How to negotiate an agricultural contract
Erin Herbold-Swalwell January 29, 2024 / Source: Farm Progress
Farm families frequently encounter agricultural contracts. Whether it’s a purchase agreement, custom farming arrangement, a farm lease or an easement agreement, you may feel overwhelmed by the length of the contract or its language.
Many Iowa landowners are evaluating lease and easement opportunities covering an array of areas, including wind, solar or transmission line projects. Understanding and reviewing these agreements is essential to protecting your farm business and business successors. These agreements can be quite lengthy and complex.
In past columns, we have discussed evaluating lease and easement opportunities involving wind energy, crude oil pipelines and electric transmission lines. Recently, companies started seeking easements and leases for solar (photovoltaic) projects in Iowa. Also, many electric utilities are updating transmission lines or adding transmission capacity in developing areas, impacting farmland surrounding these areas.
Remember, a lease is just a contract where the party owning land conveys a portion of land to another party to use for a specific time, usually for a specific periodic payment. An easement is a similar concept, but is a grant of a right given to another to use land you own. For instance, utility companies generally request easements for utility line installations and will record those agreements.
What are your rights?
For landowners affected by the construction of these projects, though, the biggest question is what rights and legal responsibilities will they assume or give away if they enter into an easement or lease agreement.
Questions for farmers and landowners to ask include:
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What is the term and for how many years of the easement?
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Will the entire easement be recorded at the county recorder’s office, or is it just a memorandum of the agreement?
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Is the agreement assignable? (Can the company assign their rights to another company?)
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What is the payment and how is it structured?
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As a landowner, am I protected from liability if there is a problem with the installation?
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How will my farming operation be impacted, and for how many years?
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What access rights, and through what routes, does the company have?
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In the event of a legal dispute, is there a mandatory arbitration or mediation clause?
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Will my land be returned to its former condition after construction and installation? What is the process for removing and replacing topsoil?
Whether it is a wind, transmission line or solar project, or other legal agreement, asking the right questions and consulting with experts and your attorney is key to understanding your rights and responsibilities when entering into a long-term easement or lease arrangement.
Farm leases
It is quite common for landlords and tenants to renegotiate after Sept. 1, even if the farm tenant was not terminated. With corn and soybean prices falling, it appears that many landlords and tenants are discussing lease rates and evaluating farm lease agreements. Below are some tips and tools to consider when negotiating a legally binding farm lease contract, which can apply to all land contracts.
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What type of lease? Landlords and tenants may want to revisit the structure of the lease. An important consideration is to have a written lease, even in the most amicable of situations.
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What is the form of the lease? The most common form of farm lease still appears to be a fixed cash rent lease. However, the flexible cash lease is growing in popularity. The crop-share lease is also an option.
Some tenants have successfully renegotiated lower cash-rental rates by using different forms of leases, including the flex-lease, which spreads the risk between landlord and tenant or going to a straight crop-share lease. Typically, these leases are used by both parties to level out the playing field or spread the risk between both parties. These agreements:
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Ensure the landowner is still paid cash, which makes the landowner happy.
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Shifts risk, which makes either party happy depending on the year.
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Adjusts the actual rent with yields and prices.
As always, there is a wealth of information regarding farm leasing available on the ISU AgDecisionMaker and the ISU Center for Agricultural Law and Taxation websites.
Landlords and tenants should consider the timing of payment and consider filing a landlord’s lien. With lower commodity prices, a tenant may request that payment be made under the lease after the crop is harvested or in installments — usually one in the spring and one in the fall.
If a landlord accepts this term, they should consider filing a landlord’s lien under Iowa Code Ch. 570, by filing a financing statement with the Iowa secretary of state (UCC-1). The lien should be filed within 20 days of the date the debtor takes possession of the leased premises.
Landlords may be more open to rental renegotiation when the tenant is willing to make investments in soil conservation measures. Some tenants own equipment to install waterways, tile and terraces to improve soil conservation. ISU offers a sample lease supplement regarding tile and drainage improvements to the land.
For next month’s column, I’ll talk about what’s happening so far in the 2024 Iowa Legislature, focusing on key issues and bills affecting agriculture.
Follow these tidbits of advice
To protect your farm operation, follow these tips when negotiating a contract, which could be one-sided in favor of the company or another party:
Think about the kids. Always think about the next generation or what happens in the event of your death or disability. How does that impact your succession plan and your family?
Gather information and consult attorney. As with any document affecting your property rights, asking the right questions and having the document reviewed by your attorney is key to making the best decision. You may also want to attend public informational meetings to gather information and understand the process.
Ask questions. Don’t be afraid to evaluate the contract and ask questions. Most of the time, there is no silly question.
Study hard. Do your homework before you start negotiations with the other party.
Think it through. Always enter into any negotiation over a contract with an open mind and respect for the other party. Also, be ready to decide if what you are gaining from the contract is worth what you are giving up.
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