Leasing farmland is a common practice that can be a profitable venture for nonoperating rural land owners. In 2014, a total of 4,670,320 acres of agricultural land in Wisconsin was rented out, with landlords received rents totaling $579,953,000.1
However, these agricultural leases can cause issues when the landowner’s circumstances change – for example, when they wish to the sell their property or lease to a different tenant. In these cases, it is often necessary or desirable to terminate the lease.
Plan for Lease Termination
The proper time to plan for the termination of an agricultural tenancy is before a purchase agreement for the sale of property is signed. The existence of the lease should be disclosed to potential buyers, and expectations as to possession date of the property should be clear during negotiation of the deal’s business terms.
Jason Brasch, U.W. 2015, is a shareholder with Bakke Norman, S.C. in Menomonie, where he practices in real estate and business law, and probate and estate planning.
Failure to properly plan for, and appropriately address, these agricultural leases can cause issues at the closing table or cause a deal to fall through altogether.
The following information is designed to help landlords and their attorneys navigate the termination process for agricultural tenancies and avoid serious issues when selling property.
Types of Tenancies
To effectively terminate an agricultural tenancy, one must first understand which type of lease is at play. Agricultural land can be leased in one of two ways: under a written lease agreement or as a periodic tenancy.
Like any other lease, a valid agricultural lease lasting longer than one year must meet certain requirements. Specifically, the lease must be in writing, signed by all parties, and contain at least the following terms:
Agricultural land may also be rented under a periodic tenancy, which does not have the same formalities as a written lease agreement. These tenancies occur any time a tenant holds possession of real property, without a valid lease, and pays rent on a periodic basis.3
Common examples of periodic tenancies include situations where:
the agricultural land is leased under an oral agreement;
the tenant retains possession of the property after the expiration of a valid written lease; or
the tenant leases property under a written lease that does not satisfy the statutory requirements.
Terminating Tenancies upon Expiration
When the tenant does not agree to terminate the tenancy upon its expiration, the process required for termination depends on the type of tenancy involved.
If there is tenancy under a valid lease, termination is relatively straightforward: the termination is allowed as prescribed by the lease terms.4 If the written lease is silent as to termination requirements, the best practice is to send the tenant written notice of nonrenewal at least 90 days prior to the stated lease term’s expiration.
It is important to note, however, that if the written lease expires and the landlord allows the tenant to remain in possession of the property or the landlord accepts a rent payment from tenant, they have likely created a periodic tenancy that must be handled in accordance with the rules for terminating a periodic tenancy discussed below.
The process to terminate a periodic tenancy at expiration is determined by statute. Generally, a landlord can terminate a periodic tenancy at the end of the rental term by giving written notice to the other party.5
In a year-to-year periodic tenancy (agricultural tenancies are year-to-year pursuant to Wis. Stat. section 704.03(2), the end of the rental term is the end of the rental year.6 There is no particular wording required within the notice; it must simply be in writing and substantially inform the tenant of the intent to terminate and the termination date.7
While the notice requirements are fairly simple on their face, the timing of the required notice may be problematic. Before a landlord with a year-to-year periodic tenancy can terminate the tenancy, they must give notice to the tenant at least 90 days before the end of the rental year.8
This 90-day notice requirement is essential to remember because it can have serious implications on a landlord’s ability to sell and/or a buyer’s ability to use their property.
For example, most purchase agreements grant the buyer an immediate right to use the purchased property upon closing. However, if a landlord forgets or neglects to give a tenant at least 90 days’ notice, the landlord will likely be required to permit the tenancy for another year, or may end up trying to come to an agreement with the tenant to terminate the tenancy, which could be a significant expense to the landlord and could seriously impact their land sale.
Terminating a Tenancy Prior to Expiration
In addition to the provisions discussed above, the landlord may be able to terminate an agricultural lease or tenancy, prior to expiration, upon the occurrence of certain events of default. In an agricultural setting, the most common of these events would be nonpayment of rent. However, such a situation is often complicated and is beyond the scope of this article.
Termination by Agreement
Both types of tenancies may be terminated at any time by written agreement signed by both landlord and tenant. This type of agreement is often the preferred solution as it can eliminate the uncertainty surrounding the notice requirements and other termination issues outlined above. Such an agreement should contain, at a minimum, the parties names, the effective termination date (and the date the tenant must return possession of the property to landlord), and any other material terms agreed upon by the parties.
Negotiating a termination may involve more upfront costs for the landlord. For example, the tenant may require a termination fee or reimbursement for costs they have already spent on the property. However, these costs are often minimal when compared with the possible costs associated with a land sale falling through.
This type of agreement may also be the landlord’s only option when trying to terminate a tenancy prior to its expiration or occurrence of an event of default.
Regardless of which method is used to terminate the tenancy, once it is terminated, if the tenant does not relinquish possession of the property, a landlord can use all legal means to remove the tenant from the property and may recover damages for the tenant’s continued possession after termination.9
Conclusion: Get It In Writing
Agricultural leases and periodic tenancies can be steady sources of income for many rural property owners. However, plans change, and these agreements may not work for them in the future. When terminating an agricultural tenancy, it is essential for a landlord to pay attention to what type of tenancy is in place and plan accordingly.
The best method for addressing concerns with leased agricultural land when selling is to have a plan in writing. That can be either a lease termination agreement with the tenant, or a buyer’s acknowledgment in a purchase agreement, or other signed document, that the buyer is taking title to the property subject to the agricultural lease.
This article was originally published on the State Bar of Wisconsin’s Agriculture Law and Rural Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.
1 U.S. Department of Agriculture, NASS, 2014 TOTAL Survey –State Profile: Wisconsin (2014).
2 Wis. Stat. § 704.03(1) and Wis. Stat. § 706.02.
3 Wis. Stat. § 7.02(2).
4 For holdover tenants, the same terms and conditions from the original lease apply, except a tenant no longer has any right, if they originally had the right, to renew or extend the lease, purchase the leased property, or restrict the landlord from selling the leased property without giving the tenant the option to purchase. Wis. Stat. § 704.25(3).
5 Wis. Stat. § 704.19(2)(a).
7 Wis. Stat. § 704.19(4).
8 Wis. Stat. § 704.19(3). Unlike other states, Wisconsin does not have a standard expiration date for agricultural leases. In the absence of an express expiration date, the calendar year end is often used.