Should You Terminate Your Land Lease? 3 Warning Signs to Consider

In a perfect world, every one of your land rental agreements would be a match made in heaven. Sadly, that’s not always the case.

There are times when you have a tenant farming your land, and there are others when it’s not so great. And a bad farmer can lead to a loss of both potential and actual revenue. 

So if you’re wondering whether you should terminate your land lease, here are three clear signs that you should. 

How to terminate a cash rental agreement. 

First, let’s walk through exactly how to terminate your lease. 

Generally speaking, a farm lease automatically continues from year to year, unless either party (landlord or tenant) gives notice of termination by a specific deadline. These deadlines vary by state, and it’s possible for a written lease to state a date that comes before the state deadline. 

For example, the deadline for notice of termination in Iowa is September 1, and it applies to leases that terminate on March 1. Note that this is a six month lag time, which means that terminating a lease. 

However, if mutually acceptable to all concerned parties, it is possible to terminate or modify a lease at any time. Keep in mind that if you’re in a bad lease agreement, it’s more than likely that the other party is benefiting. That means that you’ll most likely have to stick with the stated deadlines. 

1. Lack of sustainable farming. 

Generally, you can identify the health of the land through a visual inspection, either by physically traveling to the field or viewing satellite imagery. Darker spots on the ground could indicate that the tenant isn’t taking proper care of the land.

This is not an uncommon problem, as farmers who lease land rather than own it are more likely to engage in high-yield farming practices that aren’t sustainable. This maximizes their short-term returns, but it damages the land over the long term.

If this is happening in your lease, it probably means that your incentives and the farmer’s aren’t aligned. Here are some practices we recommend to get things back on track: 

• Lease your land for at least three years at a time. This will incentivize your farmer to take long-term precautions to preserve the soil health

• Contract with soil testing companies to give a soil prescription that detail which fertilizers should be applied in that field, and provide those prescriptions to the farmer 

• Review fertilizer receipts from your farmers to validate that they are adhering to these practices

If none of the above practices are part of your cash rental agreement, then you need to terminate it and start fresh.

2. No data sharing provisions.

If you don’t know what’s going on with your land, you have no basis for determining whether your farmer is doing a good job or not. By including data sharing provisions in your lease agreement, you can equip yourself with the information that will help you better care for the farm in the future.  

Farmers should be sharing the following four pieces of data with you: 

• Crop yield information. Yield data helps you to determine gross revenue; without it, you’re simply relying on prior operators to help you identify the cash value of your land. 

• Fertilizer and nutrient application data. Understanding the nutritional component of farmland management is key to good stewardship of the land. It’s important for you to know exactly what your farmer is putting into your soil, so you can understand your land health. This is especially important as there is no damage deposit in a land rental agreement. 

• Soil tests. Odds are, your farmer is already testing the soil, so you should receive copies of those results. You can then combine this data with the previous year’s yield data to assess your soil’s nutrition and needs. Generally, you could collect soil sample data every three years.

• Cash rent lease records. It’s crucial to know how much your land has been rented for in the past. If you know how much your land is historically worth in soil and by yield, you can increase the value of your farm by proving how much it can produce. Then, should you decide to rent or sell, you’ll have the data you need to set the right price.

By receiving this data, especially soil and yield data, you can get a clear idea of how well your farmer is tending to that land. And since the cash value of the land is directly proportional to the quality of the farming, this can directly improve your bottom line. 

3. No adjustments due to commodity prices.

As we mentioned earlier, the cash value of your land is directly proportional to the quality of the farming. This isn’t an abstract principle, but tangibly rooted in the reality of the crop market. The more your land is able to produce, the more money you’ll be able to make, which increases your income.

However, there’s an intervening variable here that comes into play: commodity prices. When the market for a particular crop is up, that means you can make more money. If the market is down, that means you make less. This, in addition to yields, directly impacts the value of your land.

So when we’re in an up commodity market (which we’re seeing right now), that generally means you can charge more for a cash rental agreement. But if you’re locked in at the same rate year over year, you’re quite literally leaving money on the table.  

On the other hand, if the market goes down and you don’t adjust your lease to those prices, you run the potential of losing them as a tenant. Although farmers have mechanisms to hedge against futures markets, there still is an element of risk involved, and some farmers may be inclined to cut their losses.

Thankfully, whether you’re proactively looking for a new tenant who’s willing to pay more, or you’ve recently had a tenant walk away from an agreement, having an online marketplace like CommonGround to quickly and easily find potential good-fit tenants can be a lifesaver. 

Final thoughts: Get it in writing. 

A general rule of thumb: if it’s not in writing, then it’s not happening. 

One of the reasons that landowners run into trouble with their farmer tenants is because they leave a lot of their expectations unspoken. Or, they rely on a “gentlemen’s agreement” to be in effect. 

But whether you want farmers to use a certain fertilizer type or mandate soil testing every three years, you need to include it in the lease agreement. Only then do you have a shot at enforcing it. 

If you want a partner who can help you identify exactly what you need to put in your lease agreement, CommonGround is here to help. On top of that, we can also help you determine the full value of your land, so you can maximize the value of your assets. Click here to get in touch with our team.