This post should not be construed as legal advice.
If you are renting farmland then part of your job is keeping the landlord happy. Keeping the landlord happy may come in a whole host of ways, such as cleaning the driveway off after a snowstorm for an elderly landlord or paying a “bonus” in good years to control your cash rental rate from going up. But there is always the chance that the landlord may start to expect these extras and assume the extras are now part of the lease. When this happens trouble can ensue. This point is highlighted by a recent Iowa Court of Appeals decision involving a tenant paying a bonus during a recent period of high prices to the landlord.
In Peck v. Four Aces Farms, Inc., tenant (Four Aces Farms) agreed to rent farmland from landlord (Peck) at $195/acre for the 2007 crop year. Tenant also agreed to pay a rental rate for storage bins on the farm, along with the electricity and propane associated with using the bins. Finally, landlord agreed to supply tenant with poultry litter at $20/ton.
The 2007 crop year was a good year for tenant with good yields and rising prices. In order to keep the landlord happy, tenant decided to issue a bonus payment to the landlord that split the profit 50/50 on the rented farmland (minus shared expenses and the rent already paid). This bonus payment started the problems in the relationship.
For the 2008 crop year, parties signed a similar lease as in 2007. The lease did not mention sharing profits, but the landlord believed there was an oral agreement to share profits. Again 2008 was a good year, and tenant paid landlord a portion of the profits. 2009 featured a similar written lease as before (no written mention of sharing profits), but 2009 was a bad crop year and tenant did not pay a bonus to the landlord. By 2011, the relationship had become strained between the parties but tenant still offered landlord a bonus payment which was rejected. Eventually, the landlord file suit against the tenant claiming among other things, that the lease was actually a 50/50 crop-share lease with the cash rental rate the minimum. The trial court found that a crop-share agreement did exist and that is the issue we are going to focus on in the appellate court’s opinion.
The appellate court found that the written lease included no reference to an agreement to share profits from crop on the rented farmland. But this failure to reference an agreement did not preclude an oral agreement from co-existing with the written lease. The tenant acknowledges the bonuses were paid to keep the rental rate from rising too quickly during the good years. All this left the landlord with the impression he was entitled to share in the profits 50/50 (even though it was clear from the lease he was not).
The appellate court reversed the trial court’s decision. In the appellate court’s mind, the tenant knew that a crop-share agreement would run counter to Farm Service Agency’s (FSA) rules. Other things working against the landlord: expenses were not shared as they would be in a traditional crop-share lease, all FSA forms reflected that tenant was the sole operator, and landlord was not involved in any decision making process.
What is the take away point from this decision? The tenant had a good reason for making the bonus payments: to keep the landlord happy, keep renting the farmland, and prevent the landlord from raising rental rates too high after a string of good crop years (bad crop years can sometimes follow). But that good reason backfired and the landlord believed that the lease now included an oral 50/50 crop-share agreement.
What can you do to prevent a similar situation? You could put the possibility of a bonus in the written lease, but that may not always be possible. You could make clear (in writing) when presenting the bonus that it is being done outside the lease and because the crop year was good. Being clear can potentially prevent situations as those seen in the case above.
The other way around this would be to just utilize a crop-share or a flex-cash lease. Both reward landlords during good crop years and potentially remove the need for bonus payments. For those curious on how these leases operate, check out the University of Maryland Extension’s Grain Marketing’s Ag Lease page.