Updated: Jul 8, 2020
This post is not intended to provide legal advice.
I realize that we are roughly 5 months away from when many of you will need to give notice to terminate a lease or at least will want to make the tenant/landlord aware of your plans for 2016 (yeah I realize it’s early in 2015). Today, I want to focus on strategies to consider including in your lease to update the rental rate annually.
Why would you want to update your rental annually and not continually pay the same rate year to year? Updating your annual rate can help the tenant in years when commodity prices are low or potentially when costs of inputs are high (think low diesel prices are here to stay?). For the landlord, updating the rental rate annually can allow the landlord to collect higher rental rates when commodity prices are high.
The simplest method to updating the rental rate annually is utilizing a flex-cash lease. A flex lease is similar to a cash lease in that the landlord charges the tenant an amount per acre. Unlike a cash rent lease, rent under a flex rent lease can fluctuate up or down depending on crop yield, market price, or a combination of both. To get a better idea of how a flex-case lease would work, Iowa State University Extension has some good examples available here.
Flex-leases do cause some problems, such as increased paperwork and trust that tenant is providing the landlord with accurate records, although yield data will potentially become less of an issue as more producers adopt yield monitors in their combines. But many landlords may not want to worry about calculating a rental rate each year. So what to do in those situations?
One possible solution would be to add language to the cash rental rate allowing the parties to renegotiate the rental rate when necessary. Parties could potentially agree to review the rental rate annually and modify that rate. This was actually the route taken by a tenant and landlord in Gibbons Ranches, L.L.C. v. Bailey, 289 Neb. 949 (2015). In Gibbons Ranches, the parties had a term in the lease to annually review the rental rate. One year, the parties did not agree to what the rental rate should be and tenant paid the previous rental rate which lead to a lawsuit. The Nebraska court found that this language did not make the lease ambiguous. The rental rate originally agreed upon would be the rental rate paid by the tenant unless both parties agreed to change the rental rate. If they so agreed, then that rental rate is the new rental rate till the parties come to a different agreement.
Considering new rental rates is something all tenants will want to consider from time to time. Market conditions will change and you may be able to afford one price one year, but not the next. Working with your landlord and educating them on why you cannot afford the old rental rate is something you may have to do. The problem is potentially once the rental rate reaches a higher level, landlords may not want it to go down, but again educating the landlord on current input costs and market prices may make them more willing to update the rate.
If you have other questions on agricultural land leasing, check out our previous posts at (http://www.aglaw.umd.edu/blog/?tag=ag+lease) and (http://www.aglaw.umd.edu/blog/?tag=land+leasing) or the Agricultural Leasing In Maryland book or for those in Pennsylvania Owning and Leasing Agricultural Real Estate.