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Factors to Consider When Entering a Farm Lease
July 22, 2016

 

South Bend / Mishawaka, IN – For many farmers and landowners, the easiest and most cost-effective way of doing business with each other are oral agreements. However, the risks associated with relying on informal “handshake” agreements (including, for example, an increased risk of costly time consuming litigation) heavily outweigh the cost-effectiveness of entering into an oral agreement in the first place. The prudent way to avoid such risks is to put agreed upon contract terms in writing. The benefits of putting any agreement in writing, in particular a lease, cannot be overstated.

A written farm lease serves two primary purposes. First, it provides a specific record of the agreement. Without a specific written record of an agreement there can be misunderstanding between the parties as to what was agreed to. In the course of drafting a lease, misunderstandings can be ironed out and oversights prevented. The second purpose of a written lease is to provide legal proof of the lease agreement should a dispute arise between the parties.

In general, the following provisions are common in most agricultural leases: Length of the lease; Amount of rent; Termination process of the lease; Limitations on assigning the lease; Compliance with conservation requirements and enrollment in federal farm programs; Crops to be planted; Insurance requirements; Farming methods to be utilized; The responsibility for maintenance and improvements; Any options to extend the lease or purchase; and How Attorneys’ fees should be allocated should a dispute arise.

Obviously, terms should be added or subtracted to fit the specific requirements of the respective parties.

Types of Farm Leases:

The two most common types of agriculture leases are (1) the cash rent lease; and (2) the crop-share lease. In a cash rent lease situation, the tenant is obligated to pay a set price per acre or a flat rate for the leased land. This type of lease opens up the tenant to specific risks, while the landlord gets a set rate of return on the property whether crop prices are high or low. In this scenario, the tenant may or may not receive a return on its lease investment if crop prices or yields are low in any given year. Prudent parties should negotiate the terms of the lease to hedge against economic risks related to the variability in crop prices and yields. Crop-share leases entitle the landlord to receive a set share of the crops produced by the tenant in exchange for allowing the tenant to farm the land. The landlord may agree to cover an amount of the costs associated with reaping crops from the leased land. Crop-share leases shift the risk of price variability towards the landlord as the landlord’s return is now increasingly dictated by crop prices or the volume of harvest.

Lease Termination:

Termination of a farm lease can come at the end of the term or, if the lease is extended, the parties can terminate the lease upon meeting certain requirements of notification. Termination of the lease will depend on the terms of the lease and Indiana law.

A tenancy for a certain period is one that has a specific start date and a fixed end date.  The common law rule does not require notification for termination of a tenancy for a period of years because the parties already know the day upon which the lease would terminate.  The parties, however, could provide in the lease that a notification is still required at a set time. A periodic tenancy has no definite end and is automatically renewed until proper notification is given, whether it be month-to-month or year-to-year. Under I.C. § 32-31-1-1 et seq., 3 months’ written notice is required to terminate a year to year tenancy on a farm lease. The purpose of such notice to terminate a tenancy is to reasonably inform the tenant that the tenancy will not be renewed for an additional year and the lease will terminate at the end of its current term.  A month-to-month periodic tenancy typically requires thirty days’ notice before the lease can be terminated.

If you have questions about creating a farm lease, negotiating the terms of a farm lease, and/or enforcing an existing lease, contact Attorney Blake D. Sheeley of May Oberfell Lorber at bsheeley@maylorber.com or call (574) 243-4100.

The content of this article is for informational purposes only, and does not contain, nor should be construed as containing, legal advice.

 

 

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