This post should not be construed as legal advice.
Recently the Iowa Court of Appeals reviewed a lower court’s interpretation of a form crop-share lease with some modifications used by a corporation. The corporation in this case was made up of siblings and the corporation owned farm equipment and leased farmland to one of the siblings. This case highlights the need for clearly written leases, especially when the lease is a part of the farm transition plan.
The corporation entered into a 10-year crop-share lease (50/50 split) with the sibling Gregory (one of six siblings) while the dad was still alive. An attorney used a standard form crop-share lease for Iowa to draft the lease but added an addendum which gave Gregory (one of two sons currently involved in farming with the dad) rights to use farming equipment owned by the corporation and responsibility for replacing that equipment. An addendum is just an additional document not part of the original lease or contract and typically contains additional terms. The lease was approved by the corporation’s directors at the time: dad, Gregory, and another son.
Two years into the lease, dad passed away, and Gregory’s siblings voted in new corporate directors. These new directors questioned Gregory’s use of corporate farm equipment on non-corporate farmland and demanded he purchase the corporate farm equipment, or the corporation would terminate the lease. The directors eventually filed a lawsuit seeking to terminate the lease based on Gregory’s use of corporate farm equipment on non-corporation farmland.
In looking at this issue, the crop-share lease form contained language requiring all necessary equipment needed to carry out the lease to be supplied by the tenant (Gregory). The addendum to the lease allowed Gregory to utilize the corporate equipment and contemplated how to share new equipment costs by Gregory and the corporation. To the court of appeals, the addendum language gave Gregory the right to use corporate farm equipment on non-corporate farmland. To the court, it seemed odd that Gregory would agree to pay half the cost for new equipment for it to only be for corporate farmland. The addendum also limited the corporation’s ability to sell farm equipment. But the addendum did require Gregory to pay for maintenance and repairs to corporation equipment he used in his operation.
This case highlights the importance of having a well-written lease for the farmland and a separate well-written lease discussing farm equipment — not one document. With the farmland lease, the corporation’s attorney in this case should have removed the language in the lease requiring the tenant to utilize his equipment on the leased property. Adding to the form lease would have also allowed the parties to settle other issues that arose in the case, which we did not discuss here (namely, splitting fuel costs and transportation costs). When using a form lease, take a moment to consider the language and modify as needed to meet your needs and the other party’s needs.
The other issue to consider from the case is communication in your farm transition or estate plan. Although we have little information from the court’s opinion on the family dynamic or the farm succession plan, these are potentially areas where the plan could have worked better. Why do I say this? The court points out that shortly after the father’s death, the shareholders of the corporation replaced Gregory and his brother with three other siblings. There may have been ways to structure voting and participation rights in the farming corporation to allow Gregory more management of the corporation, how that would work about managing his farm, and how his five other siblings would participate in the corporation. The key here is communicating and working out these issues early on.
Remember the University of Maryland Extension has resources available to help you in develop your lease including videos, a leasing booklet, and form leases you should always consider modifying to meet your needs. These materials are available at http://go.umd.edu/MDAgLease. The University of Maryland Extension also has a page dedicated to Farm Estate Planning and Succession Planning at http://go.umd.edu/agtrans.