Topics to cover when writing lease

At the 2014 Iowa Women in Agriculture Conference at the FFA Enrichment Center in Ankeny, women from across the state gathered to hear sessions on many agricultural topics, including leasing and finance. Don Kearn, vice president of Smith Land Service Co. at Atlantic, discussed farm leasing. Specializing in farmland sales, management and appraisal, he explained what needs to be included in a f

Topics to cover when writing lease

At the 2014 Iowa Women in Agriculture Conference at the FFA Enrichment Center in Ankeny, women from across the state gathered to hear sessions on many agricultural topics, including leasing and finance. Don Kearn, vice president of Smith Land Service Co. at Atlantic, discussed farm leasing. Specializing in farmland sales, management and appraisal, he explained what needs to be included in a farm lease.

The biggest concern with farm leases: Put them in writing. A lease is a legal contract, and should spell out all expectations and responsibilities of both parties even if they’re family. Some attendees questioned how to have those clear discussions with family members. Kearn says the best place to start is by looking at the budget for the farm. Try to be reasonable with prices, and take a middle-ground approach to marketing.

Several aspects of a lease should not be ignored. You need to include provisions regarding maintenance of property, conservation work, maintaining soil fertility, tillage systems, removal of stalks, liability insurance, maintenance of buildings, chemical use, yield data and maps, hunting rights and livestock on the farm.

Dialogue is important

Maintenance concerns vary from mowed or unmowed grass waterways to fence fixing to tree removal. Each should be discussed to outline who is responsible for what. Kearn gives an example: “If I started renting land that had small trees on it, I would take responsibility to remove the new brush. I might say I could help clear existing brush, but I would charge for that.”

When leasing land in a one-year lease, as recommended by Kearn, both landowner and tenant can have the opportunity to continue a dialogue about expectations and responsibilities, and talk about this on a regular basis. Even with a one-year lease, it’s important to discuss conservation efforts and be a steward of the land. Points to discuss, like soil testing, tiling and fertilizer application, can add cost to the farm’s budget, but can add benefit in coming years.

Whether or not to remove cornstalks from the field, allow livestock on the property or limit tillage are also key points, Kearn says. Though baling cornstalks for feed can save money short term, the organic matter and nutrients staying on a field can benefit long-term soil quality and save on fertilizer costs. Running cattle on a field can also prove beneficial short term, but if the cattle create paths that end up breaking a new terrace, the added cost of fixing that terrace could potentially outweigh the benefits.

Collecting yield data, maps

Likewise, a no-till system can decrease erosion while building soil organic matter, but other tillage methods can help break up pest and weed cycles. Discussing these management practices and terms in the lease specifically, citing expectations and goals, can make the lease clearer.

When collecting yield data and maps, tenants should also know what information the landlord expects to receive. Kearn says yield data can affect the value of a farm, giving the landlord reason to know and use that information. The tenant and landlord should also have an understanding of building maintenance for the property. This is important to note in the lease not only for upkeep of structures like grain bins, but also small sheds or buildings that may have sentimental meaning to the owner.

Terminating a farm lease

Kearn says if a lease is to be terminated, the process must follow specific guidelines. In Iowa, the termination notice must be in writing as an individual letter to all tenants, and must be delivered by certified mail or be signed by all tenants.

A return receipt is not necessary if the termination notice is being sent by certified mail. These steps must be done no later than Aug. 31. That’s the law in Iowa; the deadline to terminate a lease is Sept. 1 if you don’t want the lease to stay in effect for the following crop year.

By using one-year leases that contain an expiration date, you can avoid having to go through the process of terminating leases. You can continue the lease by writing a new one-year lease without changing tenants if the current arrangement is working well and the two parties agree to continue, he adds.

When working with leases, it’s important to note key differences. For example, you need to include information regarding when the payment is to be made. With many current cash leases, there is one upfront payment. If the annual rental amount is not paid all upfront, Kearn says a preferential lien should be filed with the Iowa secretary of state to ensure the second payment is given priority.

Different types of leases

Keep in mind that crop-share and custom-farming leases can impact income differently than cash rent leases. Kearn says these two types of leases are labeled as active income, which could affect Social Security benefits. “If you’re thinking of switching from cash rent, talk to your tax adviser so you know what effect that will have on your tax liability,” he says.

If you are a landlord looking for a farm management firm to help you with leasing, Kearn cites some duties they should handle. A farm manager should help you with the lease terms, write the lease, serve notice to terminate the lease, handle Farm Service Agency and Natural Resources Conservation Service paperwork, and keep track of yield maps and updates.

The farm manager should stay in contact with you without you having to contact the farm management firm first, and should be able to recommend tenants in the area and help with checking costs of farm improvement needs. When signing on with a farm manager, Kearn advises, “Be sure to read what you’re signing.”

For more resources on farm leasing, Kearn suggests ISU Extension’s Ag Decision Maker Website at www.extension.iastate.edu/agdm. Click on the “Whole farm” tab; then go to the “Leasing” section. You’ll find the latest ISU cash rental rate survey and other helpful farm leasing information. Contact Kearn at [email protected].

Dittmer is a Wallaces Farmer intern.

Why a written lease?

Written leases make the lease terms more definite and leave less chance for disagreement and misunderstanding. “People tend to selectively recall only those portions of conversations that reinforce their point of view,” says Kelvin Leibold, an Iowa State University Extension farm management specialist. “It protects not only the original parties, but also assignees and heirs in case either party should die, or the farm is sold.”

A written lease encourages both parties to consider all aspects of the lease before the lease period begins, notes Leibold. Decisions are made before the problems occur. In subsequent years, it provides a basis for changing provisions when conditions change. Written leases also provide documentation in case of a tax audit or for settling an estate. In Iowa, lease agreements that cover more than one crop year are required to be in writing, and leases written for five years or more must be notarized and recorded at the county recorder’s office by the tenant.

ISU farm management specialists say the document should meet at least the following minimum requirements:

contain an accurate description of the property

specify a definite period for which the lease is to run

state kind and amount of rent, and time and method of payment (cash lease)

specify how production, USDA payments and input costs are to be shared (crop share lease)

Sample lease forms are available. See ISU publications FM 1538 (AgDM C2-12) titled “Iowa Farm Lease Form,” or FM 1874 (AgDM C2-16) titled “Iowa Cash Rent Farm Lease” (short form).

He said it

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“Whether you are a landlord or a tenant, being honest and up front when dealing with farm leases can avoid a lot of problems.”

Don Kearn,
vice president,
Smith Land Service Co.,
Atlantic

This article published in the October, 2014 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2014.

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