Can I Break My Lease?

A question we’ve received more frequently the past few months is, “I am concerned about my lease payments and it would be beneficial for me if I could somehow get out of my lease.  Is it possible to break my lease?”

Short answer? You may break your lease but you will still owe the amounts remaining.

Long answer? It depends.

The first step is determining why you want to break the lease.  Is it the rental amount?  The term, or length of time, of the lease?  Is it an issue about when rent is due?  Is the issue with the lease at all or is there some other issue causing cash flow problems (such as marketing contracts)?

Pinpointing the issue(s) will allow you to focus your efforts upon: (1) entering into a discussion with your landlord about potential amendments or changes to your lease; and/or (2) reconfiguring your operation to solve the other underlying issue you have identified.

If you wish to approach your landlord, first review your lease (if it is written).  Ensure that amendments to the lease are permitted, likely with the consent of both parties.  Also approach your landlord with a concrete action plan about what amendment(s) the lease you require and why.  Consider outside-the-box ideas, such as a balloon payment at the end of the lease or flexible lease payment provisions.

But if you feel you must break your lease, and the landlord is not open to amending the lease, what can you do?  First, is it possible to find another person to take over the lease?  This is called an assignment of the lease.  Read your lease carefully to determine if an assignment is permitted; it may not.  However, if assignment is permitted, you can assign your lease to another person so that person may take over the obligations under the lease you cannot meet.

Second, attempt to every extent possible to meet as much as possible the obligation.  This means that if you can pay 50% of the rent payment due, do so.  If you are required to fix the fences, do so to the extent possible.   In short, demonstrate a good faith effort to comply with the obligations of the lease.

Third, understand that the lease is a legal obligation.  Absent a legal reason to declare the lease unenforceable, the lease is a contract.  A landlord may utilize a lien or file a lawsuit seeking past due rent and/or other damages.  You may be required to enlist the services of an attorney if you wish to dispute the lien or lawsuit.

The takeaway?  To the greatest extent possible, try to find a solution with your landlord before you must miss a rental payment or are unable to meet an obligation under the lease.  The key, as always, is proactive communication between the tenant and landlord.  The landlord has an interest in finding and maintaining a good tenant; try to be that tenant.

 

Some pragmatic thoughts about leases

I’ve been working with and thinking about leases this week and, rather than delve into a legal issue, I think it is important to discuss some pragmatic issues.

When entering into a lease, do or think of the following (and note, this list is not inclusive of all issues, just some common items I’ve noted of late):

1.  Read the proposed lease.  Then read it again.  Make sure you understand all the provisions and how all the provisions related to each other.  If you have any concerns, questions, or just niggling doubt about something, discuss it with the other party to the lease and clarify any provisions in the lease as needed.

2.  Speaking of clarifying any provisions in the lease, you do not want any ambiguity in the lease.  Write the lease so there is not any doubt about what each party is/is not obligated to do.  Detail is your friend.  If you want a specific date for when rent is due, write it down.  If you require a certain type of crop rotation, write it down.  Be clear, be concise, and write it down.

3.  With that said, there is no need to get overly complicated.  If you have provisions in your lease that have absolutely no use, there is no need to include them.  For example, why have a section about organic practices if you and the tenant agree to conventional agricultural production?

4.  Sign the lease.  Do not negotiate all the details and then not sign a lease.

5.  Think about the long-term.  If your relationship with the other party goes south, are there provisions about how to terminate the lease?  Is the leased property vital to the continuation of your operation?  Consider your relationship with the other party and how your operation may be impacted should the lease end.

6.  Communication is the key to any successful relationship.  Communicate any problems, issues, or concerns you may have, especially before they become a crisis.

Leases have not only legal implications but also pragmatic implications.  Think through not only the legal implications but also, whether you can afford the rental price or whether the tenant will practice the agricultural practices you require.  Take the time you need to thoroughly negotiate and read the proposed lease terms.  Understand not only the lease but the implications of the lease on your operation.

Need further assistance?  Or have questions?  You are welcome to contact us — we’re happy to help!

The importance of persistence

I have been considering a story I heard from a colleague about the beginning farmers who are currently renting his crop land.  The beginning farmers began to cultivate (pun not intended) a relationship with my colleague for a few years.  They would call my colleague, ask if he had any land they could rent without disrupting any current tenants, if he knew of any other landowners looking for a tenant, keeping my colleague up-to-date on their operation and plans, and generally letting my colleague know they were interested should an opportunity ever arise.

The opportunity then came.  My colleague was considering renting his land and, as he had in years past, received a phone call from the prospective tenant.  This time, my colleague indicated he was interested in renting the land and asked for more details regarding the tenants’ operation, their agriculture and educational background, and ideas for maintaining the environmental integrity of the land.  My colleague also discussed the use of the Nebraska Beginning Farmer Tax Credit program and the requirements for both himself and the tenants to qualify.

What have I gleaned from this story from the perspective of a beginning farmer?

  1. Polite persistence is key.  We all know that access to land is the single most difficult barrier for beginning farmers to overcome.  But that doesn’t mean you can’t talk to people in your community, create relationships with landowners, and generally let the word out that you’d like to rent land.
  2. Don’t expect immediate results.  It took the tenants in the above story a few years for their persistence to pay off.  But when my colleague was considering renting his land, the first people he thought of were the people who maintained a relationship with him and let him know about their interest in renting his land.
  3. Have a plan.  Don’t just approach a landowner and state you’d like to rent the land.  Know what type(s) of crops you wish to grow, your ideas on fertilization and pesticide use, whether you wish to pursue cash rent or share rent, your farming background, and any other pertinent details that demonstrate that renting to you is in the best business interest of the landowner.
  4. Be aware of any programs that assist beginning farmers.  A tax credit is a wonderful tool in your plan.  Know about it and discuss it with potential landlords.

What have I gleaned from this story from the perspective of the landowner?

  1. Be receptive to renting to beginning farmers.  Sure, it may be a bit outside your comfort zone to rent to a beginning farmer but it may make business sense as well.  Listen to the ideas and keep them in mind.
  2. Be aware of any programs that assist beginning farmers.  Who doesn’t like a tax credit?  As a landowner, you may qualify for the Nebraska Beginning Farmer Tax Credit.  Calculate the tax credit and consider it in the larger picture of your operation’s financials.
  3. Have a plan.  There may be a time when you can no longer cultivate your own fields.  If that time comes, do you have relationships with other farmers who would be interested in renting your land to maintain your income stream?  More long-term, if you want a successor to the operation, do you have one?  Renting to a beginning farmer may provide you with a mechanism to maintain your operation for another generation.

Ultimately, there are benefits to both beginning farmers and landowners by being persistent and allowing persistence.  You never know — you may just find the perfect fit if you persist.

A short guide on South Dakota law for leasing agricultural land.

South Dakota has a few wrinkles in their laws that are unlike Nebraska’s laws regarding the lease of agricultural land.  What do you need to know?

  1. South Dakota does permit oral leases, but those leases are only year-to-year leases.  South Dakota does not permit an oral multi-year lease.
  2. If there is no contract or usage to the contrary, rent is payable yearly at the end of each year.
  3. If your oral lease is for forty acres or more, special provisions apply to terminate the lease.  A landlord must give written notice on or before September 1 to terminate the lease or it is renewed automatically.  If notice is given on or before September 1, the lease terminates on March 1.  This is applicable to tenants leasing crop land and grassland, either native or tame.
  4. If you have a written lease, the above provisions regarding notice to terminate are not applicable.  The termination provision(s) in your written lease determine how and when the lease is terminated.
  5. If you are seeking a multi-year lease, it must be in writing.  Keep in mind that any lease for agricultural or wildland may not exceed twenty years.

The takeaways from above?  While oral leases are permitted in South Dakota, it is only on a year-to-year basis.  Further, if more than 40 acres is leased, notice to terminate the lease must be given prior to September 1st.  Written leases are preferred in the law, although a lease for agricultural land may not last longer than twenty years.

Your leases and the importance of September 1st

An oldie but goodie post as Nebraska farmers approach September 1st:

There is evidence that in Nebraska, most farm leases are oral year-to-year leases.  This is important because Nebraska law governs how to terminate such leases and September 1 is a critical day should a landowner wish to terminate an oral lease.

First, the law:

The Nebraska Supreme Court has ruled that a farm lease begins on March 1 for oral year-to-year leases.  To terminate an oral year-to-year lease, however, the Court has ruled that six months notice must be given prior to March 1.  In other words, to terminate an oral year-to-year lease, a notice to quit must be received by the tenant prior to September 1 of the preceding year.

Second, some examples:

Example 1:

The landowner as an oral year-to-year tenant.  Landowner decides she wants to terminate her lease with Tenant because she wants her nephew to rent the land beginning March 1, 2014. Landowner sends a letter to Tenant and Tenant receives it October 30, 2013.  Is the lease terminated so the nephew may rent it on March 1, 2014?

No, the lease is not terminated because an oral year-to-year lease requires a tenant to receive notice by September 1, 2013.  Here, Tenant received noticed from Landowner on October 30, 2013.  This means that Tenant may lease the farm land until August 31, 2014.

Example 2:

Same facts as above except now, Landowner sends a notice to quit to Tenant, which Tenant receives on August 30, 2013.  Is this lease terminated so the nephew may rent it on March 1, 2014?

Yes, the lease will terminate as of February 28, 2014.  Keep in mind the lease between Landowner and Tenant continues through February 28, 2014 but the Tenant has received a proper six months notice of termination, which is required under Nebraska law.

Third, some gotchas:

The above represent the default rules in Nebraska for termination of unwritten year-to-year leases.  The landowner and tenant can come to a mutual, voluntary agreement to modify the default rules.  Thus, if both the landowner and tenant agree, an unwritten year-to-year lease may end in June with 30 days notice.  The key is that there must be a mutual, voluntary agreement to do so.

If a landowner is terminating an unwritten year-to-year lease, it is advisable to do so with a letter and not in-person.  Additionally, it is best to send the notice to quit with time to spare from the September 1 deadline, as the tenant must receive the notice by September 1; it is not relevant when the landlord sends the notice.

Moreover, the above rules do not apply to written leases.  To terminate a written lease, the landowner and tenant must merely review what the lease states about termination and follow the lease provisions.

If you need clarification or just want to ask about dates and deadlines, you are welcome to contact us.  We’re happy to help Nebraska and South Dakota’s farmers and ranchers (both landowner and tenant!).

The essential terms that must be in a lease

We’ve talked about why leasing may not be a bad option but, when presented with an opportunity to enter into a lease, what do you need to include in the lease?

First, you need the names of the lessor (landlord) and lessee (tenant).  Make sure you have the correct lessor and lessee.  The land may be in a trust, which means the trustee of the trust must sign the lease.  You may have a limited liability company, meaning you sign on behalf of the LLC.

Second, you need a description of the property to be leased.  This is ideally the legal description of the real estate.  If you are going to lease buildings, such as a barn or residence, also include that in the lease.

Third, you need to memorialize the rental price.  How much is rent and how will it be paid?  Will you pay a graduated rent (rent increasing every year of the lease to a set amount) or will you pay a share of the crops grown?  Will rent be paid monthly, quarterly, yearly, or some other schedule?  Should rent be mailed to the landlord at a specified address or can rent be paid when in person?

Fourth, you need a term for the lease, or how long it will be in effect.  Is this a one-year lease?  Two-year lease?  Five-year lease?  Is it a lease that renews automatically every year unless one party takes action to terminate the lease?

Fifth, each party to the lease needs to sign it.  This is such an obvious step that it is easy to overlook it.

Finally, remember the statute of frauds.  If you enter into a lease that is over one year, the lease must be in writing.  If you enter into a lease for under one year, it may be an unwritten lease if the essential elements (except signatures) are agreed upon.  However, a written lease is preferable to an unwritten lease.

Do you have a lease question?  Or are you considering entering into a lease, either as a landlord or tenant?  Feel free to contact us as we’re happy to discuss the lease with you.

What is the statute of frauds?

Nebraska, along with every other state, has what is called a statute of frauds.  The purpose of the statute of frauds is to protect all parties to a contract; it is, as the name suggests, to prevent fraud.

Sales and Leases of Land:

For sales and leases, Neb. Rev. Stat. § 36-105 requires “Every contract for the leasing for a longer period than one year, or for the sale of any lands, shall be void unless the contract or some note or memorandum thereof be in writing and signed by the party by whom the lease or sale is to be made.”

We begin with a discussion of leases.  As § 36-105 states, “every contract for the leasing for a longer period than one year … shall be void unless the contract … be in writing and signed by the party to whom the lease … is to be made.”  If you have a lease for five years, that lease must be in writing and it must be signed by you, the person leasing the property (otherwise known as the tenant).  But what if you have a lease that is only for one year?  A one-year lease does not fall into the requirements for the statute of frauds.

(Keep in mind, however, that there are other good reasons to obtain a written lease, regardless of the statute of frauds.  It is a good idea to memorialize the essential terms of a contract, such as names of the parties, description of the land, price/rent, other general terms, and signatures.  This allows for a reference point in the future about the terms of the contract and can hopefully dispel disputes before they begin.)

The other category of contracts considered by the statute of frauds is the sale of land.  The “sale of any lands[ ] shall be void unless the contract or some note or memorandum thereof be in writing and signed by the party by whom the … sale is to be made.”  Again, this is a seemingly simple statement, that the sale of land must be accompanied by a written agreement signed by the seller.

There is an exception to the above, found in Neb. Rev. Stat. § 36-106.  A contract may be enforced in cases of part performance.  What this means is if a person is seeking to enforce the contract (specific performance), that person is required to prove an oral contract, the terms of which are clear, satisfactory, and unequivocal.  Additionally, the person must prove acts done in part performance of the oral contract were referable solely to the contract sought to be enforced, and not such as might e referable to some other or different contract.  Finally, the person must prove that nonperformance of the oral contract by the other person would amount to a fraud upon the person seeking specific performance.  See American Central City, Inc. v. Joint Antelope Valley Authority, 281 Neb. 742 (2011).

What does that mean?  To be frank, it means that you should get a written contract and not rely upon the exception in § 36-106.

Uniform Commercial Code:

If you are a farmer who is considered a merchant, the Uniform Commercial Code (“UCC”) provides that a contract for the sale of goods of $500 or more is not enforceable without some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his or her authorized agent or broker.  Neb. U.C.C. §2-201.  There are specialized provisions in § 2-201 and we will discuss those at a later date.

A merchant, for our purposes, is defined as “a person who deals in goods of the kind or otherwise by his or her occupation holds himself or herself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.”  Neb. U.C.C. § 2-104.

Keep in mind that this provision is for ‘goods’, such as crops, dairy, or livestock.  It is not for land leases or sales.  If you want to read an in-depth discussion today, this publication from the Farmers’ Legal Action Group is great.

Clearly, this is not a simple topic and we’ve only scratched the surface.  Feel free to contact us if you have specific questions, especially if you are a beginning farmer!

Maybe leasing land isn’t a bad option?

I was planning a different topic today but the release of the Kansas City Federal Reserve’s Main Street Economist Report “Financing Young and Beginning Farmers” caused me to reverse course.

Of interest to me in the report is that more beginning and young farmers are turning to lease agreements to enter farming or ranching.  This is not surprising given the economic conditions discussed in the report: higher fixed costs, higher land costs, and higher debt-to-income ratios for beginning and young farmers.  But entering farming or ranching via leasing may not be the worst idea.

First, leases allow a beginning farmer to cultivate a relationship with a landowner.  This relationship, especially if it is with an established farmer or rancher, can lead to mentoring and education for the beginning farmer.  You have the opportunity to learn from someone, ask for advice, and develop a mentor/mentee relationship.

Second, leases allow for flexibility with changing market conditions.  Leases can be drafted so the beginning farmer shares the risk with the landlord.  Thus, if the drought continues or commodity prices dip, the beginning farmer will not be locked into a debt repayment; instead, there is flexibility in the lease price if the lease is drafted to share risk.

However, even if the lease is not drafted to share risk with the landlord, a lease provides more flexibility than debt repayments.  Instead of being obligated to repay the purchase price for a parcel of land, you may be able to stagger your leases so they are renewable on different dates, allowing you to determine which parcels of land provide the most bang for your buck and let go of parcels that are not producing to your standards when the lease ends.

Third, at least in Nebraska and Iowa, there are tax programs available for landlords who rent to beginning farmers.  These tax programs can be a strong incentive for landlords to rent to a beginning farmer and beginners should consider approaching possible landlords with a lease proposal with these tax programs incorporated into the proposal.

There are risks with leases, namely that the landlord will not renew the lease.  As a result, a beginning farmer has to weigh the risks and rewards of a lease with the risks and rewards of ownership.  Keep in mind your debt-to-income ratio, especially when considering purchasing land.  Your debt-to-income ratio affects everything from whether you can obtain a loan to what interest rate will be used to whether you will qualify for future loans you may need/want, such as for machinery.  In short, beginning your operation with a lease may allow you to build up a nest egg to purchase land at more attractive terms than would be possible without the lease.

To know whether it is better for you to lease or own depends upon financial knowledge of your operation.  As discussed earlier this week, that requires good financial recordkeeping.  And to know whether you are obtaining good lease terms also requires knowledge of the income your operation generates, meaning you need good financial recordkeeping.

Need some help deciphering the above information or perhaps need some help drafting a lease or purchase agreement?  Then contact us — it is what we are here for!