Long-Term Leases Provide a Valuable Succession Planning Tool as Recent Court Case Highlights
Updated: Nov 11, 2020
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Developing a farm succession plan which allows the next generation to take over the farm and provides for non-farm heirs is not an easy task. While you may want to treat your children equally, keeping the farm viable for the next generation may not allow for equal treatment. Why? Dividing the farmland equally may result in one heir getting fewer acres than are needed to support a family. Your heirs are also human and could potentially carry grudges against a sibling.
A recent decision out of Iowa highlights what can happen when a farm succession plan fails. In Gent v. Gent, Thomas sought an injunction from the Iowa courts to limit how his brother, John, could utilize family farmland John had leased. John had initially leased the farmland from their parents for 25 years. This court decision highlights why families should work to develop plans to meet their goals. There is no one-size-fits-all approach in this process and families will have to understand that communicating, goal setting, and adapting are essential in this process.
John Gent leased family farmland from his parents under the terms of a 25-year lease in 2010. His brother, Thomas, exercised an option after 2010 to purchase the family farmland and notified John that he intended to terminate John’s lease as successor to their parents. John went to court to have his lease declared valid and Thomas counter-sued claiming John was destroying the value of the farmland by removing structures or damaging the farmland in others ways on the leased farmland and the lease was invalid. The district court granted Thomas’s request for a permanent injunction to prevent John from further damaging the farmland. John appealed this decision.
On appeal, the court highlighted Thomas’s testimony at trial that John had damaged the farmland by removing soil conservation structures and had threatened to treat the land with a chemical to prevent vegetation from growing for 10 years. John testified that removing the conservation structures was done under their father’s direction.
The issue with this testimony is it did not match John’s history of farming. John farmed not only this family farmland but other farmland, giving him experience and a history of using good husbandry practices on cropland. To the court, the 25-year lease gave John no incentive to destroy the family farmland (either by removing structures or spraying a chemical on the land). Thomas, on the other hand, had no farming experience, no knowledge of the current farmland conditions, and was unaware of what their dad had approved for John to do. To the appeals court, there was no evidence that John committed waste and no evidence that Thomas would suffer a future injury, which was necessary to receive an injunction.
Long-term leases can be one way to allow on-farm heirs to continue to farm family farmland and provide funds to off-farm heirs. Long-term leases also prevent the off-farm heir from using past grudges to prevent the on-farm heir from continuing to lease the farmland. In this case, it’s unclear if the off-farm heir wanted to terminate the lease in order to lease to another tenant, take up farming himself, sell the farmland, or just carried a grudge against his brother. In any case, canceling the lease without paying damages to the on-farm heir will be difficult unless the on-farm heir has done something to breach the lease.
Using some additional tools could help provide fair treatment to all heirs. Families should sit down and develop goals, discuss the goals with heirs (siblings, in-laws, and others) to make sure the heirs understand why the family farmland is being transferred to the next generation the way it is. Then farm families can work with an attorney and other professionals to develop a plan allowing the farm to continue on for the next generation and providing fair treatment of off-farm heirs. If you are interested in learning more about this topic or seeing upcoming workshops on developing a farm succession plan, check out UME’s Farm Transitions and Estate Planning page.
Gent v. Gent, No. 17-1677, 2018 WL 4923115 (Iowa Ct. App. Oct. 10, 2018).