The Perils of Informal Land Agreements
February 23, 2016
Unless you are lucky enough to own every acre you farm, the relationships you have with your landowners are some of the most important for the health of your operation. Losing a quarter section, even if it is breakeven to grow on, can increase fixed costs on machinery and overhead for your other acres, driving you into the red. But your relationships with your landlords are solid, right? And the terms your land agreements are concise and written down?
If you cannot say yes to the second question, I would make the case that you cannot say yes to the first. You probably will be tempted to argue one of the following:
We have an understanding. While a handshake agreement can go a long way, it can also end up in a ransom-like situation. For example, in a recent Iowa legal case, an operator who agreed to “some type of bonus” to keep farming a piece of land ended up de facto changing a $195 per acre lease into a 50-50 agreement—a situation that ended in a lawsuit with a huge payment to the landlord.
We have known each other for decades. It is an uncomfortable thing to confront, but if you and your landlord have known each other for decades, odds are increasing every year that the relationship will soon pass to the next generation on one side or the other. Are your children and your landlord’s children on equally good terms? Does everyone have equal insight into what terms exist?
We are both good on our word. Whose word? Nothing kills a relationship like remembering things differently and having no way to resolve it.
It’s family. I believe this is one of the biggest reasons to write it all down. Imagine the Thanksgiving dinner referenced in another recent Iowa court case, where the daughter of one of five children who had an oral agreement to hold some family land in equal shares announced that she and her father had hired a lawyer regarding the farm. I doubt much was the same in the family thereafter.
It takes time and money. You could invest in professional tools like Granular, which allow you to analyze the profitability of your operation under each landowner agreement, but even doing some simple math using Farmdoc-provided crop budgets for 2016 can help. If you make an assumption that losing 10% of your land base means spreading out at-capacity non-land fixed costs over 10% fewer acres, a 1,600-acre operation losing a quarter section would lose between $7,000 and $18,000 as a result. What are you willing to invest to prevent that type of a loss?
To sum it up. Write it down. It is one of the simplest things you can do to keep your operation going for generations to come.
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