A lease is a type of contract. As such, it must meet certain legal requirements to be enforceable in a court of law. It is important to understand both how a contract is formed and how the courts will interpret that contract.
Elements of a Contract
In order to have a valid contract it must include certain elements. These elements are typically not difficult to demonstrate in a farm lease arrangement.
- Competent parties: A party having capacity, the ability to understand the nature and effects of one’s acts, to enter a binding contract. This usually means having reached a certain age and being of sound mind. Landowners and farm operators are not usually minors or mentally incapacitated, but this does emphasize the importance of setting up a power of attorney and a will or trust.
- A legal subject matter: The purpose of the contract must be legal. The subject matter of a farm lease is agricultural production, which is, perhaps with a couple of exceptions, a legal enterprise.
- An offer: A promise to do or refrain from doing something in exchange for something from the other party and made in way that a reasonable person would expect a binding contract to arise from its acceptance. The offer can be made by the landowner or the tenant.
- Acceptance: A display of willingness to be bound to the terms of an offer. Any modification or addition of terms in not acceptance but a counteroffer. Offer and acceptance, particularly where the parties have signed a written agreement, is expressed in the lease agreement.
- Consideration: Something of value or a promise to do or to refrain from doing something. The innate nature of the lease arrangement, exchanging the use of one’s property for the payment of rent, provides consideration by both parties.
The Statute of Frauds
The requirements of the statute of frauds has been discussed previously in the section on “Farm Lease Basics,” but it is worth mentioning again here. The typical statute of frauds renders contracts involving real estate unenforceable if not put in writing. However, many states, including Iowa, have made exceptions to this rule for leases of a year or less. This means that any lease for over a year must be in writing and it must contain the signatures of the parties.
Additional Contract Considerations
In his book, “A Farmer’s Guide to Production Contracts,” Professor Neil Hamilton sets out twelve rules that should be considered when entering a contract. This list is provided below, though modified to address the farm lease arrangement.
1. Remember the first rule of contracts – whoever wrote the contract took care of himself. This can give the party that presents the lease a substantial amount of control. It is important to remember that a sustainable lease takes the interests of both parties into account to create a lasting relationship. There are many times that farm tenants present their own lease forms, particularly if they lease from several landowners. If this is the case it is particularly important to ask questions about provisions, and you shouldn’t feel uncomfortable by asking to have an attorney look over and explain the contract.
2. Read and understand any contract before signing it. Because the words in the contract will be enforceable in the future, you need to understand what you are promising to do and what you can and cannot hold the other party responsbile for. This holds true whether the tenant provides the lease or you use a form lease from a university extension or state bar association. It is important, particularly when promoting sustainable practices, not to assume a lease provides adequate protection without fully understanding its terms. If the lease is relatively large or complex you should consider having your attorney go through the contract with you to make sure you understand all of the provisions.
3. Know that complying with contract terms is required before you have performed under the contract. If you are not able to perform the promises you make in the contract the tenant may have the option of terminating the lease and may bring a suit for breach of contract. This is particularly important in creative leasing arrangements that require more participation from the landowner, such as completing the necessary paperwork for organic certification. Because of this, you will want to make sure you are able to live up to the promises you make in the contract or be willing to pay the consequences.
4. Never assume your failure to perform a contract will be excused. If the tenant is damaged by your failure to perform under the contract, assume you will have to make amends. If you think you will not be able to fully meet your obligations under the lease, it is usually best to let the tenant know so both of you can deal with the situation. You may be able to negotiate a substitute arrangement.
5. Know the other party’s financial situation and performance history. This is important in any lease, but particularly so in long-term agreements. Some tenants may provide resumes or references for you to check. A beginning farmer may lack capital and any history of performance. Through recognition of such problems an arrangement can be reached that minimizes your risk while allowing you to enter a lease with a new farmer.
6. Weigh the advantages of the contract against any increased costs or risks. Developing a sustainable lease may require alternative approaches to the farm lease arrangement. Before signing the lease you should make sure the lease arrangement will continue to meet your financial needs.
7. Remember proposed contracts are always subject to negotiations. Many agricultural leases use fixed “boilerplate” language. But all contracts are negotiable before signing; nothing forces you to sign the contract until you are satisfied with the deal. It is particularly important when developing a sustainable lease from a typical agricultural form lease to recognize that the terms provided in the lease can be modified. But, careful attention should also be paid to how modifications affect the rest of the lease.
8. Make sure any changes to the contract are made in writing. Although it can be difficult to change a contract after it is signed, shifting conditions can persuade both parties it is in their best interest. To ensure the changes are enforceable, the new terms need to be in writing and signed or initialed by both parties.
9. Do not rely on oral communications made by the other party, either before the contract is signed or during the contract performance. If your lease ever has to be interpreted in court, the court will most likely rely only on the written language of the contract itself. Court usually refuse to accept evidence of oral agreements that goes against the contract language, and most form leases include a similar restriction. Because of this, you will wnat to get in writing any agreements important you you. If you are unable to do this, then make sure to keep copies of any documents, such as letters, payment sheets, and checks you can use to show what was agreed to.
10. Keep good records of your performance. You never know when you will need to prove you have lived up to your end of the bargain. Keeping good records is the only way to do this. This is especially true when a crucial part of the lease requires you to make a certain contribution. Whether it is contributing to the costs of production, providing specialized equipment or labor, or taking care of legal work, if you have records indicating you have done what you promised, you can avoid headaches in the future.
11. Do not hesitate to ask questions when you do not understand what is happening. The best time to ask questions about what you are promising to do is before you promise to do it. This is especially important for landowners that do not have farming backgrounds or are unfamiliar with farm lease arrangements. To make sure you understand the terms of the contract, you can ask questions of a potential tenant and your advisors. The Introduction to this guide provides a description of places where you can obtain additional assistance.
12. Stay in touch with the other party to the contract. Regular communication with the buyer will help prevent misunderstandings about the lease or about what is required to satisfy the lease requirements. Open lines of communication will help parties make sure that each is doing what the other party understood they would do. Increased communication also boosts tenant confidence in the stability of their tenure, a critical element to a sustainable lease agreement.