Farm Leases
Phillip L. Kunkel, Attorney Scott T. Larison, Attorney Hall & Byers, P.A. St. Cloud, MN ![]() Copyright © 2009 Regents of the University of Minnesota. All rights reserved. Leases play an important role in many farming operations. Many farm operators do not own the land they farm or they own only a portion of it. The number of farm operators who lease land continues to rise. Yet many farm landlords and tenants are unfamiliar with the legal aspects of the landlord/tenant relationship. In addition, leasing farm machinery and equipment has become commonplace. Increasingly, anything one can borrow to acquire, one can also lease. Types of Real Property Leases The landowner and farmer are free to establish the relationship that will govern their operation. The lease agreement between the parties is critical in determining what rights and duties exist between landlords and tenants. The following elements are necessary to create a landlord/tenant relationship:
Oral Leases Under Minnesota law, any lease extending for a period longer than one year is void unless the contract is in writing and signed by the party by whom the lease is to be made. This law, known as the Statute of Frauds, is in force in every state and applies only to leases that are wholly oral. The writing required to remove a lease from the application of the Statute of Frauds does not have to be a detailed contract. A memorandum or note is sufficient if it has been signed by a party or for that party. An exception to the Statute of Frauds has been recognized by most courts, however. Even if a lease is unenforceable because of the Statute of Frauds, it may be enforced if one party relies on the contract and substantially performs under the lease. The action required on the part of the tenant to constitute such substantial performance must be determined on a case by case basis. A second exception to the Statute of Frauds has been recognized by courts in cases in which one of the parties has misrepresented or otherwise taken advantage of the other. The Statute of Frauds cannot be used to accomplish a fraud. Classification of Leases Tenancy for years is a tenancy measured by a period of time, lasting for an amount of time specified in the lease. Unless the lease provides otherwise, no notice is necessary to terminate such a tenancy. The tenant's right of possession automatically terminates at the end of this period. Although agricultural tenancy begins on March 1 in many farm states, no law in Minnesota determines when an agricultural tenancy begins. The Minnesota Supreme Court has determined, however, that farm leases do not terminate in the summer months while the crops are still unharvested. Rather, such tenancies terminate in the spring or in the fall. When a year-to-year tenancy terminates is important because the date of termination determines when the written notice must be given to legally terminate the tenancy. Rights and Duties of Landlord and Tenant Of increasing importance are concerns regarding ownership of growing crops. It is clear that in cases of cash rent lease, the crops belong to the tenant. In the case of a crop share lease, however, the answer is not so clear. Most states have held that the tenant retains title to the crops until they are harvested and divided. Other courts, including Minnesota courts, have held that a landlord's interest in the crop attaches once the crop has been planted. As a result, the landlord may sell his share of the crops prior to harvest. Minnesota law provides special protection for agricultural landlords by giving them a lien for rent upon crops grown or growing on the leased property and their proceeds. To protect this lien, a landlord must file a lien statement in the county recorder's office within 30 days after the crops are planted. A landlord's lien which is perfected by filing a lien statement has priority over all other liens or security interests in the crops grown or produced on the leased property. A possible limitation on the use of such a statutory landlord's lien is presented by the Bankruptcy Code. Even though such a lien is perfected, it may be set aside in a later bankruptcy proceeding. As a result, it may be more advantageous for an agricultural landlord to include provisions creating a security interest under the Uniform Commercial Code (UCC) in any such lease. However, any such security interest will not obtain the priority granted the landlord by the Minnesota lien law. To ensure that his security interest will be the first lien against the crops grown on his farm, the landlord should require each and every other party who claims an interest in his tenant's crops to agree to subordinate their claims. The requirements for creating a security interest under the UCC are discussed in another fact sheet in this series, Security Interests in Personal Property. Personal Property Leases If the leased property proves to be defective, it may be much more difficult to enforce any warranty claims against the lessor or dealer. The UCC provisions dealing with implied warranties do not, in the case of a bona fide lease, apply to defective property. Besides warranty difficulties, the lease may provide that in the event of default, the lessee not only loses possession of the leased property and recovers none of the payments made to date, but also is held liable for the balance of the lease payments. Finally, the lease may provide that in the event of default, the lessor may repossess the property without notice or resort to the courts. In short, the leasing of personal property may prove to be a risky business unless the farm operator understands the nature of the relationship with the leasing company. In addressing these issues, many courts have held that arrangements bearing the lease label are, in fact, disguised security interests or sales contracts. The question of whether an arrangement is a true lease or a sales contract must be determined by the facts and circumstances of each case. As a general rule, however, inclusion of a provision in the lease that allows the lessee to purchase the property at the termination of the lease for little or no additional consideration will be construed by a court as evidence that the arrangement is, in fact, a sales arrangement. If found to be a sales contract, the provisions of the UCC with respect to security interests and termination of security interests may apply in the event of default. In addition, the provisions of the UCC regarding warranties may be triggered. Conclusion To order other publications in this series, contact the University of Minnesota Extension Store, 20 Coffey Hall, 1420 Eckles Avenue, St. Paul, MN 55108-6069, e-mail: shopext@umn.edu or credit card orders at 800-876-8636 or (612) 624-4900 (local calls). Titles include:
The fifteen publications are also available as a package: Farm Legal Series (WW-7291). This publication is designed to provide accurate information in regard to the subject matter covered. It is published with the understanding that the authors and the University of Minnesota are not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required, the services of a competent professional should be sought. ![]()
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