Do I Need a Written Lease
This is a common question asked by both tenants and landlords. Obviously, many farm lease agreements have existed for years without being written down. A recent ISU survey shows that only about two-thirds of Iowa farm leases are on paper.
Where both parties know and trust each other, an oral lease may work perfectly well. However, there are several reasons why a written lease can be beneficial, even in the most amicable of situations.
Although key points may have been discussed, a written lease provides a clear record of what was agreed to. After several years the parties involved may recall details of the lease agreement differently.
The type of lease agreement you use can affect tax liabilities, including income and self-employment taxes. It can affect whether a farm qualifies for special use valuation for estate taxation. A written lease provides useful documentation for making these determinations, or in case of a tax audit.
A preprinted lease form may contain provisions that tenants and owners have not thought of discussing.
Oral leases are valid for only one year at a time in Iowa. If a longer contract is desired, it must be in writing. However, twenty years is the maximum length for a lease contract in Iowa.
If either party becomes deceased, the lease remains in effect for the heirs until it expires. It is essential that the heirs be informed about the terms of the agreement.
Farm Lease Forms
ISU Extension has developed a draft lease form. The Iowa Farm Lease form includes many provisions that you may want to consider. If you don’t want to include a provision, simply draw a line through it. The Iowa Farm Lease can be used for either cash or crop-share lease agreements. Look for AgDM Information File C2-12 at: http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-12.pdf. A short lease form is also available in AgDM Information File C2-16, http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-16.pdf. In both versions, you can fill in the blanks electronically.
Other lease forms can be downloaded free of charge from the Midwest Plan Service web site at: http://www.mwps.org/
- NCR-76, Cash Farm Lease (with flexible provisions)
- NCR-77, Crop-share or Crop-share/Cash Farm Lease
- NCR-106, Irrigation Crop-share or Cash Lease
- NCR-109, Pasture Lease
- NCR-215, Farm Building or Livestock Facility Lease
- NCFMEC-23, Farm Machinery Lease
The lease form contains several key features. A table is provided for specifying the amount, date and method for making cash rent payments. You simply fill in the blanks. It also has a section for describing flexible or variable rent provisions.
For a crop-share lease, there is a table for recording how various costs are to be divided between the tenant and owner, and how the crop and other payments should be split.
Flexible cash lease
Some farm leases call for the final rental rate to be determined by a formula that takes into account the actual yields attained and the actual selling prices available during the marketing season. Details about how the rent will be determined each year can be included in the “Variable Cash Rent Agreement” section on the final page of the Iowa Farm Lease, or in a separate document. Including an example or two is helpful.
Investments by tenants
Sometimes tenants want to invest in long-term improvements such as buildings, grain bins, conservation structures, and even lime. However, they are concerned about losing their investment should the lease be terminated early. The Iowa Farm Lease contains a section where these expenditures can be recorded, along with a schedule for reimbursing the tenant for the remaining value of the asset should the lease be terminated before the useful life of the investment is over.
The Iowa Farm Lease also contains language and blanks to fill in for many different situations including environmental considerations such as handling pesticides, following an approved conservation plan, and cleaning up disposal sites for hazardous wastes and containers.
Several supplements to a farm lease are also available for recording long-term investment.
- File C2-07, Lease Supplement for Investing in Improvements on a Rented Farm
- File C2-08, Lease Supplement for Obtaining Conservation Practices and Controlling Soil Loss
These lease supplements provide extra space to fully describe improvements and practices, and how their costs will be borne.
The time it takes to complete a written lease contract can prevent many problems down the road. It is simply a good business practice.