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Breaking up

Iowa requires a notice by 1 September of a land owner or tenants desire to terminate a farm lease arrangement. Don’t forget that under recent changes in the law , one 38 year old horse on a parcel can provide protection to a tenant as a farm tenant. Those terminations are 1 March unless the parties BOTH agree to an earlier date. When terminating a lease, Iowa Code requires adherence to proper notice. Failure to properly notice a tenant may result in a renewal of the lease under the current terms even if a party dies after the 1 September dead line.

If you and co owner (like a sibling) own a parcel together and the sibling rents it out and you cash your portion of the check, you are providing a strong presumption that you like the current arrangement, if you don’t, you best terminate the relationship by 1 September.

1 September isn’t the only time you can break a lease, failure to pay rent when due will also violate it. In the times of soaring costs of production and falling prices, some tenants have and more will, walk on high rents they are obligated to pay. The land owner has a responsibility to rent the ground out for what they can and then may seek the difference from the original, non paying tenant. Other lease provisions being broken may or may not result in booting the tenant off the land. For other violations, the tenant must be given a right to cure (or fix) the problem, and the violation must be materially harmful.

Making up

Like surgery, it is not required that you hire somebody, but it is usually recommended. When you are reviewing a lease or attempting to put one together, some simple rules should be kept in mind with lease,

Get it ALL in writing to prevent misunderstanding and make sure successors in interest (heirs upon death) on both sides understand the terms of the agreement. Make sure both parties sign the lease. Ensure an accurate description of the leased ground is included.

Agree upon compensation for any fall field work completion in the event of non renewal of the lease. Consider fertilizer application that may have multi year benefits and how those get compensated if the parties don’t stay in a relationship. Who gets to control the hunting, fishing and recreation rights, who sprays the weeds and who pays the taxes at the court house are all things that need to be addressed. Unless the lease says otherwise, the tenant gets the above ground portion of the crop.

Pricing isn’t always as simple as looking at the ISU average land values, adding 10% because you have great ground and demanding a check. Average cash rents reported are but one piece of the puzzle, with a rents compared to yield, corn suitability rating and a flat analysis of return on investment as compared to where else that money might earing a return all play a part in determining a fair rent. Operators would be wise to invest in education of the landowners on the costs of operating and why shinny pick ups purchased in December over recent years may have been more about tax planning and less about excess wealth and low rents. Likewise, operators who are renting from land owners facing increased medical costs should attempt to understand that sometimes, the rent is going up on the farm because the cost of housing the spouse or the land owner themselves in a care facility is going up.

If the term of the lease, which can be up to 20 years long, goes over 5 years it needs to be recorded or at least a memorandum of the lease needs to be recorded with some basic essential terms.

The Ag sector is looking at the lowest net farm income in 2016 since 2002, with a drop of 56% from 2013 prices. This is across the board, with decreases in dairy, meat, poultry, vegetable sand feed crops. Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag. Further, Farm Asset value is expected to decrease another 1.6% this year and debt to increase 2.3% for farms and non real estate debt to increase 3.8%. Net farm cash income projected for 2014-2015, when the numbers are finally in,  down 27% and  net farm income is down 37%. Add in a hotter than average July and low commodity prices and it is  uncomfortable time in the ag sector.

Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag.

I have referred to this last "good run" of farming as the rise of the "shorts farmer". A shorts farmer is one who hasn't had to have livestock to spread out risk or make hay for, can afford to hire out crop scouting and spraying, and can trade equipment to avoid getting covered in grease doing maintenance and repairs.  Shorts, while good for swimming, may not be the best gear for the rising waters ahead.

As trouble waters may be brewing, it is appropriate to review some basic concepts that perhaps we in the Ag community haven' t had  to consider in quite awhile.
Chapter 7 bankruptcy is a complete liquidation of non exempt assets, leaving the filer with some cash, some basic tools of the trade, the equity in their residence , retirement accounts, and up to $7,000 in equity in a vehicle. Eligibility depends on the size of the household. In Iowa, a single person can file if they are under $46,009 in annual income, 2 person household goes to $60,872 and so on. They can be filed once every 8 years. They are quick, taking about 3-6 months to discharge most debts.  Some debts will haunt you to the grave, including tax debt that is less than 3 years old, credit purchases made with in 90 days of filing, alimony/child support, government fines and student loans (with some small relief avaialbe for those who truly can do no work).

Chapter 12 is a bankruptcy tailored for farmers, with the requirement to repay creditors tied to a five year plan that is connected to the production schedule  of the ag economy, which is different that a factory. Farmers who file can only have $4,031,575 in debt to be eligible. That is owing $10,000/acre on 403 acre and nothing more, which isn't really that outlandish. Those who don't qualify will go to a 13 or a 11.

If you are thinking about filing a bankruptcy, you can do pre bankruptcy planning. Pull your financial statements, run a cash flow, get your taxes done and filed and meet with an advisor. Sometimes, the lenders  can restructure  your debts without filing a formal bankruptcy. Iowans have a tendency to hang on too long and miss opportunities to reset the game pieces and as result, end up consulting advisors and bankers when it is already too late.

Beware of gifts or below market sales prior to filing a bankruptcy, These transfers can be set aside and pulled back into a bankruptcy filing. Additionally, creditors who receive payments from someone who files bankruptcy can have those payments pull back into the bankruptcy estate if they were made 90 days prior to the filing.  The creditor has some defenses, to include showing that the payments were ordinary business transactions but it can sometimes be more painful monetarily than it is worth.

Think about the round baling being done this summer. The custom operator who waits in the field for the check and cashes it promptly  now doesn't care about a 1 March bankruptcy but the operator that avoids conflict and waits to send bills until December may be writing a check to the bankruptcy trustee for the work they did and collected on. If someone who owes you money files bankruptcy and you receive the notice or read it in the paper, stop contacting them at once. You have the opportunity to do some investigation into whether any you are going to get paid, but calling the debtor to ask is not the way to handle it.

If you inherit property with your brothers and sisters, you just got thrown in to business together with no business plan, no body in charge and perhaps, wildly different goals for the business. This form of ownership is called:

  • Tenancy in Common – , in which the two or more parties own an undivided fractional interest in the property, but when one of the “tenants in common” dies, that person’s fractional interest passes via probate (with or without a will) to the dead tenant’s heirs. This allows for a “step up” in the tax basis of the property for capital gains purposes, and can be used to bring in the next generation as a co-owner with the surviving spouse.

That’s why it gets complicated. Corn or beans. Hay ? CRP? Sunflowers? Multiple owners have multiple biases, goals and desires. If a co owner is deep in debt, they are motivated to maximize revenue while a well off co owner might consider things like land conservation, long term development potential or other agenda items that will bring conflict to the front burner.

Iowa law says people in these situations have the right to get paid from a cotenant who is in control of the property, their respective shares of the “rental value” of the property. Easy to figure when one co tenant got a rent check, not so easy when that co tenant is farming the ground.

The Iowa Supreme Court has pointed out that lease of executed by one tenant in common Is not binding on other tenants in common unless they okay it, like cashing a rent check.

In a case out of Clayton County:

The tenant had 85 acres of farmland owned Strawberry with a written lease that had automatically renewed each year . The tenant was terminated timely by the city. The tenant complained about how he was terminated (by the city clerk and not the council) but court found that the clerk followed the law and didn't need a separate vote of the council to terminate.

The tenant also took issue with him being barred from harvesting cornstalks following termination but the written lease clearly prohibited him from doing so, even though in a prior year he had made bales.

The tenant's only successful argument was that he was entitled to some prorated credit for lime application. A written amendment to the parties' lease provided that lime and trace materials were to be allocated over 7 years and that "if the Lease [was] not renewed," the tenant was to be reimbursed by the landlord "to the extent Tenant has not received the benefits, on a pro rata basis." The lime application was two years in when the lease was terminated. Strawberry Point unsuccessfully tried to say the lime was not an authorized expense, but because lime was primarily a tenant benefit, the city didn't have to authorize it. Just like it doesn't have to authorize herbicide.

It is clear that if this had been a handshake deal between two parties, it would have been even messier to determine who is entitled to what. As to the lease, I would think three years would be better fit for lime depletion, not seven. Consider the next level of argument, unless it is clearly spelled out in the lease, the lime proration can be determined based on uptake, cost of application, cost of product or some other method. As to the uptake, I have spoken to six different labs over the years and have gotten six different uptake rates (while similar, are still slightly variable) for minerals. Consider also how uptake would be determined, as unless a grid sample is used, data drawn at the beginning of the lease and at the end may not be really be comparing data points at all.

One Horse is all it takes.

This month, the Iowa Court of appeals ruled that one 38 year old nag horse was all that is required to create a farm tenancy. For those who rent out farm acreages, this is a big development. A farm tenancy needs to be terminated timely and appropriately by 1 September, while a residential lease can be terminated at various times. Until 2013, this would have not been a concern as at all. Unfortunately, the legislature changed the law in 2013 , removing exception from the 1 September rule for less than 40 acres unless animal feeding was the primary purpose. (read that to mean hog buildings built on leased ground). One horse is not an animal feeding operation, so 1 September is the date to keep in mind. I would think the legislature would adjust this as even the court thought "it may seem absurd to deem this tenancy a farm tenancy," but left with the black letter of the law, they really had no choice.

Lease Rates

According to Iowa State, farm rental rates slid 6.5% but that slide is not as fast as the crop cash prices. Unless a rally happens in the fall, expect tenants to be looking at their bottom lines and trying to find the best value for their rental dollars.  

Thursday, December 05, 2019
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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