Leases

Overview

A lease is a contract between two parties for the use of goods or land for a term in return for some form of “consideration” (i.e., payment – anything of value, whether it be money, some services, a promise of some future action, etc.).  In the agricultural context, there are many kinds of leases—farm leases, crop-sharing leases, machinery leases, and more.  This section is mostly focused on leases for real property.

 There are two sources of lease law in North Carolina – one is North Carolina law, and the other is the language of the lease itself.  Leases are flexible contracts and the involved parties can generally insert whatever terms they agree upon, though North Carolina law mandates that some lease terms cannot be changed even if both parties agree.

 Agricultural leases generally take the form of a cash lease, a crop-share lease, or a combination of the two.  A cash farm lease operates like a typical lease of real property – the tenant pays cash in periodic installments in exchange for the use of the land.  Under a crop-share lease, the tenant agrees to pay the landlord a share of the crops grown on the leased lands as rent.  The tenant may also have to pay a certain amount per acre for land used for pasture, hay, and silage.

 

Legal Issues

Lease Terms

Recording

Sample Leases and Lease Clauses

Taxes

Termination

 

NCDA&CS Lease Information

None, but see http://www.ncftn.org/planning/planning-resource-library/leases

 

Applicable Law

N.C.G.S. Chapter 42: Landlord and Tenant

N.C.G.S. Chapter 42, Article 2: Agricultural Tenancies

N.C. Common Law

 

FAQs

Do I need a written lease, or will an oral lease be enough?

While an oral lease for a less than a three year term is valid in North Carolina, N.C.G.S. § 22-2, it strongly encouraged that you make sure any lease you enter into is in writing.  If there is ever a dispute over the terms of the lease, it is extremely helpful to have the terms in writing to avoid confusion and to provide proof of what the parties’ intentions were.

 If the lease term is longer than three years, it must be in writing. N.C.G.S. § 22-2.

What information must be contained in any lease?

Any type of lease of real property must contain the following information in order to be valid:

  • The names and addresses of the tenant and landlord (and spouses, if applicable);
  • A description of the property to be rented.   This includes a common legal description of the property and a note of any specific areas or buildings that are excluded;
  • The term of the lease;
  • Rent or other compensation to be paid: how much is due, how the amount is calculated, and when it is to be paid.

Purchase Nursery, Inc. v. Edgerton, 153 N.C. App. 156, 568 S.E.2d 904 (2002) (“A valid lease contains four essential elements: (1) identity of landlord and tenant, (2) description of land to be leased, (3) a statement of the term of the lease, and (4) rental or other consideration to be paid.”).  A court will fill in gaps in an incomplete lease “if the contract provisions can be determined from separate but related writings.”  Greenberg v. Bailey, 14 N.C. App. 34, 37, 187 S.E.2d 505, 507 (1972) (citations omitted).

Additionally, if the lease is for a term longer than three years, it must be in writing or it is invalid.  N.C.G.S. § 22-2.

 

What additional information should be in an agricultural lease?

An agricultural lease should contain some additional information beyond a normal real estate lease, whether it is a cash farm lease or a crop-share lease.  An agricultural lease requires certain provisions for land use, amount and payment of rent, and operation and maintenance of the farm:

  • Land Use
    • General Provisions - The lease should clearly show what crops and how many acres of each crop will be planted, how many acres will be used for permanent pasture, and how many acres will be used for other purposes and what those purposes are.  The total number of acres should also be calculated.
    • Restrictions – Any restrictions that the landlord wishes to impose upon the tenant should be clearly listed in the lease.
    • Government Programs – The landlord and tenant should agree on the extent of participation in government programs (i.e. assessments/subsidy programs) and the distribution of the proceeds of such programs, and put this agreement in writing.

 

Should I record my lease with the register of deeds?

Yes.  It’s not required by the law, but recording your lease with your county register of deeds is a good idea, especially if the lease is for a long term.  Under N.C.G.S. § 47-18, any real property lease with a term longer than three years must recorded in the county register of deeds in order to be effective against subsequent purchasers.  In other words, if you do not register your lease in the register of deeds and a third party buys your leased property from the landlord, that person may terminate your lease.  Recording in the register of deeds protects you against any sale of the property until the end of your lease term.

 

What should the various sections of a farm lease look like?

Several sample leases are available here as free downloads from the North Carolina Farm Transition Network.  While these samples are not drafted to the specifications of North Carolina law, they are a good representation of the kinds of things you could expect to see and should look for in a farm lease.  Before signing any lease, it is advisable to contact an attorney to be sure that you understand the legal implications of all the terms in the lease.  This is especially important because lease terms can almost always be adjusted by agreement of the parties, and you need to be aware of what you’re agreeing to—once you sign the lease, you are bound to its terms in most cases.

Below is a summary of terms you may encounter in a farm lease:

 

1) Amount and Payment of Rent (Cash Farm Lease)

  • Cash Rental Rates – The lease should outline the type of land or improvements, the number of acres of each type of land or improvement, the rate per acre, and the total amount for each type of land or improvements.  Alternatively, the lease may provide one total for the “entire farm” unit.
  • Rental Payment – The amount and due dates for the periodic rent payments should be clearly listed in the lease.  Rental adjustments may also be included if the landlord and tenant agree on some deviation from the periodic installments.

2) Crop-Share Rent and Related Provisions (Crop-Share Lease)

  • General Agreement – The tenant and landlord must agree on an arrangement under which the tenant pays rent by paying the landlord a share of the crops grown on the leased land.  The agreement should also include the share that the landlord and tenant will contribute toward furnishing labor, machinery, and cash operating expenses.
  • Other Crop-Share Cash Agreements - As previously mentioned, under a crop-share agreement, a tenant may owe some cash expenses on top of the agreed-upon share of crops.  These and any other agreements should also be outlined in any crop-share lease.  Such agreements might include
    • Shared operating expenses;
    • How much of the landlord’s share of crops the tenant is obligated to store;
    • Arrangements for delivery of the crop to the landlord;
    • Cash rent on non-shared items;
    • Provisions regarding pasturing;
    • What crops the tenant may take for home use; and
    • The buying and selling of jointly-owned property.

3)     Operation and Maintenance of Farm

        The tenant and landlord should agree to conditions regarding how the farm will be operated and maintained and included in the lease.  These provisions are generally organized by the party agreeing to the condition.  Below is a non-comprehensive list of standard conditions for operation and maintenance that are found in agricultural leases.  Any other conditions which you choose to include in your particular lease should be considered, and any of the following conditions may be omitted if not applicable or if the landlord and tenant simply agree not to include them.

  • The tenant agrees:
    • General maintenance – To provide the labor necessary to maintain the farm and its improvements during the rental period in as good condition as it was at the beginning, excluding damage from normal wear and tear and damage from causes beyond the tenant’s control.
    • Land uses – Specific provisions regarding land use which will depend on the land use plan in your particular lease.
    • Insurance – Not to engage in activities that would violate restrictions in the landlord’s insurance policies without the landlord’s written consent.  These will be dependent upon the landlord’s insurance policies in your particular lease.  The parties should also agree who is responsible for crop insurance and other insurance policies.
    • Noxious weeds – Whether the tenant must use diligence to remove noxious weeds, and if so, by what means the weed infestation must be treated.
    • Addition of improvements – Not to construct, modify, or allow to be constructed any improvements without the landlord’s written consent.
    • Conservation – To control soil erosion according to an agreed-upon conservation plan; to keep in good repair all terraces, open ditches, inlets and outlets of tile drains; preserve all established watercourses or ditches including grassed waterways; and/or to refrain from any operation or practice that will injure such structures.
    • Damage – When leaving the farm, to pay the landlord reasonable compensation for any damages to the farm for which the tenant is responsible.  Any decrease in value due to ordinary wear and depreciation or damages outside the control of the tenant is excepted.
    • Costs of operation – An agreed upon balance of the costs of operation (normally falling almost if not completely on the tenant).
    • Repairs – Not to buy materials exceeding a specified amount for maintenance and repairs within a single year without the landlord’s written consent.
    • Use of pesticides/fertilizers/chemicals – If the farmer does not want the tenant to use certain chemicals in farming the land, this should be expressed in writing in the lease.

 

  • The landlord agrees:
      • Loss replacement – To replace or repair as promptly as possible any building or equipment used by the tenant that may be damaged or destroyed by fire, flood, or other cause beyond the control of the tenant or to make rental adjustments in lieu of replacements.
      • Materials for repair – To furnish all materials needed for normal maintenance and repairs.
      • Skilled labor – Any agreement to furnish skilled labor tasks that the tenant is unable to perform satisfactorily.
      • Reimbursement – The maximum amount for which the landlord will reimburse the tenant for materials purchased for repairs and maintenance in any one year, except as otherwise agreed, and the time at which reimbursement is due after the tenant submits the bill to the landlord.
      • Removable improvements – To allow the tenant to make minor improvements of a temporary or removable nature, which do not mar the condition or appearance of the farm, at the tenant’s expense, and provisions for when the tenant may/shall remove the improvements.
      • Compensation – To reimburse the tenant at the termination of the lease for field work done and for other crop costs incurred for crops to be harvested during the following year.  Unless otherwise agreed, current custom rates for the operations involved may be used as a basis of settlement.

 

  • Both landlord and tenant agree:
      • Not to obligate other party – Neither party shall pledge the credit of the other party without the other party’s written consent.  Neither party shall be responsible for the debts or liabilities incurred, or for damages caused by the other party.
      • Capital improvements – Costs of establishing hay or pasture seedings, new conservation structures, improvements, or of applying lime and other long-lived fertilizers shall be divided between landlord and tenant.  The tenant will be reimbursed by the landlord either when the improvement is completed, or the tenant will be compensated for the share of the depreciated cost of the tenant’s contribution when the lease ends based on the value of the tenant’s contribution when the lease ends based on the value of the tenant’s contribution and depreciation rate.  Rates for labor, power, and machinery contributed by the tenant shall be agreed upon before construction is started.
      • Mineral rights – Nothing in this lease shall confer upon the tenant any right to minerals underlying said land, but the same are hereby reserved by the landlord together with full right to enter upon the premises and to bore, search, and excavate for same, to work and remove same, and to deposit excavated rubbish, and with full liberty to pass over said premises with vehicles and lay down and work any railroad track or tracks, tanks, pipelines, power lines, and structures as may be necessary or convenient for the above purpose.  The landlord agrees to reimburse the tenant for any actual damage suffered for crops destroyed by these activities and to release the tenant from obligation to continue farming this property when development of mineral resources interferes materially with the tenant’s opportunity to make a satisfactory return.

What other non-necessary provisions might be considered in an agricultural lease?

  • How will disputes between landlord and tenant be resolved?
    • An arbitration agreement may be included in the lease if this is agreeable to both parties.
  • Does the tenant have the ability to sublease or assign the property?
    • If the landlord wishes to prevent the tenant from subletting the property, a clause must be included that prevents any assignment without the written consent of the landlord.
  • What will happen to the tenant if the landlord sells the land during the tenant’s term?
    • Normally this should not be a problem, as North Carolina law requires a new landlord to honor the terms of an existing lease.  See, e.g. Perkins v. Langdon, 231 N.C. 386, 57 S.E.2d 407 (1950).

 

What are the tax differences between crop-share and cash farm leases?

Though the tax implications are very nuanced and beyond the scope of this website, The Ohio State University provides a good summary of how the decision on which type of agricultural lease to use may be affected by the I.R.S. code here.  It is always advisable to speak to an accountant or tax attorney before making any important decisions involving taxes.

 

How much notice is required for termination of a lease?

Most agricultural leases are year-to-year or for a “term of years” (ending on a set date), due to the time needed to plant and harvest crops. 

As a general rule, year-to-year leases may be terminated by notice given one month or more before the end of the current year of the tenancy.  N.C.G.S. § 42-14.  If you do have a month-to-month tenancy, notice given one week before the end of the month is required, and for a week-to-week tenancy, notice given two days before the end of the week.  N.C.G.S. § 42-14. 

A lease for a term of years automatically terminates at the set end date unless the landlord and tenant take action to renew the agreement, either as a term of years or year-to-year.  If the tenant “holds over” and stays past the end date, the landlord may treat the tenant as a trespasser and may sue to evict and recover reasonable compensation for use of the property.  Coulter v. Capitol Finance Co., 266 N.C. 214, 146 S.E.2d 97 (1966); Kearney v. Hare, 265 N.C. 570, 144 S.E.2d 636 (1965); Vernon v. Kennedy, 50 N.C. App. 302, 273 S.E.2d 31 (1981).

Special rules apply to the counties of Alamance, Anson, Ashe, Bladen, Brunswick, Columbus, Craven, Cumberland, Duplin, Edgecombe, Gaston, Greene, Hoke, Jones, Lenoir, Lincoln, Montgomery, Onslow, Pender, Person, Pitt, Robeson, Sampson, Wayne and Yadkin.  In these counties, all agricultural leases made for a period of one year or from year to year must run from December 1 to December 1, rather than January 1 to January 1.  However, notice of at least one month before the end of the year to terminate the lease is still applicable.  N.C.G.S. § 42-23.  If the tenant is unable to harvest all the crops grown on lands leased by him due to illness or any other good cause prior to the termination of the contract on December 1, he may reenter the premises until December 31 to harvest and divide the remaining crops, but he may not use the houses or outbuildings or that part of the land from which the crops have already been harvested.   N.C.G.S. § 42-23.

 

May a landlord take crops from leased land at will?

Generally no—if a landlord “unlawfully, willfully, knowingly and without process of law” unjustly seizes his tenant’s crop when he is not owed anything, then that is a Class 1 misdemeanor.  N.C.G.S. § 42-22.  However, the landlord has a lien on all crops produced until the rent is paid, and may claim them if he is owed rent or damages.  N.C.G.S. § 42-15.  If the tenant removes any crops without the landlord’s consent, without giving five days’ notice of the intended removal, and before satisfying any liens held by the landlord on the crop, then that is also a Class 1 misdemeanor.  N.C.G.S. § 42-22.

 

 

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