Articles, Blog

Top 10 Things You Should Know about Agricultural Leases

August 25, 2019


(upbeat music) – Hi I’m Shannon Farrell, I’m the Agricultural Law specialist with OCEC’s department of
Agricultural Economics. For lots of agricultural operations, AG leases are a huge part of
their productive capabilities so today we’re gonna talk
about the top 10 things that you should include in any
written agricultural lease. Agricultural leasing is
a really important tool for lots of operations because from an economic standpoint
it’s just difficult to own all the land that
you might need to properly operate your agricultural operation. So leasing is an important
and valuable option for lots of us whether
it’s for crop production or for livestock production. And in Oklahoma and most
other states as well lots of agricultural leases
are conducted on a handshake. As a lawyer I’m gonna suggest that the handshake deal
might still be a contract but it’s probably better for you to actually have a written lease in place. And with each written
lease you really need to think carefully about the terms that are gonna be made part of that. And part of the discussion of actually having a written lease is that you actually get to
discuss through those terms and the conversation might
be every bit as valuable as the written document that
you eventually come up with because in the discussions
you actually work through a lot of the problems
before they become problems. Having said all that I would argue that there are probably 10 things that every agricultural lease, whether it’s for crop production
or for livestock production needs to contain, so we’re gonna
talk about those 10 things. The first of those is the
actual legal identifiers of the parties to the lease. Now, that already sounds
a little bit like legalese but what I simply mean is
the names of the parties to the lease, that might
seem like it’s pretty straightforward, it’s Joe and Susan or whoever the case might be. But the question is how do Joe and Susan respectively own the land
or are operating the lease? The land might be owned by an individual, it might be owned by a husband and wife. It might be owned by a
partnership, LLC, corporation, trust, the list goes on and on. So you need to make sure that you have the actual accurate legal identifier for the party that owns the land, and you also need to have the actual accurate legal identifier for
party that’s leasing the land which again can be a partnership
an LLC, a corporation. It’s important that you
actually have those names right because those are the parties that are actually gonna be
liable for whatever occurs with respect to the lease
if there are controversies about the lease itself. So make sure you actually have
those identifiers correct. Number two on our leasing list, is the actual accurate legal
description of the land. We all know that we’re leasing
the old Ferguson place, but the problem is well we might know it’s the Ferguson place, future people that might
actually be impacted by this lease might not even know where the Ferguson place is. So first off, let’s make
sure that we’re actually using the proper legal
description for the property that’s involved in the lease. The northwest quarter
of section 15 township to north range for West Indian Meridian located in Logan County
Oklahoma for example, might be the actual legal description of the 160 acre tract that we’re leasing. But let’s make sure that that description is actually full and also accurate, which means if there hasn’t
been a survey of the property in decades it might be time to conduct a survey of the property. The actual legal description being used in the lease is beneficial
for both of the parties too in that it actually tells
the tenant and the Landlord the actual physical extent of the property that’s being leased. It defines boundaries for what is leased and also defines boundaries
for what’s not leased. So we often overlook the legal description but it actually is a really big deal with respect to our lease. Number three is when’s
our lease going to start? And when is our least going to end? And this issue manifests
itself in a number of ways. First and foremost though
we actually wanna know how long does this lease last, and there are two primary
ways that we see that happen in agricultural leases. Number one it might be what
we call a tenancy for years or a tenancy for a term and that lease has a defined
start date and end date. This lease commences on January 1st 2019 and ends on December 31st 2019. Because the lease has very specific dates for a start and end
date and doesn’t mention anything about renewals, we
know when the lease starts and we know when the lease ends. Nothing additional is needed
to give the tenant notice that that lease is gonna terminate on December 31st, because
the lease itself says it’s going to terminate on December 31st. Now another alternative that
we see a lot in agriculture is what we would call a periodic lease. This lease commences on January 1st 2019 and can be renewed annually, thereafter subject to the agreement
of the Landlord and Tenant. What that means is that our
lease has a one-year period but at the end of that
one-year period it can renew, and that by the way
automatically will renew unless the tenant or the landlord provides notice that the
lease does not need to renew. Now an important thing for us to remember is that even under an oral lease, that oral leases actually can exist, again they may not be the best idea but they can be out there if they’re for no longer
than a year period at a time. But if there are one-year periodic lease that means that one year
or a lease keeps renewing and keeps renewing and keeps renewing until either the landlord or the tenant says nope I’d like to terminate the lease. So how do you go about
terminating that periodic lease? Well, in Oklahoma and many other states if it’s a one-year period
you have to provide at least three months written notice to terminate that lease. So if our lease was supposed to terminate at the end of December,
the 1st of December, the 1st of November, the 1st of October that’s the period by which we
would have to have provided written notice that we
don’t want the lease to renew for the coming year. And I’ve been using this, this January 1st and December 31st example on purpose because that’s the way lots of
our agricultural leases work. However, I want you to
think of a crop cycle that coincides with the calendar, and the answer is the most Oklahoma cases you can’t think of one. For example, if we’re talking about a winter wheat stocker operation, we’re probably doing seedbed preparation and cultivation in the summer, probably planting sometime in September. We turn out cattle for grazing then we may pull them
off probably oftentimes in February, March maybe
and then maybe harvest a wheat crop in June. None of those things line
up with the calendar year. And so if you’re setting up your lease to where you have a renewal notice or you’re required to
provide notice of termination in the middle of your crop growing, you’ve got some problems. So I want you to make sure
that the period of your lease if it is a renewing lease or
if it’s a terminating lease, if it’s a tenancy for term
or it’s tenancy for years that it coincides with
the production cycle of whatever it is you’re raising. Whether it’s crops or livestock, we don’t need that lease
either capable of terminating or being required to have a
subject of notice of termination if we’re in the middle
of that production cycle. So think about your terms very carefully and define when you
can enter the property, when you can leave the property and what are the consequences
of having a lease terminate when we don’t have the ability to pull off livestock or to harvest crops. Think about the what-ifs
in every situation there. Number four what production
practices are required? Which production practices are prohibited? And which production
practices are allowed? There are lots of situations
in which these terms can arise but some of the most common might be if you have organic farming
going around the property or near the property on other
sections of the property that’s being leased, there
might be restrictions about your ability to
use chemical fertilizers, pesticides and the like
if it might interfere with your organic certification
for those other areas. So if you’re going to
lease land to someone but preserve organic production around it one of your terms might
be that you don’t allow non-organic production practices. In Oklahoma we have an
increasing number of acres going into no-till production systems or low till production systems,
and it takes a lot of time to get those production
systems fully integrated. So you probably don’t
want someone coming in using conventional tillage
and then you have to go back to the no-till system and
again resetting the clock and spending years reestablishing
that production process. So specify those kinds of things. If we’re talking about grazing land, one of the most common issues that I see frequently overlooked
in Oklahoma pasture leases is dealing with stocking rates. A well grazed field can have enormous production possibilities, but a field that’s being over grazed can suffer years of production setbacks. So setting a stocking rate for your field if it’s gonna be under
release is hugely important. Now the question is how do we go about setting that stocking rate? That’s something you should talk about with your Extension educator, with your animal science specialist or your production consultant. In some cases, a numeric stocking value just in terms of head might
be adequate to the task. In other cases you might be trying to define a certain
amount of forage canopy that you wanna maintain, a certain height of forage if you will. Just make sure that your stocking rate is commensurate with what
you’re trying to preserve in terms the productivity of your land to make sure that happens. If you have any other kinds
of production practices that you want to make sure are used or that you wanna make
sure are prohibited, again those things have to
be made explicit in the lease because if they’re not spelled out the tenant basically has
the right under most laws to do kind of what they want in terms of production practices. Number five is, who’s
responsible for things like inputs and maintenance of
improvements on the farm? If we’re leasing out
farmland, one critical issue might be soil health. Well, who’s responsible for
maintaining the nitrogen, potassium, phosphorus,
micronutrients of the soil? Is that something that’s a responsibility of the tenant or the landlord? And typically we often think the tenant should be responsible for
ordinary fertilizer operations, but what if we’re talking about soil pH? That’s something that
has a multi-year impact and it might take us years to get back the economic value of amending soil pH. So if we’re gonna do that as the tenant do we need to have a multi-year lease to make sure we reap the benefits of that? If we’re gonna have a
fairly short term lease is that something that the landlord should actually provide for themselves and include that as
potentially a cost benefit of actually having a lease. Other things to be considered especially if we’re talking
about a livestock lease, are fences and livestock
handling facilities. Now under Oklahoma law,
the owner of livestock is responsible for keeping them contained using ordinary reasonable
prudent measures. So if we own the livestock
we’re responsible if those livestock escape, but what if we don’t have the ability to maintain the fence line, if that was something that’s
reserved to someone else? That’s the issue that we run into a lot with agricultural leases
especially with livestock, so make sure there’s a clear agreement about who has the obligation
to maintain fences and the safety of livestock
handling facilities as well and make sure that the
liability issues in the lease are commensurate with that. If we don’t have control over
the fences it’s hard for us to sometimes take responsibility
but make no mistake, the owner of the livestock
is the first person to get on the hook if there’s liability for escaped livestock. So again, be very careful
about who has responsibility for maintaining livestock
containment there. Item number six is rent. We imagine that’s probably
top of mind for everybody when they’re trying to figure that out. And the first question we always get is how do we figure out what
a reasonable rent rate is for agricultural land? We always invite people to consult our agricultural land lease surveys that are published by Oklahoma
Cooperative Extension, as a place to start, but you’d also need to remember that those
rates are regional averages and so your local market can vary. You’re always trying to
compare apples to apples as best you can when you’re trying to set a market rate for your rent. So take that into account and get as much information as you can about the local market and
about the specific piece of land that you’re leasing to actually go about setting your rental rate. There are all sorts of
variables most of them going to the productivity of that land, obviously more productive
land should be worth more in the rental market than
less productive land. So the data that’s out there
are good sources to start with but do as thorough a job as you can actually analyzing the
market before you actually delve too deeply into
those lease negotiations. These days we see lots of different ways of handling lease rents as well. And many of them for years
fell into the category of cash rents or share rents. And if you’re not familiar with those, a cash rent is simply a dollar
amount that’s paid per period for the privilege of leasing the land, X number of dollars per acre
per year would be a cash rent. The share rent on the
other hand would be based on shares of the inputs
into a crop most likely and shares of the revenues
that are generated from the sale of that crop. One we typically see in
Oklahoma is a one-third share, 2/3 share with one-third share going to the landlord, 2/3
share going to the tenant for production of hard red winter wheat. Now one-third two-thirds
didn’t just happen by accident, the economics of the production of hard red winter wheat in Oklahoma kind of led us to that 1/3, 2/3 share. But if we’re talking about irrigated corn that’s a completely different number we may be looking at a 60/40
or a 50/50 split, in that case and different numbers exist for soybeans and canola and for forage crops and all sorts of other things. So just because you’ve always heard 1/3, 2/3 don’t just assume that
those are magical fractions that’s the economics of
things like seed cost, fertilizer, who provides mechanical input such as cultivation, harvesting, labor? All those things go into
the production of the crop. Govern how you should
probably split the shares for Landlord and Tenant. So make sure you analyze the economics of those situations first. Furthermore these days, we’ve
seen lots more creativity in terms of how rents are calculated, we’ve seen hybrid leases that
may have a flat cash term but have a variable share term or a term that’s variable based
on market conditions, productivity of the crop, all sorts of other issues out there. We’re not gonna say there’s a
right or a wrong way to do it but we just need you to think through very carefully how you do that. So first thinking carefully again, take into account the market, take into account the
inputs that are provided by the landlord and by the tenant. And then take into account the mechanics of how the rent is going to be paid. When is rent due? Is it gonna be paid
quarterly, monthly, annually? Is it gonna be paid in money? Is that money gonna be made in the form of a cashier’s check? Is that supposed to be deposited directly to the landlord’s account? If we’re paying in terms
of actual commodity where’s that commodity
supposed to be delivered? To a specified elevator? To an elevator under the
account of the landlord? The possibilities as
you can see are endless. So this be as detailed
and thorough as possible about when and how that rent
is supposed to be paid as well. Item number seven on our list is disclosing other interests
that are attached to the land. One of the most common things that we see is that this surface owner may not be the mineral owner in Oklahoma, and as a result without notice
perhaps even to the landlord or to the tenant we see
oil and gas operations occurring on the property. So if the landlord is
the surface owner only and doesn’t own minerals, that’s something that needs to be disclosed to the tenant so they understand there might
be a third party out there with the ability to authorize oil and gas operations on the property. If the surface owner
does own the minerals, then you kind of have
an obligation to work with the tenant as well to explain that a mineral lease might be in place, an oil and gas production
might be occurring. One phenomenon that we’ve seen in the past 10 years in Oklahoma, is that surface owners have
actually been authorizing oil and gas companies to dispose off saltwater, drilling
fluids other items, from oilfield production on property. And for example drilling fluid may eventually break down
but it takes time to do that and odds are that your
productivity of the land is going to take a hit for
some term maybe a few years as the soil absorbs or processes the materials contained
in that drilling fluid. Lots of tenants have had drilling fluid applied to the property where
they were growing a crop and needless to say it didn’t really act like a fertilizer for the crop. So we had lots of hard feelings between tenants and landlords, so one thing I strongly encourage all tenants and landlords to
do is to discuss for example the fact that drilling fluids might be applied to the land,
if that’s a possibility, or to explicitly say no drilling fluids won’t be applied to the land. But either way make sure that any interest regarding oil and gas
leasing or development or fluid application are
discussed between landlord and tenant and made explicit there. Increasingly in Oklahoma as well we’ve seen lots of
production of wind energy and in the past two or three
years massive expansion of the solar energy industry as well. So if there’s any existing solar leases or wind energy leases on the property, those are things that
also need to be disclosed to the tenant because those could cause some changes and how
the surface is operated. If we’re talking about
wind energy development there might be relatively
expansive impacts with respect to the use of the surface but there’s lots of usable surface in between the developed turbines. With solar it’s almost the exact opposite, it’s usually a much more compact footprint but the area of the solar
operation is completely occupied by the solar operation. All that to say wind and
solar operate very differently again wind very dispersed,
solar very compact but they do have impacts
in the use of the surface by a tenant and that’s one thing that needs to be disclosed
to the tenant as well. Any other interests out
there that might result in a third party interfering with the operation of the
tenant on the property, it’s just a good idea to
talk about with the tenant to make sure that there are again are no hard feelings in place there. Item number eight, a
partnership statement. When you’re leasing land to someone or when you’re leasing land from someone I’m willing to bet you’re
not actually trying to form a partnership with them, although you might
eventually choose to do that. But right now you’re not a partnership and you don’t wanna be
treated like a partnership because partners have
this thing that we call joint and several liability,
which means the liability of one party basically becomes the liability of all the parties. And although it may be a
gross oversimplification especially if there are
any lawyers in the crowd, we’ll talk about the finer points of joint and several liability some other time. But you just need to
know you’re not trying to form a partnership with this person. Having said that, especially if you’re in a
shared lease arrangement, you work together on this operation, you provide the cost of
inputs in this operation you share in the revenues
from this operation. To an outside observer
it kind of looks like you’re a partnership. So you need to make sure that
you’re very clear about that make sure that your lease
does contain language that says hey, we’re leasing
this land from one another, there’s a landlord-tenant relationship and it is not a partnership relationship. Item number nine on our
list is Notice Provisions. How are the landlord and tenants supposed to contact each
other if something goes wrong or if they need to
provide some legal notice, like for example that we
need to terminate this lease? Well, you need to specify
two notices in your contract, one needs to be an emergency contact. If there’s something drastic and urgent that’s happening on the property that needs a response immediately, what’s the best phone
number to contact each party so you can get quick
communication going there? And that probably needs to
be a mobile phone number, and if it is a mobile
phone number make sure that the person that’s using it lives in an area where cellular service is somewhat reliable otherwise we probably need to
specify a landline number. You should also specify in your lease the emergency contact information
for local authorities. For police, fire and emergency
medical response as well just in case the tenant
may not be familiar with the area needs to know how to reach those first responders quickly. But the other form of notice
that we need to provide is the actual legal notice. So again, where do checks need to be sent, where notices of termination
of lease need to be sent et cetera, etcetera and that probably needs to be
a physical mailing address, although it may be a P. O Box as well. But if it is a P. O box
that needs to be something that will be checked regularly. I’ve seen it happen time
and again with leases that someone specifies a P. O Box and then the other party says, oh, I never check the P. O Box, you should have sent
that to my home address. Well, I never check my home address because I summer in Arizona, you should have sent it to this address. Whatever that address
was you need to specify an address that you actually will check because legal notices do not age well. You need to make sure that
you can check that mailbox wherever it is regularly
say you can provide a timely response to
whatever notices you receive. The last thing we’re gonna have
on our list, item number 10 is how to deal with dispute resolution what happens when stuff goes wrong and we just can’t agree on it? First off, I’m hoping
that by having a robust and lengthy discussion
between Landlord and Tenant as we set the terms of the
lease, you’ve got a better idea of what those problems
are and solve them upfront before they even become problems. Lots of people think that
written leases cause controversy, I don’t believe that for a second, I think written leases actually
resolve a lot of controversy before it can even raise its head, because you’ve thought through the issues and if you’ve got a question
you can refer back to the lease and say oh this is what we said
we were gonna do to fix it. But let’s say none of that works, okay. Do we wanna specify that you
have to go through a process called Alternative
Dispute Resolution or ADR before you can go to court? Now, Alternative Dispute
Resolution can take lots of forms we’ll talk about two very quickly, one of those is mediation. Mediation is basically
a guided conversation facilitated by someone called a mediator, helping the parties come to a solution to the problem themselves. In other words, the mediator is not gonna impose a solution or say you have to do this to fix the situation they’re going to try to
facilitate a joint discussion between the parties and help them arrive at their own conclusion. In the experiences that
I’ve seen with mediation I think it’s the best
alternative that we have for maintaining a healthy
ongoing relationship. And sometimes the dispute actually isn’t anything about the contract, it’s a personal conflict in the mediation has the potential to resolve that. In Oklahoma the Oklahoma
Agricultural Mediation Program is actually run through
a grant that we received from USDA through the Oklahoma Department of AG Food and Forestry
and it’s an excellent tool that’s available to lots
of agricultural producers, so make sure you look into that. Arbitration is another method of Alternative Dispute Resolution, and you can almost think of arbitration as hiring a private judge
to have a trial for you. In other words both
parties present their case to the arbitrator with evidence just as they would in a
trial, and the arbitrator comes to a conclusion that’s
provided to the parties and that most of the time the parties are gonna be required by
the contract to agree. Now alternative dispute resolution can sometimes be less
expensive than litigation but it looks a lot like litigation, and in my experience
litigation and arbitration sometimes favor the more
commercially sophisticated party. So just be careful about agreeing to an arbitration provision but unless you’re really
willing to go to trial on the issue anyway. But we’re in Oklahoma,
Oklahoma’s one big small town and I think that it’s
always in our best interest to find the most peaceful resolution to our contract disputes, especially when we’re talking
about leasing arrangements because these are the folks
that we go to school with, that we go to church with, that we attend community events with and we just kinda wanna
maintain those relationships to the best that we can. So very quickly, those
have been the 10 items I think every agricultural
lease needs to include. I always encourage folks again please, please, please have your lease in writing because stuff can happen. Take for example the fact that your landlord passes away what now? Well, if you don’t have
a written lease in place, you’re kind of in the difficult position of having to prove to the
estate judge, that oh yes, we absolutely had a handshake contract in place to lease this land. Well, what evidence do
you have beyond that? Difficult decision right? So the written lease is
beneficial for proving that we actually had a lease arrangement in the case of the death of one party, in the bankruptcy of a party because then we have to
prove to a bankruptcy court that there was a lease
interest there as well. Another way we can take care of that is to record the lease, yes, leases actually can be
recorded in county land records and it’s often in the best interest of both parties to do that,
again to provide notice to other parties out there that the agricultural
land was under lease. We’ve talked about those benefits, we’ve talked about the
benefits of having a discussion of a written lease, But let’s hope that
this program’s given you a little bit of insight
into some of the things that need to be included in the lease. What I would just tell you to do is again, think deeply about the issues both for landlord and for
tenant and come to an agreement through those through a robust
discussion with the parties get that record in writing,
it’ll be great for your farm and for hopefully generations to come. And with that if you have
questions make sure you contact your local County Extension Office, so that we can get you some resources. AG Lease 101 is a fantastic website that also connects to AGLandlease.info with all sorts of resources, templates, guides for calculating your rental rates. We hope you’ll take advantage
of those and many more. Thank you guys for being
part of our program today. (upbeat music)

No Comments

Leave a Reply