Written land leases are a must
Historically, farmers and their neighbors made most of their cropland leases with a handshake based on justifiable trust. The old convention of not going after cropland being leased by a neighboring farmer seems to have disappeared. There is increasing competition for available cropland. Often, the landlord — or upon his death, his heirs — may go for the highest rent, disregarding a long-term relationship.
More and more, farmers ask us if their handshake lease will hold up and how they can better protect the base of leased cropland necessary for their operation. We generally recommend written, rather than oral, leases. Negotiating and drafting a written lease may take some effort, but the benefits can be substantial.
Chapter 704 of the Wisconsin Statutes governs leases and “fills in the blanks” if any terms are missing. Section 704.03 states that an oral lease for a term of more than one year is not enforceable unless it is in writing and meets certain other requirements.
Both parties benefit
From a tenant’s perspective, a written lease can bind the leased cropland for enough years to justify planting alfalfa or winter wheat, or to support nutrient management plans or a farm expansion. A written lease also may give the tenant, at the end of the lease, a first right of refusal to lease the cropland at the competitor’s offered rent or a first right to buy the real estate if it is offered for sale during or shortly after the lease. Then, the tenant is able to match the rent, price and terms if a third party’s offer to lease or buy the cropland is accepted.
From the landlord’s perspective, a written lease better defines the obligations and duties of the tenant. Landlords often want provisions requiring the tenant to maintain the acreage and quality of alfalfa and proper crop rotation, rather than planting corn or soybeans year after year on the same fields. A written lease should clearly state what happens if the tenant defaults on payment of rent or other required performance under the lease or becomes insolvent. Landlords frequently require provisions requiring the tenant to pay a stipulated interest rate on payments in default, greater than the legal rate of 5%, and for payment of reasonable attorney’s fees for the defaulting party.
If the tenant is a limited liability company or a corporation, its members or shareholders are not personally responsible in the event of default. These entities are formed to limit the owner’s liabilities for the corporation’s debts and obligations to the amount of their investment in the entity. Increasingly, landlords are requiring the owners of the tenant entity to personally guarantee the entity’s obligations under the lease. Landlords are often requesting provisions that the tenant is not permitted to assign the lease to any third party without the landlord’s written consent. The landlord wants to control who is operating his land and to avoid a sublease to a third party at a greater rent.
Landlords may be hesitant to enter into longer-term leases because they are concerned that rents may dramatically rise in future years. More frequently, our clients establish a base rent and then allow an adjustment each year based on that year’s commodity prices. The landlord benefits from a higher commodity price, and the tenant benefits from the assurance of a longer-term lease.
At a minimum, a lease should provide for the amount of rent, the term of the lease, the due date for payment of rent, and a description of the property being rented. The lease must be signed by the tenant and all owners of the leased land.
Halbach is a partner in Twohig, Rietbrock, Schneider & Halbach S.C. in Chilton. The firm specializes in ag law.
This article published in the April, 2010 edition of WISCONSIN AGRICULTURIST.