Thursday, November 12, 2020

Is it a Farm Lease Or Not? – And Why it Might Matter

Overview

In the agricultural sector, agreements other than leases are sometimes utilized which authorize a person to conduct farming operations on behalf of the landowner.  The status of that person can differ.  The person may be classified as a farm tenant or an employee or a cropper.  What are the differences and why does the classification matter?     

The classification of persons conducting farming operations for a farm landowner – it’s the topic of today’s post.

Status of a Person Conducting Farming Operations

Some farming and ranching operations utilize employees, while other operations hire a farm management company or an individual as an independent contractor with compensation based on a certain number of dollars per acre to prepare, plant, cultivate and harvest. Custom cutters provide combine crews that follow the harvest each year from Texas to Canada. Usually, those who hire custom cutters treat them as independent contractors from a legal perspective.

While the status of a tenant or independent contractor is usually clear, the status of a cropper is less clear. A cropper occupies a legal position somewhere between the status of a tenant and an employee or independent contractor. A person is likely to be a cropper and not a tenant when the landowner supplies land and all the inputs, controls the operation of the farm and pays a portion of the crop to the person who actually raises and harvests the crop.

A cropper, unlike a tenant who has a possessory interest in the leased premises and control over the farming operation, only has permission to be on the land. A cropper does not have any legally enforceable interest in the crops and has only a contract right to be compensated in-kind for the cropper’s labor. This has bearing on whether the farmer is entitled to statutory notice of lease termination under state law.  Under Iowa law, for example, a “cropper” is distinguished from a “tenant.”  The relevant statute defines a person as a cropper rather than a tenant if the landowner supplies the land and the inputs, controls the operation of the farm and pays a portion of the crop to the person raising and harvesting the crop.  In that situation, the farmer has no legally enforceable interest in the crop or land involved, only has a contract right for compensation in-kind for labor provided, and is basically an employee of the landowner (i.e., a wage earner) that is hired to produce a crop. See Henney v. Lambert, 237 Iowa 146, 21 N.W.2d 301 (1946). Therefore, because a cropper does not have any property right in the leased premises, the cropper is not entitled to statutory notice of termination - there is no interest to be terminated.  Instead, a cropper’s “lease” terminates upon harvest of the crop. 

As opposed to a cropper, a farmer operating under a crop-share arrangement with the landowner is a crop-share tenant and not a cropper.  Thus, the statutory notice of termination requirement applies.  For example, in Hoffman v. Estate of Siler, 306 S.W.3d 854 (Mo. Ct. App. 2010), the plaintiff was held to be a year-to-year tenant under an oral farm lease rather than a cropper.  As a result, he was entitled to a statutory 60-day notice of termination of tenancy.  The arrangement was determined to be a typical 50/50 crop-share arrangement. The plaintiff supplied his own farming equipment, made all of the farming decisions, performed unpaid maintenance, applied for government programs and dealt with conservation agents. 

When a question arises with respect to the status of the parties, courts attempt to determine the intent of the parties as evidenced by the terms of the written or oral contract, circumstances surrounding the agreement, the action of the parties and the type of farming operation. Typically, no single factor controls. Instead, an examination of all the factors is necessary in most situations to determine the status of the parties. Indeed, most courts do not find controlling the parties’ characterization of the arrangement. But if a landowner gives exclusive possession of a farm to another party, some courts have held that act to establish a landlord-tenant relationship. As for croppers, a court could find them to be employees instead of independent contractors under a state workers’ compensation law.

Recent Case

The issue of the legal status of a farmer was involved in a recent Arizona case.  In F.S.T. Farms Inc. v. Vanderwey, 2019 Ariz. App. Unpub. LEXIS 1430 (Ariz. Ct. App. 2019), the plaintiff farmed for the defendant. The defendant leased farmland from a company and the plaintiff would farm the land, and both would split the crops produced. The state condemned the land and reached a settlement with the company, causing the defendant to be unable to furnish the land to the plaintiff. Neither the plaintiff nor defendant was a party to the condemnation action, and neither received any part of the settlement.

The plaintiff sued, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. At trial, the main point of contention was whether the sharecrop agreement was a lease giving the plaintiff a property interest or a cropper’s contract creating an employment-like relationship. The plaintiff argued the agreement was a lease entitling him to one-half of the amount allocated to crop loss in settling the condemnation matter – approximately $500,000. While the defendant admitted contractual liability, he argued the agreement was a cropper’s contract, therefore the plaintiff’s damages should be limited to its lost profits totaling $10,000. The trial court jury found the agreement was a cropper’s contract and awarded the plaintiff damages of $207,214.40, equivalent to one-fifth of the settlement allocation.

On appeal, the defendant argued that the jury’s conclusion that the sharecropper agreement was a cropper’s contract necessarily limited the plaintiff’s recovery to $10,000. The appellate court held that as a matter of contract law, the plaintiff’s recovery was limited to the $10,000 in lost profits. The appellate court noted that the agreement provided that the parties would share all crops produced on the property and income received on account of growing and sale of crops from the property, and that while both parties were aware of the condemnation action, neither received any income from the settlement. The appellate court held that contract damages are intended to compensate for what the claimant lost because of the other party’s non-performance, and additional recovery is only available in exceptional circumstances, which were not present in this case. On remand, the trial court must determine the amount of damages on the plaintiff’s claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

Conclusion

It is important that parties to a farming arrangement clearly understand the legal nature of the relationship and the legal implications that flow from that relationship.  Disappointed expectations can lead to litigation, and that’s what farmers and others in rural areas desire to avoid.  

https://lawprofessors.typepad.com/agriculturallaw/2020/11/is-it-a-farm-lease-or-not-and-why-it-might-matter.html

Contracts, Real Property | Permalink

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