreement (normally ranges from 25/75 to 50/50). In this scenario, the farmers both share the risk with the other person and the landlord will typically satisfy the “actively engaged in farming” requirement of federal programs. The downside (or upside – depending on your view) for the tenant is that he/she loses autonomy because the landlord is involved in the decisions of the operation. Sharply different than the cash rent lease, rental income will be subject to self employment taxes and may lower the landlord-farmer’s social security check if he/she is retired.
Hybrid Leases: Want the best of both? It’s possible for your attorney to draft an agreement between the farmers where the landlord will receive a minimum fixed rent payment while sharing in some of the profits, losses, and decision-making. It’s important to memorialize the rights and responsibilities of each party in this agreement.
Rusty also points out a few major issues that should be considered including soil/water quality, maintenance of fixed assets, uses (or prohibitions) on the real property including allowed/prohibited farming practices, use of farm equipment and facilities (e.g., barns, corrals), termination of the lease, death, assignment/subleasing, improvements on the land (e.g., building fence), reservation of rights for hunting/fishing/camping, and remaining unharvested crops at the end of the lease.
In close, Rusty notes that more information on farm leases (including forms) may be found from the University of Illinois – Farmdoc and Iowa State Extension. I would also like to add that helpful information can be found here and here.
As a final note, agricultural landlord-tenant and contract law are state law issues and can vary somewhat from state to state. I highly recommend seeking counsel from an attorney licensed in your jurisdiction. Yes, I realize that I am an attorney and do this for a living … and I also realize that the landlord-tenant relationships within the agriculture industry are oftentimes between family members and friends. However, it is nonetheless important to memorialize the terms of the agreement to help ensure that both parties clearly understand the terms. This helps prevent a dispute rooted in miscommunication that could strain a close business relationship.