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Incorporating conservation practices into farmland leases

• August 26, 2021
• 10 min read

By Alejandro Plastina, Farm Foundation Agricultural Economics Fellow

Disclosure: This blog is not intended to constitute legal advice, and landowners and operators are encouraged to obtain advice of counsel regarding operation of farm leases.

Handshake versus written contract

According to the 2017 U.S. Census of Agriculture, 31% of U.S. farms and 65% of U.S. farmland are operated by farmers who rent all or part of the land they operate. However, no information is available on the percent of acres or farms leased through oral agreements or “handshakes” versus written contracts at the national level.

A statewide survey in Iowa found that 53% of the state farmland is leased, and 83% of the leases are cash rental agreements (Zhang, Plastina, and Sawadgo, 2018). The survey also reported that 69% of all cash rented acres are leased through written contracts. While both oral and written agreements are commonly used, valid, and enforceable, the existence of an oral agreement can only be proven—in general—for one year (Tidgren, 2020).

A strong argument in favor of promoting the use of written farm leases is that they allow landowners and tenants to clarify their expectations, define the meaning of the terms included in the contract, and cover all the provisions relevant to both parties. In summary, it makes sense to put the contract in writing because both parties value their relationship and want to avoid later misunderstandings.

At a minimum, a written farm lease should include (Tidgren, 2020):

• Full names and mailing addresses of parties
• Length of the lease
• Tenant’s rights and duties (such as removing weeds and maintaining fences, if so agreed)
• Landlord’s rights and duties (such as paying property taxes, if so agreed)
• Allowed use of land (consider hunting rights, purposes other than farming)
• Legal description of property and number of contract acres
• Amount of rent and date due
• Allocation of lime and trace elements over life of lease
• Indemnification provisions

When considering the addition of conservation practices (such as cover crops, buffer strips, bioreactors, or terraces) to a farm lease, it is very important to put it in writing. If the parties typically rely on handshakes to celebrate a farm lease contract, their interest in incorporating conservation practices presents a fresh opportunity to review the terms of the agreement and consider putting the revised terms in writing as proof that both parties value their relationship. To accommodate conservation practices involving multi-year installations such as terraces or buffer strips, the parties are encouraged to evaluate multi-year contracts with indemnification provisions for early termination and reimbursement of unused portion of the investment, as discussed in the last section of the article. In Iowa, two-thirds of all cash-leased farmland is under multi-year contracts, and 94% of all cash-leased farmland are in the same tenant-landlord relationship for more than 1 year (Zhang, Plastina, and Sawadgo, 2018). Therefore, using multiple-year contracts should not be a major barrier to incorporating conservation practices to farmland agreements.

What are the steps to add conservation practices to a farm lease?

First, it is important to identify the goals to achieve through the implementation of conservation practices. Some parties might be interested in reducing soil erosion, some others in increasing soil organic matter, others in sequestering carbon, monetizing soil health, or contributing to the local nutrient reduction strategy. A great resource to learn what conservation practices work for you and the farm is the “Whole Farm Conservation Best Practices Manual” published by Iowa State University Extension and Outreach, or similar reports published by your state’s Land Grant University.

Second, communication between the parties is critical to evaluate expectations regarding agronomic practices, easements, contract length, rights and duties, as well as monetary incentives from cost-share programs (such as EQIP and CSP) and carbon and environmental services payments (from initiatives such as the Soil and Water Outcomes Fund, Nori, Bayer Carbon), and other incentives from the landowner (such as lowering the rent, signing a longer lease, or cost-sharing).

Third, a more complex lease agreement might justify sharing more risks and rewards across parties through a flexible lease. Although there are multiple ways to develop a flex lease, one possibility would be to agree on a base cash rent, lower than the going fixed cash rate, plus a bonus payment depending on production or price targets. See Ag Decision Maker File C2-21 for a detailed discussion of flex leases.

Fourth, file a Conservation Plan with the Farm Service Agency (FSA) with form AD-1026, which can be found at www.fsa.usda.gov/ad1026form.

Finally, put the new lease or addendum in writing and have it signed by all parties. The landlord can file a UCC-1 to perfect his/her lien on the new or modified lease, and register it with the county recorder as needed.

How to put it in writing?

Whether you are creating a new lease from scratch or modifying an existing lease, there are templates available through the Land Grant Universities to streamline the process. It is important to note that to implement a new lease, the current one must be first terminated. Furthermore, different states have different provisions regarding the termination notice itself (such as deadline and statutory termination language) and interested parties are advised to contact their local Land Grant Universities or legal counsel to learn about those provisions.

If instead of creating a new lease, the parties want to modify an existing lease, then they can simply sign a lease addendum or insert.

The standard Iowa State University lease template includes the following language to address conservation and land stewardship that might serve as guidance to some readers:

“The operator agrees to:

1. Farm the land in an efficient and steward-like manner. Land planted to corn, soybeans or other row crops shall not exceed _______ acres each year, unless by mutual agreement.
2. Furnish to the Owner by December 15 an annual report including 1) a summary of fertilizer, lime, and pesticide application records and 2) production or yield information about harvested crops each year, such as may be required for participation in Farm Service Agency programs or for setting crop insurance actual production history yields, and to use measurement methods acceptable for these purposes.
3. Do what is reasonably necessary to control soil erosion including, but not limited to, providing labor and normal farm equipment for the maintenance of existing watercourses, waterways, ditches, drainage areas, terraces and tile drains, and abstaining from any practice which will cause damage to the Real Estate. The Operator’s responsibility does not include major reconstruction of such improvements made necessary by normal wear and tear or other natural causes.
4. Protect all desirable vegetation, such as grass field borders, grassed waterways, wildlife cover, shrubs and trees. Refrain from the following practices as they relate to the disturbance of permanent vegetation: ___________
5. Follow a mutually acceptable tillage program for each of the crops planted. Such plan shall meet soil conservation and surface residue requirements as prescribed by the Natural Resources and Conservation Service (NRCS) conservation plan and include the following additional crop management practices: ___________
6. At least every 4 years, conduct soil tests and provide copies of all soil test results to the Owner as follows: ___________
7. Comply with all local, state, and federal laws and regulations governing all activities related to the application of pesticides, livestock manure and commercial fertilizers, and the cultivation of crops. Follow label directions in the handling and application of all chemicals used on the Real Estate and follow all applicator’s licensing requirements. Comply with local, state, and federal laws and regulations pertaining to groundwater contamination, manure disposal, and hazardous waste storage or disposal.”

The “Cover Crop Lease Insertion” developed by Purdue University and the Nature Conservancy suggests including all agronomic details related to the cover crop mix to be planted, specifying the acres where it will be planted, the dates, any cost-share, length of the addendum validity, and the signatures of all parties. In particular, the Insert suggests clearly specifying who pays for what portion of the expenses and offers language describing alternatives such as the owner compensates the operator for a share of the expenses, the owner agrees to lower the rental rate and/or extend the length of the contract, and the operator bears all costs.

A Lease Addendum for Conservation Practices in Action: Installing a Bioreactor

Let’s illustrate how a well-designed Lease Addendum or Insert can protect the interests of both parties in the event of an early lease termination due to unforeseen circumstances. The Addendum provides detailed information of our Midwest example farm (county, township, section, acres) where a 100-foot by 30-foot bioreactor will be installed by December 31, 2021, at a cost of $10,000, to drain 40 acres into the local creek. The sole goal of the bioreactor is to reduce the nitrate concentration of the water coming from the tile drainage in the farm and going into the local creek. The bioreactor is not expected to improve yields or mitigate production risks, but to contribute to the local nutrient reduction strategy.  

The Addendum includes the following provisions:

“1. It is agreed that the signers will share contributions and costs necessary to the installation of the bioreactor as follows:

• Total Costs: $10,000.
• Percent of costs borne by tenant: 25%. Equivalent to $2,500 total.

2. The bioreactor will be amortized over 10 years, resulting in an annual amortization of the tenant’s investment of $250, starting in the year 2022.

3. If for any reason the tenant leaves the farm before the estimated cost borne by the tenant is fully recovered through annual use, then the owner will pay the tenant for the remaining value of the tenant’s investment by the date the lease terminates.

4. The terms of the original contract are modified to extend the contract for 5 years from March 1, 2022 to March 1, 2027.”

By sharing the cost of the initial investment, both parties show their commitment to the local nutrient reduction strategy and the wellbeing of their rural community. Furthermore, the tenant secures a fixed cash rent for five years under the modified contract, and the landowner benefits from financing only 75% of the cost. By March 1, 2027, and if the contract is not renewed, the landowner would have to reimburse the tenant for the remaining value of the tenant’s investment: $250 x 5 unamortized years  = $1,250.

Before starting the fifth and last year of the modified contract, the tenant decides to exit farming and serves a termination notice to the landowner. By March 1, 2026, the landowner must reimburse the tenant for the remaining value of the tenant’s investment: $250 x 6 unamortized years = $1,500. A worksheet to organize the cost-sharing in the Addendum and calculate the remaining value of the tenant’s investment is available at https://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-08.pdf

References:

Tidgren, K. 2020. “Iowa Farm Leases: A Legal Review.” Iowa State University, Center for Agricultural Law and Taxation, Legal Issues Brief. June 1. Available at: https://www.calt.iastate.edu/files/calt_legal_document_-_leases_00000003.pdf

Zhang, W., A. Plastina, and W. Sawadgo. 2018. “Iowa Farmland Ownership and Tenure Survey 1982–2017: A Thirtyfive Year Perspective.” Iowa State University Extension and Outreach, FM 1893. Available at: https://store.extension.iastate.edu/product/6492