Landlord-Tenant or Partnership

How a Partnership is Created

The Iowa Code sets forth the requirements for the creation of a partnership.[1]

486A.202  FORMATION OF PARTNERSHIP.
1.  Except as otherwise provided in subsection 2, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.

The Code also specifically provides that the sharing of returns does not necessarily establish a partnership, even though the parties share a common interest in the property from which the returns were derived.[3]  And, the presumption that a person receiving a share of a business’ profits is a partner does not apply where the profits were received in exchange for rent.[4]

According to the statute the parties need not intend to form a partnership in order to do so.[5] This does not mean the intent of the parties is disregarded.  In fact, in determining whether a partnership exists, particularly when dealing with agricultural leases that involve sharing crops or livestock, the courts do look primarily at the intent of the parties. The Iowa Supreme Court states, “We have held that it will not be presumed that the parties to such leases [crop-share and stock-share arrangements] intended a partnership, in the absence of stipulations or evidence clearly manifesting such a purpose.”[6] Iowa courts have expressed this opinion on numerous occasions.[7] The only times where a partnership has been found to exist, at least in cases involving agricultural leases, is where the parties expressly submitted themselves to a partnership.[8]

The Effects of Partnership

It is clear the courts are very reticent to find a contract resembling an agricultural lease arrangement as constituting a partnership. The purpose for this reticence is to avoid the unjust effect that finding the parties as unwitting partners would create.[9]  The effects of a partnership include the holding of partners as agents of the partnership, thereby binding the partnership to the agreements of the individual partner.  The members of a partnership can be liable for debts incurred on behalf of the partnership and can also be liable for the actions of other partners resulting in losses or injuries.[10]  The injustice of applying these liabilities to unwitting parties is particularly troublesome where the landowner and tenant might not have a close business relationship.

How to Avoid the Appearance of a Partnership

In order to avoid the interpretation of a landlord-tenant relationship as a partnership attention should be given to the written lease agreement as well as the conduct of the parties.  In regard to both of these aspects it is important the parties endeavor to make the intent to merely form a landlord-tenant relationship clear.

1.    Within a Written Lease Agreement

The most likely way to avoid the liabilities associated with a partnership is to use language clearly expressing the intent to enter a landlord-tenant relationship. This includes providing a clear statement of the purpose of the lease, avoiding the use of terms such as partner, partnership or firm, and including a provision expressly stating that a partnership is not created.  Many agricultural form leases contain a provision stating that it is not the intent of the parties to enter a partnership.

It should also be clear in the lease agreement that even though the parties may share gross receipts from the operation it is not a profit sharing arrangement.  This means even though both parties have an interest in the crops grown or the stock raised, they are not necessarily joint property and the receipt of their sale is not divided as a form of profit, but rather according to the individual costs contributed by each party as set forth in the agreement.  It is also beneficial to ensure the lease states the landowners share is for the payment of rent.

Further, while the parties may share in the expenses of the farm operation–as such sharing can enhance the ability to adopt sustainable practices–the lease agreement can set forth the different contributions that are made by each party and establish the separate ownership of the contributed assets.

2.    In the Conduct of the Parties

In addition, after the formation of the written lease agreement itself, or if no written agreement is used, the parties should not act like partners.  If the parties do not wish to be considered partners they should maintain separate bank accounts, keep separate books, and not use a business name to describe both of their activities.  Further, while the landlord may inquire about aspects of the farm operation and require certain reports the tenant exercises most of the management decisions.  This does not mean, however, the landlord cannot provide limitations, particularly regarding land use decisions and requiring the practice of sustainable farm methods.[11]  It does mean any limitations and requirements should be set forth in the original agreement and it will then be the tenant’s prerogative to make operational decisions, provided they are in conformance with the lease provisions.[12]

Agency

Farm Tenant as Agent

“An agency relationship is a fiduciary relationship resulting from the manifestation of consent by one person, the ‘principal,’ that another, the ‘agent,’ shall act on the former’s behalf and subject to the former’s control and from consent by the latter to so act.”[13]

According to this definition, the agent must act on behalf and under the control of the principal.  Farm operators acting under a lease agreement have been found to be advancing their own interests.[14]  This is true even where the lease requires certain actions by the tenant.  For instance, a requirement that certain inputs, such as commercial fertilizers or herbicides, be used does not mean the tenant is acting as the agent of the landlord when making such purchases.[15]  The Iowa Supreme Court has held that while farming in conformance with requirements set forth in a lease agreement tenants are still promoting their own self-interest.[16]

However, just as in the partnership analysis, control over the management of the farm operation is also of concern. Again, a landowner is free to include restrictions and requirements on the tenant, even those requiring the purchase of inputs from third parties, provided the tenant retains operational control.  It should be noted that a creative lease arrangement, in order to promote sustainable practices, might provide some sharing of management between landlord and tenant, particularly relating to crop-share arrangements.  Further, an agreement that the landlord share in the costs of inputs is not interpreted by Iowa’s courts as a sufficient basis for agency.[17]

Preventing an Agency Relationship

It appears Iowa’s courts are just as reluctant to hold an agency relationship exists as they are to find a partnership in a tenancy situation.  However, again it is important to make the intentions of the party clear through the use of a written lease agreement.  Many form leases contain provisions expressly stating the lack of an agency relationship between the parties, the limited liability for one another’s actions, and the tenant’s control over management decisions.    In situations where there is some management sharing, it is particularly important to express the intent of the parties in the written agreement and to ensure the parties are working on behalf of their own interests.

Tenant or Employee

Sharecropping

The issue of whether a farm operator is a tenant under a crop-share lease or an employee in a sharecropper arrangement has reached the courts in Iowa on more than one occasion.  This can be due to both a lack of communication between parties and the substantial rights that hinge upon the determination of the relationship.  However, there are ways to assist in distinguishing which relationship the parties wish to enter at the outset of the arrangement.

The Difference Between Sharecropping and a Crop-Share Lease

Both sharecropping and crop-share leases require a division of crops between landowner and farm operator based on an agreement between the two parties.  A sharecropper labors as an employee and is then paid a share of the crop for the labor provided, whereas as a tenant under a crop-share lease is given an interest in the land and then pays the landlord a share of the crop as rent.  It is important to point out the Iowa Supreme Court has expressly stated that the sharing of crops alone does not necessarily establish the type of relationship.[18]  Therefore, landowners and farm operators are free to enter a crop-share lease arrangement with all of the legal rights and responsibilities entailed in a landlord-tenant relationship.

The principle factor determining whether a landlord-tenant relationship exists, as opposed to a sharecropper arrangement, is the intent of the parties.  Intent is determined by examining all of the circumstances surrounding the arrangement.  This includes the written terms of an agreement, whether the operator lives on the premises, whether the operator has control over buildings on the premises, who has the right of possession, which party furnishes the supplies, which party divides the crops, the duration of the agreement, and the extent to which the landowner exercises control.[19]  Again, there is no one determining factor, but rather, the courts look all of the circumstances to discern the true intent of the parties.

The Effects of the Determination

The determination of whether the relationship is that of landlord-tenant or employer-employee most significantly impacts the notice required to terminate the relationship.  If the farm operator is a tenant, either party must provide proper statutory notice in order to terminate the tenancy.  This includes delivering notice on or before September 1 and establishing March 1 as the termination date.  However, if the farm operator is a sharecropper no notice of termination is required by law.  There are also tax issues and government farm program payments affected by the relationship.

How to Ensure Proper Interpretation While Creating a Sustainable Lease

The most efficient and effective way to establish whether a crop-share lease or a sharecropper arrangement exists is to use a written agreement with provisions clearly establishing the intent of the parties.  Although, the courts look at factors such as the amount of landowner control over the operation and the contribution of supplies, this does not preclude the parties from sharing certain responsibilities, supplies, or costs.[20]  The inclusion of such provisions in a lease agreement can assist in the adoption of sustainable practices and are discussed in greater detail under the lease provisions section.  If the parties adopt a lease arrangement that requires landowner contributions or control beyond that of a customary crop-share lease, it becomes more important that the parties clearly establish their intent in a written agreement.

Custom Farming

Confusion over the type of relationship formed is not likely to occur in regards to custom farming.  The farm operator in a custom farming situation is hired to do particular work–this could include small portions of the farm operation or all of the work for the entire season–and is paid an agreed upon cash amount rather than a share of the crops.  Custom farming allows the landowner greater control over the use of the land, and some custom farmers specialize in sustainable and organic farm practices.


[1] Iowa Code Ann. § 486A.202(1) (2010).

[2] Chariton Feed and Grain, Inc., v. Harder, 369 N.W.2d 777, 785-86 (Iowa 1985).

[3] Iowa Code Ann. § 486A.202(2)(b) (2010).

[4] Iowa Code Ann. § 486A.202(3)(c)(3) (2010).

[5] Iowa Code Ann. § 486A.202(1) (2010).

[6] Chariton Feed and Grain, Inc., v. Harder, 369 N.W.2d 777, 783 (Iowa 1985).

[7] Wilson v. Fleming, 31 N.W.2d 393, 401 (Iowa 1948) (“Courts are reluctant to construe an arrangement such as this [a crop share lease] between a farm owner and occupant as a partnership unless such relation is clearly shown.”); see also Florence v. Fox, 188 N.W. 966, 968 (Iowa 1922); Federated Mut. Implement and Hardware Ins. Co. v. Eng, 178 N.W.2d 321, 324 (Iowa 1970); Johnson v. Watland, 227 N.W. 410, 411 (Iowa 1929); Farmers Grain Co., Inc, v. Irving, 401 N.W.2d 596, 598 (Iowa App. 1986).

[8] Chariton Feed and Grain, Inc., v. Harder, 369 N.W.2d 777, 784 (Iowa 1985) (citing Malvern Nat’l Bank v. Halliday, 192 N.W. 843 (Iowa 1923) and Miller v. Merritt, 8 N.W.2d 726 (Iowa 1943)).

[9] Chariton Feed and Grain, Inc., v. Harder, 369 N.W.2d 777, 783 (Iowa 1985) (citing Florence v. Fox, 188 N.W. 966, 968 (Iowa 1922) and Shrum v. Simpson, 57 N.E. 708, 709 (Ind. 1900)).

[10] Iowa Code Ann. § 486A.301, 305-306 (2010); see also Farmers Grain Co., Inc, v. Irving, 401 N.W.2d 596, 598 (Iowa App. 1986) (“It is thus quite evident that our courts have held that such stock-sale lease agreements . . . generally do not constitute partnerships in order to prevent the exposure of the parties to unwarranted and unexpected liability for conduct that he or she is ordinarily powerless to control.”).

[11] Quade v. Heiderscheit, 391 N.W.2d 261, 264-66 (Iowa App. 1986).

[12] Thompson v. Mattox, 695 N.W.2d 505 (Iowa Ct. App. 2007) (citing Meeker v. Shull, 17 N.W.2d 514, 517 (Iowa 1944) and McElwee v. Devault, 120 N.W.2d 451, 452 (Iowa 1963)).

[13] Farmers Grain Co., Inc. v. Irving, 401 N.W.2d 596, 601 (Iowa App. 1986) (citing Pillsbury Co. v. Ward, 250 N.W.2d 35, 38 (Iowa 1977).

[14] Landas Fertilizer Co. v. Hargraves, 206 N.W.2d 675, 678 (Iowa 1973).

[15] Landas Fertilizer Co. v. Hargraves, 206 N.W.2d 675, 678 (Iowa 1973).

[16] Landas Fertilizer Co. v. Hargraves, 206 N.W.2d 675, 678 (Iowa 1973).

[17] Chariton Feed and Grain, Inc., v. Harder, 369 N.W.2d 777, 790 (Iowa 1985).

[18] Dopheide v. Schoeppner, 163 N.W.2d 360, 362 (Iowa 1968).

[19] Dopheide v. Schoeppner, 163 N.W.2d 360, 362-63 (Iowa 1968).

[20] Dopheide v. Schoeppner, 163 N.W.2d 360, 362-63 (Iowa 1968) (allowing the possibility of a crop-share lease where the landowner told the operator “what to plant, where to plant it, and when to fertilize.”).