A case recently decided by the Iowa Court of Appeals offers an important lesson for farm landlords and tenants when it comes to drafting leases:  all terms of a lease should be contained in the written lease agreement.

Texas A&M Agrilife Research Photo by Kay Ledbetter

Background

Beginning in 2006, Four Acres began leasing 690 acres of Iowa farmland from Mr. Peck.  The parties signed a lease agreement that provided the lease would be for a term of 1 year for 689.5 acres, for which the tenant (Four Acres) agreed to pay $195.00.  The equal payments of $67,226.25 were due March 1, 2007 and December 1, 2007.  The only other terms contained in the lease were that Four Acres would pay rent to use grain storage bins and that the landowner would provide 3 tons of chicken litter at a price of $20 per ton.

During the 2007 crop year, prices were quite high and the Four Acres crop was quite good.  Four Acres met with an agronomic consultant who helped set up the lease with Mr. Peck and that consultant suggested that in order to keep Mr. Peck satisfied so that he did not decide to lease the farm to someone else, Four Acres should consider making a “bonus” payment.  Four Acres followed the consultant’s advice and paid Mr. Peck a “bonus” of $61,251.72 after selling its 2007 grain crop.  This payment was calculated based upon half of the “shared income” less the rental rates already paid to Mr. Peck.

The parties continued their leasing relationship with substantially the same written contract.  For the 2008 crop year, the only change made was to increase the rental amount to $200/acre.  Times were good and, again, Four Acres paid Mr. Peck a “bonus”, this time of $27,497.05.  For the 2009 crop year, the only contractual change made was an increase in bin rental rate.  When the 2009 crop was sold, it turned out that Four Acres’ rental payments exceeded the profits from the farm, so no additional “bonus” payment was made.  Although no new leases were signed for 2010 and 2011, the parties operated under the assumption that the 2009 lease “carried over” and was still in place.

For various reasons, the parties’ relationship began to go south in 2011.  When the 2010 crop was sold, Four Acres offered Mr. Peck a bonus of approximately $19,000, but Mr. Peck refused, arguing it was “not calculated correctly pursuant to their oral crop share agreement.”  In November 2011, Four Acres issued payment to Mr. Peck for the amount owed pursuant to the written contract.  Mr. Peck argued that Four Acres failed to pay the 50/50 crop share payment as orally agreed to by the parties.

Lawsuit

Mr. Peck filed suit seeking a declaration that the written lease required Four Acres pay a minimum rent ($200/acre) and that an oral agreement between the parties required payment of a 50/50 crop share.  Four Acres responded arguing there was no existence of a 50/50 crop share agreement, instead saying the only payment agreement was in the written contract and any crop share payments were discretionary bonuses paid by Four Acres to keep a good relationship with Mr. Peck to keep their lease.

The trial court sided with Mr. Peck, finding that the parties course of dealing over several years indicated an oral agreement for a 50/50 crop share payment to Mr. Peck.  Four Acres appealed.

Court of Appeals’ Decision

The Court of Appeals reversed, finding in favor of Four Acres.  [Read full opinion here.]  The court considered the written contract as well as parole evidence (meaning evidence outside the writing) including the parties’ course of dealing, conversations between Four Acres and the agronomic consultant, and other evidence.

The court reasoned that the written lease, although expressly addressing payment of rent, did not mention any type of crop share lease.  Thus, any agreement on the crop share issue would have been oral and it was Mr. Peck’s burden to prove an oral agreement existed.  This, he failed to do.

The fact that the written agreement did not make any mention of the crop share agreement went against Mr. Peck.  Further, the fact that Four Acres discussed the idea of a bonus payment with the agronomic consultant, who testified on their behalf, was helpful to their case.  Mr. Peck was unable to offer any testimony about specific conversations or instances where he and the owner of Four Acres discussed an oral crop share agreement.  Further, Four Acres offered a logical explanation of why they would make a bonus payment, namely, to keep the landlord happy to retain the lease.  These facts allowed the court to find that Mr. Peck failed to meet his burden of proof of proving the existence of an oral crop share agreement.

Take Aways

This case offers several great points to consider.  First, it is extremely important to put a lease into writing.  However, the work does not end there.  Second, it is equally as important to ensure that all terms of the lease agreement are included in the writing.  There should never be oral or outside agreements that are not included in written lease.  Had Mr. Peck added in a term to subsequent leases that addressed the crop share issue, he would have been much better off in court.  Finally, although a short written lease completed by the farmer is better than nothing, it is always advisable to have an attorney review and revise any lease agreement to ensure the document is complete and enforceable.