- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1750) Unit Title: AGRICULTURAL LAW ____________________________________________________________________________ (CLF1752) Topic: FARM LEASES Time Year(s) 2 hours 3 / 4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (P-2) - List the purposes and components of a farm lease. (P-3) - List the characteristics of liability laws as they relate to agriculture. Special Materials and Equipment: References: Castle, E. N., Becker, M. H., & Nelson, A. G. (1987). FARM BUSINESS MANAGEMENT: THE DECISION-MAKING PROCESS (3rd ed.). New York: Macmillan. Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Max A. Mickelsen, Attorney at Law (Agricultural Law), P.O. Box 750487, Petaluma, CA 94975-0487. Evaluation: Farm Lease Report and Presentation (see Activity) TOPIC PRESENTATION: FARM LEASES A. Agricultural leases are generally controlled by the same rules and regulations as any other lease of property. 1. The person who owns the land is called the landlord or the lessor. 2. The person who rents the property is called the tenant or lessee. a. Sometimes the lessee will "re-lease" all or a portion of the property to yet another person; this person is called a subtenant and his lease is called a sublease. 3. Leases can be between family members, people who know each other, or strangers. 4. Leases are not required to be in writing if their term is for one year or less. a. However, entering into a verbal (oral) lease is a major mistake, not because it is not legal, but rather because there is so much room for misunderstanding. b. No matter what the term of the lease, it SHOULD be in writing. Agreements that are put into writing require that the people writing the agreement carefully consider all of the terms; additionally, disputes that may arise later can be more quickly and easily settled if the agreement is in writing. 5. A lease is a legal contract which spells out the rights and responsibilities of the landlord and the tenant. a. A lease is also important as a working tool between the parties. b. Generally, the landlord has much more bargaining power than the tenant; frequently, the tenant wants the farm so much that he may give in or agree to provisions that are difficult--or impossible-- to achieve, unrealistically hoping that he can make the business deal work. c. Both the landlord and the tenant should analyze the economic consequences of the lease when it is being negotiated. It is also to the advantage of both to consider the long-term impact of the lease. Terms that seem beneficial in the short-term may have very negative long-term impacts. 1) For example, a landlord might ask very high rent and an eager but overly optimistic tenant might agree to the high amount. However, when the tenant finds it almost impossible to break even, he may "cut corners" just to get by; he may overgraze, underfertilize, or fail to take care of repairs and maintenance because he cannot afford to do so after paying the high rent. 2) The landlord who manages to collect the high rent will get his property back in a dilapidated and worn-out state; even if the landlord is successful in suing the tenant for failure to comply with maintenance terms of the lease, the tenant may not have any money to pay the judgment, the landlord will have paid legal fees and costs, the farm will be in worse condition than it was at the beginning of the lease, and very likely there will be bitter feelings between the landlord and tenant. 3) In recent years, a lot of emphasis has begun to be placed on a concept called "sustainable agricultural leases." This means that the lease is one which encourages the property to be returned at the end of the lease in as good or better condition than it was when the lease began, even if this entails somewhat less rent for the landlord or more favorable terms for the tenant. d. It is important to get the advice of attorneys, accountants, and other advisors who understand agriculture while a lease is being negotiated and certainly before it is signed. B. Agricultural Leases 1. Almost 50% of the farmland in the United States is leased. 2. Because leases in agriculture are so widespread, almost everyone in farming will be involved in an agricultural lease at one time or another. 3. Since farmland is usually so expensive, a young farmer's first involvement in operating a farm will most likely be a lease with either a family member or an outsider. 4. Farm leases are different from non-farm leases because of the types of activity that take place on farms. a. The term of the lease is very important and equally important are the beginning and ending dates of the lease. 1) Unlike commercial or residential leases which can begin or end on any date, farming activities have to be considered when determining the dates on an agricultural lease. - Obviously, a farm lease should not begin or end in the middle of a harvest season. - The beginning and ending dates of a pasture lease should coincide with the beginning or end of the pasture season. b. In farm leases, it is important that all of the parties who have ownership shares in the property be listed as landlords and that all of the parties who are involved in the farming operation are listed as tenants. 1) It is risky for a tenant to lease a piece of property from only one of several owners. The other owners may have rights to the property that take priority over the tenant's rights, including forcing the tenant out of possession. 2) It is risky for a landlord to lease a farm to one farmer and later discover that the farmer is in a business partnership with another person. In the event of the tenant's liability for some action, it is possible that only the person who signed the lease would be liable, not the partnership. 5. There are two basic kinds of rental arrangements in agricultural leases. a. The first and most straightforward is a cash lease. In this type of lease, the amount of rent is simply a cash amount which may be paid monthly, semi-annually, or annually. 1) Generally rental payments are made in advance. Landlords are concerned with how they will be paid. Depending on how "secure" a landlord feels the tenant is, he may require security for the rent payment; this security might involve an assignment of income from the sale of a product or crop. - If it is a dairy lease, the landlord might require an assignment from the milk handler so the rent payment would be made directly from the creamery. - If it is a crop lease, the landlord might require an assignment of proceeds from the harvested crop that is sold to a cooperative or other enterprise. 2) Whether or not an assignment is required is a bargaining issue between the parties. b. A very large percentage of agricultural leases are "crop-share" or "livestock-share" leases. 1) In these types of leases there is not a fixed amount of rent; instead, the rental income becomes a portion of the product sold. 2) The advantage of this type of lease is that the risk is shared. - In a good year, the landlord could perhaps make more money than he would under a cash lease and the tenant could perhaps make less. - In a poor year, the landlord could make less; in a poor year the tenant will lose less than he would under a cash lease. 3) Exactly how share leases are worked out is as much a function of economics as of bargaining. - Share leases are often quite uniform in particular areas so both the landlord and the tenant should check around their locale to determine what the customary shares are. 4) Common crop-share leases specify that the landlord receives one-third of the crop sold. - Sometimes it is the sale proceeds in cash; other times it is actual possession of one-third of the crop. 5) Usually in crop-share leases, the landlord also pays an equal percentage of certain costs of production. - This varies from crop to crop but might involve the landlord paying a proportionate share of fertilizer, seed, (sometimes) property taxes; he will often share in capital (or long-term) improvements. - Usually all costs associated with labor remain strictly the responsibility of the tenant. - For example, in making repairs and improvements, the landlord might be responsible for a portion of the materials, but the labor expenditure would remain with the tenant. - This type of arrangement is often beneficial to both landlord and tenant. The landlord will receive more rent if there is a large crop. If he shares in costs of items that encourage a large crop, both he and the tenant will prosper; if he shares in the capital costs of maintenance (fences, ditches, improvements, for example) the farm will not become run-down. Usually the tenant's share of improvement costs will be proportional to how many years are left on his lease so he pays for his portion of the long-term value. ****************************************************************************** Following are some of the most common provisions found in an ordinary agricultural lease. DESCRIPTION OF THE PREMISES - Depending on the nature of the farming operation, this can be a most important part of a lease. Often less than the entire farm is leased to the tenant; portions of the property are sometimes reserved (kept for the owner's use). This might be a house or some other substantial part of the property. The exact portion of the property that is being leased to the tenant should be stated very clearly. Others also might have prior rights or restrictions on the property. For instance--and this might come as a big shock to an unsuspecting tenant--most farms have Deeds of Trust or mortgages against them. Those banks or other lenders have a secured interest in the property. This has been recorded and is a prior existing right to the property. If the landlord should, for instance, default in his payments and have the farm foreclosed, the Deed of Trust will wipe out other interests later made on the property which would include the tenant's lease. Thus, if the landlord is "shaky," the tenant would be wise to take precautions to make sure that his rental payments are in fact being applied to mortgage payments so he won't be at risk. CONDITION OF THE PROPERTY - Generally, property is leased AS IS. This means the tenant must take the property as he sees it. It is important, therefore, to ask questions and make sure that both parties agree about the condition of the property at the beginning of the lease. INCREASES IN RENT - No matter what type of rental arrangement has been worked out, often there are expenditures that are beyond the control of either the landlord or tenant. Examples are property taxes, insurance costs, and similar expenses. From the landlord's standpoint, if one of those expenditures were to increase dramatically during the term of the lease, he may want to pass on some or all of that increase to the tenant. This is particularly true in a long-term lease. Those expenditures are equally outside the control of the tenant. He has to make sure that any such increases are ones he can handle. Often, long-term leases (three years or more) have the landlord bearing all of those costs as they existed at the beginning of the lease but having any increases (or at least a portion of the increases) passed on to the tenant over those base years. ZONING - The concept of zoning is discussed mostly in farm ownership. However, anyone leasing property should make sure that the intended use of the property is permitted under local zoning rules and regulations. This is a good example of why the lease is not only an important document from a legal standpoint, but why it is also important for the tenant to take the time and effort to look at the document and note any other circumstances that might affect his use of the property. DESTRUCTION AND LOSS OF USE - This is not so important on "open space" farming as it might be on a lease dependent upon improvements such as a dairy or poultry operation. Consider a 15-year dairy lease where the dairy barn burns down. Is the landlord responsible for rebuilding it? Even if he does, can the tenant continue his dairy operation, and if he can, who is responsible for his losses during the time the buildings are being replaced? Generally speaking, leases should provide that if a material part of the operation is destroyed, the tenant has the right to terminate the lease. From the landlord's standpoint, the question is whether he should have an obligation to repair any improvements that have been destroyed. Usually the landlord will be willing to repair or replace the destroyed improvements if they are covered by insurance. If they are not, then he doesn't want to be obligated to make the improvements out of his own pocket. If the destruction is of a "partial" nature that is not material to the operation, then the lease should provide that there will be a corresponding partial reduction in rent for the period of time the tenant is deprived of its use. REPAIRS AND ALTERATIONS - Almost all leases require the tenant to maintain the property in the same state it was at the beginning of the lease, with the exception of normal wear and tear. The landlord usually requires, however, that the tenant shall not make any alterations or changes to the property without his prior written consent. The real problem involves repairs vs. replacement. While it may be reasonable to expect a tenant to repair items, is it reasonable to expect a tenant to replace an item that simply wears out or cannot be repaired? If the lease is silent (i.e., makes no reference to it), then a tenant is generally responsible for repairs and maintenance but not for replacment. It is a good policy to specify in a lease what kinds of things are considered ordinary repairs and maintenance vs. what are considered complete replacement (such as when the cost to repair something exceeds what it would cost to buy a new one). NON-LIABILITY OF OWNER FOR DAMAGES - The last thing a property owner wants to have happen to him when he leases property is to be held legally liable for something the tenant does (for example, the tenant's large, vicious dog kills a neighboring farmer's 2-year-old child). Generally, the tenant would be responsible for any liabilities or damages caused by him and the landlord would have no liability responsibility. Unfortunately, if a liability lawsuit were to be filed by a person off the property, he would probably name every person he possibly could, which would include the landlord. Therefore, landlords generally want to have an indemnification provision wherein the tenant agrees to hold the landlord "harmless" from any such liability. For added protection, landlords generally require that a tenant carry liability insurance that names the property owner as an additional insured. This means that in the event of such a lawsuit, even if the landlord has no risk of liability, he will be held free of harm and, of equal importance, will be defended in any such action by the insurance company. Unfortunately, the cost of defending against a lawsuit can be as great as the liability. Thus, it is important to have adequate insurance levels to protect both parties. ATTORNEY'S FEES ON DEFAULT - If there is no provision in a lease for payment of attorney's fees in the event of default or failure to perform, then none can be recovered. Since an attorney's fees can be many thousands of dollars, it is important to have that provision. In many leases written by landlords, it is provided that attorney's fees will be paid to the landlord in the event that he brings a lawsuit. In almost all cases, this has been interpreted to "cut both ways"; thus, if that kind of provision is included in the lease and the tenant wins the lawsuit, he likewise would be able to collect attorney's fees from the landlord. ****************************************************************************** SAMPLE AGRICULTURAL LEASE THE FOLLOWING IS A SAMPLE LEASE SHOWING SOME, BUT NOT ALL, TERMS THAT MIGHT BE USED. SINCE NOT ALL ISSUES ARE COVERED, THIS LEASE SHOULD NOT BE USED FOR ANY SPECIFIC SITUTATION. THIS LEASE is made and entered into this _____ day of _____________, 19___, between ___________________________, hereinafter called "Lessor" [owner], and _______________________________, hereinafter called "Lessee" [tenant]. THE PARTIES AGREE AS FOLLOWS: 1. Lessor leases to Lessee, and Lessee hires from Lessor, on the terms and conditions set forth in this Lease, the premises with the buildings, situated in ___________________ County, California, comprising an area of approximately _______________ acres. 2. This Lease is subject to all existing easements, licenses, and rights-of-ways, whether recorded or not, and the rights of other lessees under any existing or future oil, gas, and mineral lease or leases from Lessor. 3. Lessee shall permit Lessor, and Lessor's agents and assigns, at all reasonable times, to enter the leased premises, and to use the roads established on the premises now or in the future, for the purposes of inspection, compliance with the terms of this Lease, exercise of all rights under this Lease, posting notices, and all other lawful purposes. 4. There is expressly excluded from this Lease the personal dwelling of Lessor located on the leased premises, and the garden and parking area surrounding it. 5. Lessee shall pay for all water, gas, heat, light, power, telephone service, and for all other services supplied to the premises except as otherwise provided in this Lease. 6. By entry under this Lease, Lessee accepts the premises in their present condition and agrees, on the last day of the term or on sooner termination of this Lease, to surrender the premises to Lessor in the same condition as when received, reasonable use, wear, and damage by fire, act of God, or the elements excepted, and to remove all of the Lessee's property from the premises. 7. The term of this Lease is for ____________________ ( ) years, starting on ___________________, and terminating on _______________________. 8. Lessee shall not vacate or abandon the premises at any time during the term but if he does abandon, vacate, or surrender the premises, or is dispossessed by process of law, or otherwise, the personal property belonging to Lessee and left on the premises may be deemed abandoned by Lessor without further notice to Lessee. 9. The total rent is ________________________________________ ($________), which Lessee agrees to pay Lessor in equal monthly installments commencing on the first day of this Lease and on the first day of each month thereafter. 10. Lessee shall not use the premises, not permit others to use them, nor do or permit acts that will increase the existing rates of insurance on the structures, trees, or other permanent crops on the premises, or cause a cancellation of any insurance policy covering, in whole or in part, any improvements on the property nor shall Lessee sell, or permit to be kept, used, or sold, in or about the premises, any article that is prohibited by the standard form of fire insurance policy. 11. The premises are leased to Lessee for the operation of a ________________ and the growing of crops in relation thereto, and any other incidental purposes reasonably related to the purpose. 12. Lessee shall not commit, or permit others to commit, on the premises, any waste or nuisance. 13. All rights to all minerals, oil, gas, and other hydrocarbons located on or under the leased premises are particularly reserved to Lessor, as are all timber rights, of whatever character. 14. If a partial destruction of the premises has occurred, from any cause, during the term of this Lease, Lessor shall have the option either to make the necessary repairs as soon as reasonably possible, or to give Lessee thirty (30) days notice of his intention to terminate this Lease. 15. Lessee shall care for both the leased premises and the approaches to an appurtenance of the leased premises, and maintain them in the same order and condition in which received, ordinary wear and tear excepted. Lessor shall have no repair obligations whatsoever, it being expressly understood that all maintenance and repairs, including both labor and materials, will be at the sole and exclusive cost of Lessee and Lessee hereby expressly waives any claim against Lessor therefore. 16. Lessee shall not make, or permit to be made, alterations of the premises without first obtaining Lessor's written consent. 17. Lessee shall comply with all requirements of all governmental authorities, in force either now or in the future, affecting the premises, and shall faithfully observe in his use of the premises all laws, rules and regulations of these authorities, in force either now or in the future. 18. Lessee agrees to keep Lessor free from all liability and claim for damages arising from any injury from any cause to any person, including Lessee, or to property of any kind belonging to anyone, including Lessee, or to property of any kind belonging to anyone, including Lessee, while in, upon, or in any way connected with the leased premises, including the stringing of livestock from the leased premises during the term or any extension of this Lease, or any occupancy thereunder. 19. Lessee shall carry and maintain during the entire term hereof, at Lessee's sole cost and expense, broad form comprehensive public liability and property damage insurance with limits of not less than ________________________________ ($_______________) combined single limit, insuring against any and all liability and property damage; policies shall name Lessor as an additional insured. All insurance policies shall not be canceled or terminated without thirty (30) days prior notice from the insurance company to Lessor. 20. If Lessee breaches this Lease, Lessor shall have all the rights and remedies available to Lessor under California law. 21. In any action or proceeding by either party to enforce this Lease or any provision thereof, the prevailing party shall be entitled to all costs incurred and to reasonable attorney's fees. 22. Lessee shall not assign this Lease, or any rights under it, and shall not sublet the entire or any part of the premises, or any right or privilege appurtenant thereto, or permit any other person (the agents and servants of Lessee excepted) to accompany or use the entire or any portion of the premises without first obtaining Lessor's written consent. 23. The waiver by Lessor of the breach of any term, covenant, or condition contained in this lease shall not be treated as a waiver of such a term, covenant, or condition, or as a waiver of a future breach by Lessee of any term, covenant, or condition contained in this Lease. The acceptance of rent by Lessor shall not be treated as a waiver of a previous breach by Lessee of any terms, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of a previous breach at the time of acceptance of rent. 24. The provisions of this Lease shall, subject to the provisions on assignment, apply to and bind the heirs, successors, executors, administrators, and assigns of all the parties to this Lease and all parties to this Lease shall be jointly and severally liable under it. IN WITNESS WHEREOF, the parties have executed in numerous counterparts, any of which, if duly executed, may be considered an original document. ___________________________ ****************************************************************************** Other possible items that may be considered when negotiating a farm lease include: 1. When and where the cash rent is to be paid; when and where the landlord's share of production is to be delivered 2. Farming practices to be followed by the tenant 3. Procedure for resolution of disagreements (binding or non-binding arbitration, legal action) - Provisions should specify how costs of dispute resolution will be handled (both parties pay own costs/fees, both parties split total cost, prevailing party recovers costs/fees from losing party). 4. Additional matters to fit the particular situation ______________________________________________________________________________ NOTE TO INSTRUCTOR: General information regarding farm leases can be found in FARM BUSINESS MANAGEMENT, Chapter 12, "Buying and Leasing Land," pp. 243-261, and THE FARM MANAGEMENT HANDBOOK, Chapter 16, "Forms of Farm Business Organization and Business Arrangements, pp. 333-361. Additionally, Appendix A of THE FARM MANAGEMENT HANDBOOK, pp. 499-527, contains sample lease forms covering a variety of situations. A self-rating checklist to determine a person's probability of success in a multi-person farm business association is found on pp. 530-536 (also in Appendix A). ______________________________________________________________________________ __________________________________________________________ ACTIVITY: Investigate share-leasing practices for agricultural commodities grown in the local region (crops, livestock, forest products). Information is available from Cooperative Extension on agricultural leasing practices for various commodities; sample budgets are often available which include typical leasing arrangements. Arrange to interview local producers, bankers, or farmer organizations (PCA, cooperative, farm bureau, grange), either in person or by phone. Make a final report regarding the customary leasing arrangements for the chosen commodity and present the report to the class. ___________________________________________________________ 12/16/91 MM/CH/EEZ/ch #%&C