AGRICULTURAL LEASING IN MARYLAND

Paul Goeringer, Extension Lawyer and Economist, Center for Agricultural & Natural Resource Policy

Governor’s Intergovernmental Committee on AgricultureJune 4, Annapolis MD

DisclaimerThis presentation is intended to provide general information about leasing laws and should not be construed as providing legal advice. It should not be cited or relied upon as legal authority. State laws vary and no attempt is made to discuss laws of states other than Maryland. For advice about how these issues might apply to your individual situation, consult an attorney.

Special Thanks to:

ACReS Farm, Agricultural & Rural Mediation Services

Why Care About Leasing Laws?

County 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Carroll 57.68$ 63.04$ 62.52$ 63.57$ 62.53$ 59.84$ 54.00$ 68.50$ 56.00$ 58.00$ 79.50$ Cecil 68.28$ 61.74$ 68.39$ 72.31$ 75.04$ 72.19$ 71.00$ 79.00$ 68.00$ 71.00$ 85.50$ Kent 82.16$ 85.33$ 75.96$ 83.08$ 83.79$ 89.13$ 86.00$ 90.00$ 75.50$ 80.00$ 122.00$ Queen's Anne 73.39$ 83.40$ 86.15$ 90.47$ 92.55$ 92.18$ 86.00$ 79.50$ 75.00$ 81.00$ 113.00$ Talbot 69.77$ 78.40$ 74.86$ 76.71$ 83.79$ 83.02$ 71.00$ 78.00$ 75.50$ 77.50$ 105.00$ Washington 55.57$ 54.77$ 59.58$ 59.96$ 62.53$ 61.75$ 55.00$ 57.00$ 53.50$ 56.50$ 74.50$

Selected Maryland Counties Cash Rental Rates 2002 - 2012, Source USDA-NASS

Why Care About Leasing Laws

Why Care About Leasing Laws?

Why Care About Leasing Laws?• Leasing of farmland is very important to agriculture

• According to National Ag Statistic Service (NASS), 32% of all ag land is rented in Maryland

• Charts show us rent prices and crop prices going up.• Higher crop prices leading to issue of some producers wanting

more land for their operations – bidding up rent prices• Some landlords may want what they view to be their fair share of

higher crop prices• Both of these working to cause landlord/tenant disputes in ag

• Understanding land leasing laws can help to limit disputes that can arise over the life of the lease.

Overview• To be valid a lease needs:

1. Valid contract

2. Extent of the property to be leased

3. Definite lease term/how long will the lease be for?

4. Definite rental rate

• Note none of this 4 requirements states the lease should be written, an oral lease could be valid if it meets the 4 requirements

Overview• Three types of leases

1. Crop-share lease2. Fixed cash lease3. Flex-cash lease

• One other type of relationship exists, custom farming contract, but this is not a leasing arrangement because landowner makes all the decisions and hires third parties to perform preparation

Oral Lease• Oral leases

• Pros:• Simple, usually just have a rent and lease term clauses, and generally

no other clauses• Shows trust in other party

• Parties like to think the other one will always be reputable and honest with them.

• Cons:• May not always meet legal requirements• No written record• No reminder of what was agreed upon• Any legal dispute will rest on which party is more believable.

Written Leases• Written leases

• Pros:• Have a written record of terms• Allows the parties to negotiate the lease and develop a lease that works

for them • Clearly define who is responsible for what during the life of the lease• Good business practice• Provides proof to lenders you actually have the acreage claimed under

lease• Cons:

• Looks like the parties do not trust each other• May prefer there be no record of what was agreed to

So When Does a Lease Have to Be Written?• No requirement that a lease be in writing, unless the lease is for

a period longer than 1 year.• Example 1, lease that runs from January 1, 2013 to December 31, 2013

• Not required to be in writing and can be oral

• Example 2, lease that runs from January 1, 2013 to December 31, 2013 and can continue after Dec. 31, 2013 until terminated by one of the parties • Not required to be in writing

• Example 3, lease that runs from January 1, 2013 to December 31, 2015 is for a period longer than 1 year• Needs to be in writing.

• But having a written lease is a good business practices

Amending the Lease• Lease can be amended at any time as long as the parties

agree to amendments

• Amending the lease allows for the document to more meet the needs of the parties as they change

• But if you do amend the lease, good practice to get amendments in writing!

Lease Renewal• Lease renewal is always the responsibility of the tenant

• Landlord can never force a tenant to renew• Landlord can only accept offer to renew or find a new tenant

• Lease can also extend automatically until notice of termination is given. Very common in agricultural leases.

Lease Termination• Lease may terminate on certain date, may or may not

require notice to be given

• Either party will need to follow proper termination process

• If lease specifies process, then follow that process exactly

• If lease doesn’t then must follow Maryland law and that requires 6 months notice to terminate a farm lease (MD. Code Real Property Section 8-402)• Allows for oral notice of termination, but again better practice to use

written notice.• Written provides a record.

Lease Termination• What if you have crops growing when the lease

terminates?• Common law view was if the lease had a definite termination date

then not entitled to harvest growing crops• Are exceptions to this rule

• What is the practice in the area? Did landlord make some assurances?

• Big deal to consider if participating in Cover Crop Program and required to destroy the crop by March 1.

Right of Reentry• Landlord has no right to reenter the leased property,

unless that right is retained in lease

• This means unless specified by the landlord when the lease is made has no right to reenter for any reason or allow new tenants to enter before the lease expires.

• What if land has recreational use value?

Sublease and Assignments• Assignment is when tenant signs lease rights over to a

third party and third party takes over lease

• Sublease is when tenant only signs over lease rights for a portion of the duration of the lease

• Traditionally, tenant has the right to do either of these without the consent of the landlord, but this right can be modified in the lease

Death of Either Party• Death of either party does not terminate the lease

• If landlord dies, then tenant continues to make rental payments to landlord’s estate

• If tenant dies, then tenant’s estate continues to make rental payments to landlord

• Parties can decide to follow proper termination process to end the lease.

• One important reason to consider a written lease is your own death, will you heirs know what you agreed to?

Bankruptcy or Financial Stress of Either Party

• Bankruptcy or financial stress of either party does not terminate the lease, regardless of the language used in the lease

• If this happens, immediately contact a bankruptcy attorney to preserve any rights you may have

Failure to Pay Rent• Cash rent and flex cash rent leases have no automatic

statutory liens in growing crops for unpaid rent

• Landlord can include language in lease to create security interest in crops for unpaid rent, but requires certain steps to be done to be valid.

• With crop-share leases, a statutory lien is created in growing crops for rent.

Good Husbandry Practices• Good husbandry practices is broad but means those

agricultural practices that conserve fertility, usefulness, and value of the soil.

• Idea is to prevent tenant from using property in way to reap quick profit but use land in way that sustains it.

• Considered by many to be an implied duty in the lease• Implied means does not have to be explicitly included in the lease• We just assume it exists in the lease• But no MD court has said this duty exists.

Lease Recordation• No requirement to record the lease

• Other groups may require copy of lease to be on file with them:• USDA’s Farm Service Agency or Natural Resource Conservation

Service may require copy of lease to demonstrate you have control over acreage you claim to have control over

• Banker may also require copy of lease again to demonstrate you have control over leased property

Insurance• General liability insurance

• Tenant will want to insure any of their equipment on the property, such as grain augers and tools

• Landlord will want to insure any buildings or permanent structures on the property

• Crop Insurance• Tenant will carry burden with cash rent and flex cash lease.

Landlord may want to require certain coverage level on crops grown on leased property to insure payment of rent

• Tenant and landlord can split crop insurance costs based on the crop share

Removal of Fixtures• Unless agreement states otherwise, Maryland tenant has

right to remove fixtures they erected on the leased property when the lease terminates

• But before erecting any fixtures or improvements on the property would want to discuss with landlord about the fixtures to be added.

• Get in writing!

Recreational Use of the Property• Remember a previous slide, unless the

landlord retains the right to reenter, then has no right to reenter the property

• If property has high value for recreational uses, such as hunting, fishing, hiking, etc. Then landlord would want to retain those rights to allow others to use the property

• Landlord and tenant would want to work out how recreational uses by third parties would work if the landlord retains those rights

Repairs• Traditionally,

• Landlord has no duty to make repairs• Tenant only has to make ordinary repairs, including keeping roads

cleared on the property, mowing, lane scrapings, and etc.

• Can be modified by agreement:• Lease can specify who makes what repairs or pays for what

repairs• For example, lease property is used for grazing of livestock,

• Lease could specify condition fence should be in and when tenant will pay for repairs to the fence and when landlord will pay for repairs.

Noxious Weeds• Noxious weeds in Maryland include : 1) Musk, Canada,

nodding, plumeless, and bull thistles; 2) Johnson grass; and 3) shatter and wild canes (§ 9-401)

• Duty to control them falls on both landlord and tenant, creates odd situation if landlord does not reserve right to reentry

• Can spell out in lease who is responsible for what when noxious weeds become an issue:• For example, lease could state that landlord shall provide herbicide

and tenant will perform the spraying

Conclusions• Leasing land is not just a simple handshake deal. Need

to consider your goals and what you want out of the leasing relationship.

• In developing your leases, think in terms of worst case scenario. • Probably won’t happen but still good to plan for• Have process in place to deal with the problems that will arise

under the leasing arrangement

• Always get in writing

Agricultural Law Education Project

Upcoming Projects• Survey of Farmers to determine legal needs – Late Fall/Winter

2012-13• Factsheets:

• Overview of Maryland’s state and counties’ Right-to-Farm laws• Estate Planning for Farm Families (update of previous factsheet)• Agricultural Liability Series

• Fencing Law• Liability for Visitors on the Farm• Liability for Livestock (aka What if my horse bites someone?)• Preparing for a Nuisance Suit or Environmental Claim

• Future workshops• Land leasing workshops – Cecil, Kent, Queen Anne’s, and Talbot counties• Workshops over the Right-to-Farm law – Cecil, Kent, Queen Anne’s and Talbot

counties• What are your rights in a lawsuit? – Maryland Farm Bureau State Meeting this

winter.

THANKS ANY QUESTIONS?Contact info:Website: canrp.umd.eduPhone: 301-405-3541Email: lgoering@umd.edu