Ever heard someone say they've had a handshake lease on a piece of farm ground for 20 years? From a legal standpoint, they leased that land 20 times for one year each time. What's the difference? It's a distinction that matters under the law because it affects things like lease termination.
Rusty Rumley, senior staff attorney at The National Agricultural Law Center, based at Fayetteville, Arkansas, says oral leases are still a fairly common part of doing business in the farming industry today. However, these oral, or handshake, leases are beginning to disappear.
"Oral leases used to be the rule rather than the exception," he notes. "We are starting to see them go away due, to some extent, to USDA programs that require those trying to apply for disaster assistance to be able to show a written lease to prove legal possession of the land."
As the leasing landscape shifts, Rumley says both landowners and tenants will need more knowledge about how leases work and what they want from the agreement.
ORAL LEASES HAVE LIMITS
Most people have never heard of the statute of frauds, but this is common-law doctrine that many states have adopted by statute. It requires all leases longer than one year be in writing. The statute also controls real estate transfers and exchanges.
Essentially, the statute of frauds requires these types of agreements to be in writing and signed by those against whom enforcement could be sought. So, while two longtime friends can have a handshake agreement over a piece of rental land, because that agreement involves real estate and/or an agreement that takes more than a single year to complete, if it is not written and signed, a court could find the contract to be invalid should there be a disagreement over terms.
When a party to an oral lease wants to terminate it, rules vary by state. Rumley says in Arkansas, for example, termination requires a written notice delivered by certified mail. It must be made on or before June 30 and pertains to the next year. Essentially, this is a six-month notice of term for a full-year lease.
How does a written lease help here? Rumley says a written lease should include a clear path as to how either party terminates the agreement. Those terms, as long as they are agreed upon by the parties, do not have to follow particular state laws regarding timing or how notice is delivered.
What will the tenant use the land for? Don't make assumptions based off of the norm or a history with a particular tenant.
Rumley says a landowner might assume he is renting the property to the tenant for rice production, for example, because that's the history the two parties have between them. But, things change. Perhaps low rice prices have forced the tenant to look for other revenue opportunities.
"What happens when that tenant also leases out duck-hunting rights?" Rumley asks. "That can be lucrative. Does the landowner get a share of that? It is also something that brings an added level of liability to the land. Suddenly, there are additional people coming onto the land with guns. As the landowner, are you OK with that from both the financial and liability standpoints?"
He adds there can be issues around what crops are to be grown on rented land. This used to primarily be a decision based on the market and what a tenant was set up for. A landowner could assume a tenant would be producing one of a limited number of traditional crops for that region. But, today hemp and medical marijuana could show up on a landowner's property if the farmer believes these offer an opportunity for increased revenues and diversity.
"You want to know, as a landowner, who will use the land and what crops it might be used for," points out Rumley. "Some landowners even want to stipulate against production of certain crops over concerns of liabilities attached with their production."
When a tenant passes away, if there is time left on the lease, this will typically pass to heirs. A good written lease will provide for this scenario.
"If you have something in writing where everyone knows their rights and obligations under these circumstances, it can prevent problems, even if everything seems perfect between the contracting parties," Rumley explains.
If a farmer sprays a herbicide that drifts onto someone else's land, and it damages a crop or landscape, who is liable: the farmer or the landowner?
This can depend on the state, Rumley says. In some cases, the farmer is liable, especially when it comes to selecting an applicator who is qualified, or if the farmer is the applicator, in taking proper precautions.
Many common-law leases today include liability clauses. It's not uncommon to require a tenant to purchase liability insurance for the activities that take place on that property and to list the landowner as an additional insured.
CONSIDER THE POSSIBILITIES
Renting pasture next to a highway? What happens if the cattle get out and cause an accident? This is an example of a type of risk that should be considered based on what a tenant is doing on the land. Agritourism is another example. If hundreds of kids are going to come every year to a pumpkin patch or a corn maze on rented land, this is clearly a higher risk use of the land than if it were an isolated soybean field without anyone living within a mile or two. The lease between the parties and the responsibilities associated with those enhanced liabilities should be reflected in the terms of the agreement.
Are tenants required to sign up for crop insurance? That likely depends, to a large degree, on the type of lease they have. In cash rent situations, especially those paid up front, Rumley says there's likely nothing in the lease about the amount of crop insurance the tenant should carry. If it's a range lease, again there's likely no requirement. But, if the agreement is a crop share lease, the landowner has a stake in the crop. Because he has this financial interest, he will probably want the crop protected through insurance.
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