The lease agreements that allow farmers to grow crops on land owned by someone else should be carefully drafted and fair to both parties, said Gerald Harrison, a Purdue University agricultural economist and farm law specialist. Many farmland leases are one-year agreements and expire at the end of a crop year, Harrison said. Leases for the 2004 crop year may automatically renew unless they are terminated before the end of this month, he said.
"Indiana law says that a landowner must give a three-month termination notice in advance of the end of the crop year," Harrison said. "Many leases are oral and probably can be terminated as late as the end of November. That would put you three months from the end of the traditional crop year, which is the end of February. If the lease expires on Jan. 1, it's already too late to give a three-month notice."
Ideally, lease arrangements are completed by September for the following year, Harrison said. Waiting until the last minute to work out the details invites problems, especially if a landowner decides against renewing a lease. A termination notice can get lost in the mail or delivered late to the tenant farmer, thereby failing to meet the three-month notice requirement.
"For the tenant who loses a lease with a November notice, it may mean a hardship, since other land may be unavailable to maintain the size of his or her farm operation," Harrison said. "Early communication is the key, and it is best to have a written lease that requires late summer decisions for the following year. "Many people write a term lease, which specifies the length of the agreement. If you have a term lease you don't have to give a termination notice. That's not necessarily a good way to do business, but it is legal."
Another reason written leases are better is because a contract between a landowner and tenant can include language dealing with special circumstances. For instance, what happens if the landowner dies and the property is sold? What recourse does a tenant have if they're growing a multi-year alfalfa crop and the lease is terminated after one year? How much control does a landowner have over the chemical applications a tenant makes?
Certain tenant's rights are protected by law, Harrison said.
"Tenants have a right to an ongoing crop. For example, a tenant has a right to wheat that's planted in the fall but not harvested until June or July the following year," he said. "A landowner may terminate a tenant but the tenant still has a right to that crop.
"The same doctrine that allows a terminated tenant to harvest a growing crop should support payment to a tenant who has done good-faith preparation of land for the next year's crop."
Issues like multiple-year applications of fertilizer can easily be handled in a written lease, detailing payment for "unused nutrients" should a lease termination occur, Harrison said.
"Whether the tenant decides to terminate or the landlord decides to terminate the lease, either way they need to be properly compensated," he said. "In fact, a landowner may be wise to take control of the fertility and lime applications, and factor these expenses into the rental or lease arrangement."
A landowner can obtain a "landlord's lien" on the crop to be harvested if the tenant doesn't pay the rent, Harrison said.
"It does need to be properly recorded," he said. "A landlord's lien is a nonconsensual lien. Ag lenders tend to have prior consensual liens, which may have a priority over a landowner's lien, so that the landowner may end up not being paid his or her rent, especially if the tenant goes into bankruptcy. Thus, the landlord may be well advised to obtain a consensual lien or take other financial, protective measures in advance of renting the land. Indiana still requires 'direct notice' to hold a security interest against buyers of secured farm products."
Other lease-related points landowners and tenants need to keep in mind include:
- A lease drafted for longer than three years must be in writing to be legally binding against third parties, and be recorded within 45 days of its execution.
- In some cases, delivery of a termination notice can be a problem. "Sheriffs deliver legal notices to individual addresses daily, and they return with a receipt," Harrison said. "That receipt may be appropriate in some situations and is the best evidence of delivery."
- Landlords may need farm management advice, as well as legal assistance, in the selection of lease types and legal terms to include in a farmland lease.
For more information about farmland leases, contact Harrison at (765) 494-4216, toll-free at (888) 398-4636 or by e-mail at [email protected].