Farm leases don’t have to be overwhelming or scary. Peggy Kirk Hall, assistant professor and Extension field specialist in agricultural law and resource law for Ohio State University, shares five things to consider when creating a farmland lease.
1. Verbal leases
A verbal lease might be enforceable, but Ohio law says it should be in writing. The Statute of Frauds requires that a lease be in writing and signed by the party against whom enforcement is sought.
To enforce a verbal lease, a party would have to go to court and convince the court to make an exception to the Statute of Frauds writing requirement and provide proof of the terms of the verbal agreement.
Verbal leases also create uncertainty: How long does the relationship last? When and how can a party terminate a lease? Who is responsible for property maintenance and improvements?
2. Record the lease
Recording a written lease puts the rest of the world on notice that the lease exists. Ohio law allows a “memorandum of lease” that doesn’t divulge all the details but must include: Names and addresses of parties, legal description of land, lease period and rights of renewal.
Most farm leases renew automatically unless one party gives notice of termination. It’s important to identify by what date and how one party must give notice of termination.
Lease provisions aren’t all that scary. At minimum, leases should include: Names and addresses of parties, legal description of land, amount of acreage, start and end dates, basis for lease payment, payment due dates, rights of renewal, termination, soil fertility and death/disablement of parties.
5. Crop share
Crop share leases have financial planning implications. Farm rental income can affect taxes and social security benefits. Determine if the type of income is passive investment income or earnings from self-employment.
To determine the type of income: Is there material participation by the landowner? As a general rule: crop share leases often equal material participation and, cash and flexible cash is not material participation.
Material participation is also required to qualify for “special use valuation” under federal estate tax.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)