Low crop yields from this year's drought could mean an inability of some farmers to meet farmland rental agreements if they suffer major losses of income. The possibility means tenants and landlords need to communicate with one another and both parties need to review the terms of lease agreements. "The ability to meet rent payments will vary widely among tenants due to the differing financial impacts of the 2012 drought," says Chris Hurt, Purdue Extension agricultural economist.
Contributing factors include final crop yields, final grain prices, the amount of production that is forward-contracted, level of crop insurance coverage, if any, whether there is livestock involved and a producer's financial strength heading into the 2012 drought.
But regardless of financial circumstances, Purdue Extension agricultural economist Gerry Harrison says tenants and landlords are legally locked into lease agreements.
"The law is clear on the duty to perform under a contract," he says. "A cropland lease, oral or written, is a contract."
A tenant's overall financial position will couple with the type of lease agreement to determine whether rent can be paid and what options tenants and landlords have. Common lease agreements include crop sharing, straight cash rent or a variation of the two.
"If it is a crop share lease, the landowner is in a similar position to the tenant," Harrison says. "If the lease is a 'flex' lease, what is the flex provision? If the flex is based on crop yield, the lack of yield may remove any liability the tenant has, based on the flex provision.
"If the flex lease is based on price for the crop, the tenant with a short crop may have a serious problem."
Under Indiana law, a landlord can terminate a lease with 10 days' notice if a tenant doesn't pay rent when due, unless both parties agree otherwise or if the tenant pays the rent in full within the notice period.
"At the very least, some flexibility in non-payment of rent by the due date might be needed this year until a crop insurance payment or a loan becomes available to the tenant," he says.
Harrison has a free publication that provides an in-depth look at the legalities of farmland leases in Indiana: Legal Aspects of Indiana Farmland Leases and Federal Tax Considerations (pdf).