September 1st and your leases

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!).

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.

 

What to keep in mind with flexible lease arrangements

As you may know, flexible leases are gaining in popularity.  Flexible leases are just that — more flexible than your straightforward cash or share lease.  There are various iterations of the flexible lease, from a bushel rental to bonus provisions based upon price and/or yield but regardless, there are a few more moving parts in these leases.  What does that mean?

First, like all leases, the lease must comply with the statute of frauds.  You also need a meeting of the minds. All the essential elements of a lease must be present.  That means while the rental price is not determined until after the growing season, a formula or method to determine the price must be in the lease contract to satisfy the essential elements.  But what else?

Make sure you understand how the numbers work in the lease.  Run various scenarios to truly understand the implications of the rental price.  Also explore any impact, positive or negative, on the use of government programs.  For example, you’ll want to ensure whether there are any USDA payment limitation implications from the lease.

Specifically from a landowner perspective, other considerations include whether the lease will subject you to income tax complications.  For example, will you be able to defer income for a year?  Will you be subject to self employment tax?  Alternatively, do you need to build a base for Social Security payments?

If you are a beginning farmer in Nebraska, we’re happy to discuss any flexible lease arrangement you may have in mind and the potential issues that may arise.  Feel free to contact us at any time!

Land access for small farmers

This interview with Temple Grandin on her thoughts on the future of small farms is very intriguing.  Land access is certainly a pressing concern for small farmers, as well as beginning farmers.  It got me thinking about various methods of obtaining land access for small farmers.  What are some ideas for obtaining land access, especially if you need or want access to a population center:

  • Ownership of land

This is the obvious, albeit for many people the most difficult solution to obtaining land access.  But not all is lost.  It takes persistence, networking, and workable finances, but it is possible to purchase land.  There are many programs available from both the Farm Service Agency and individual states (for example, aggie bonds) to assist with land purchases.  Additionally, small farmers have a built-in advantage: they don’t need or require enormous tracts of land.  So, keep an eye out for smaller tracts of land that may be a bit off the beaten path.  Talk to anyone who will listen (or at least won’t walk away!) that you are looking for land to purchase.  Look for land that, while it may not be perfect, will nonetheless fit your needs.

  • Lease of land

As I’ve written here before, I think leases are an option if properly considered.  A lease, especially if you are a new small farmer, provides an opportunity to test your business plan, your marketing and product, and whether this is a career you can and want to pursue.  Leases also provide an opportunity to develop a relationship with a landowner who may be willing to sell land and/or provide references to others in the community about your operation and need for land.  Also, keep in mind that the State of Nebraska has a program in place when leases are signed: the Nebraska Beginning Farmer Tax Credit.  Keep in mind the tax credit requires a lease of ten or more acres.

  • Urban lots

Urban lots may be exactly what your small farm needs.  You would be in the population center, would likely have direct contact with consumers, and may have more housing options available.  But there are issues unique to urban areas.  First, you need to know the zoning regulations and the zoning of the particular lot you may use for your operation.  You may also have to consider whether homeowner covenants are in place.  Some covenants prevent gardens, commercial activities, and/or require a house to be built on the lot within a certain period of time.  An urban lot is also best for vegetable, fruit, or similar operation; animals will very likely not work due to municipal ordinances barring farm animals in city limits.

In the end, access to land is a difficult but not necessarily insurmountable problem, especially for small farmers.  So don’t give up on making your business plans, networking with others, participating an apprenticeships and internships, and generally following your dream.  And if following your dream requires a bit of help, you are always welcome to contact us.

Land access for beginning farmers

By far, the topic of conversation among beginning farmers is access to land.  I’ve talked to many beginning farmers about this very topic.  How, I am asked, can I obtain access to land?

Before answering that question, we should start with what we know.  According to the Kansas City Federal Reserve, Nebraska agricultural land prices for irrigated land increased 32% and non-irrigated land increased 26.8% from the previous year.  Preliminary data on Nebraska cash rent values as of February 1, 2013 tell the same tale — cash rents are up statewide, depending upon the type of land,  from 19 to 30 percent.  (Keep in mind, however, that the preliminary data is broken down by region so the numbers vary more at that analysis level.)

With the above reality, how to obtain access to land?  I can’t promise the magic bullet, but I do have some ideas:

  • Take a long, hard look at your (proposed) operation and determine how much land you need, not how much land you want.  You may be able to lease smaller parcels and obtain the land your operation needs.  This may also include considerations of geography, i.e. whether you should move if you have the opportunity to secure land.  It will also include considerations of the type of land you need and housing possibilities.
  • Search for internships and other job opportunities to gain experience and network with other producers.  Internships and other opportunities are listed and/or promoted in various locations, including Beginning Farmers.
  • Consider leases, rather than ownership, especially when building your operation.  If you know an operator, present the operator with a business proposal to lease the property.  The proposal can include utilization of programs such as Nebraska’s Beginning Farmer Tax Credit.  More information about the Beginning Farmer Tax Credit is here.
  • There are several land-matching programs out there.  The Center for Rural Affair’s LandLink program is a nation-wide program where land owners with beginning farmers.  The Center also has a comprehensive list of other land-matching programs by state and region.
  • There are websites available which list agricultural land for sale.  A Google search will find numerous resources.
  • Keep in mind various financing strategies, both for your operation and real estate.  The Farm Service Agency has a variety of financing strategies for operating loans to real estate loans.

You don’t have to in your twenties to consider these strategies.  In fact, according to the latest research, many beginning farmers (those with ten years or less experience) are between the ages of 35 and 64.  There is no reason you cannot take some time to consider what you want to farm, how you want to farm, where you want to live, and craft a long-term strategy.

There are a lot of details in this post and Legal Aid of Nebraska is happy to help you with any questions about your particular operation.  Feel free to contact us!