Many farm leases are year-to-year verbal leases, despite many potential pitfalls. A written farmland lease does not need to be lengthy or be prepared by an attorney. However, I have found that effective farmland leases include at least four components.
First, the landlord and the tenant should be defined. The landlord’s identity would seem self-evident. However, Ohio law allows one co-owner of land to enter into a lease that will bind all other co-owners. Further, if the current owner of the land owns the land through a life estate or under a life lease, the lease’s landlord should be defined to include the people who would own the land if the current owner dies before the lease terminates.
Second, the character of the lease should be defined. Traditionally, there were two types of farmland leases: cash rent and crop-share. A cash rent lease is usually structured as a payment or series of payments from the tenant to the landlord in exchange for the tenant’s ability to raise crops and keep all revenue earned from those crops.
In crop-share leases, the landlord has traditionally paid the real estate taxes and half of the cost of inputs such as seed, fertilizer and herbicides. The tenant would provide all labor and pay the other “share” of input expenses. The annual crop would be split between the landlord and the tenant. Crop-share leases have been adjusted in some instances so that the landlord pays for no inputs and receives a correspondingly smaller portion of the crop, sometimes around 30 to 35 percent.
Recently, “hybrid leases” have become more prevalent. These leases usually include a base cash rent and bonuses to the landlord for good yields, good crop prices or both. A tricky part of hybrid leases is that the bonus calculation can be confusing or hard to verify.
Third, the duration of the lease should be specified in the lease. The lease should have a definite end date or unquestionably clear automatic renewal provisions. Such clarity allows tenants to conduct advance marketing of grain and make timely orders and purchases of inputs for the following year. This also gives landlords income and expense certainty in budgeting their enterprises.
Fourth, the lease should set forth the rent amount or rent formula, along with specific rent-due dates in cash rent leases. Ohio State publishes, online and through local OSU Extension offices, farmland rent amount surveys that can give a general idea of the range of reasonable cash rents. Additionally, a cash rent rule of thumb is sometimes 1.5 to 3 percent of the land’s fair market sale value. However, field configuration, soil type and the quantity and quality of subsurface drainage (called “tile” or “ditching”) all factor into rent amount calculations.
I usually recommend that most annual cash rent be due after fall harvest, perhaps with some rent due in conjunction with wheat harvest or in the spring. This allows tenant farmers to better cashflow their operations, which can lead to more timely and effective stewardship of the land.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.