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Serving: NE
Aerial view of flooded fields Tyler Harris
ACCOUNTING FOR DAMAGE: Establishing an equitable rental rate that accounts for the requirements of both parties is a priority when considering future adjustments for property affected by flooding.

Accounting for risk: Land leases and natural disasters

Floods have left many landlords and tenants wondering how damage will affect ag property leases in Nebraska.

By Jim Jansen and Jeff Stokes

According to recent findings from the USDA Agricultural and Resource Management Survey, agricultural land rent totaled $2.44 billion in Nebraska for 2018.

The survey found rent as the third-largest farm and ranch production expense. Natural disasters limiting the ability of farmers or ranchers to fully use rented land poses a financial risk to these operators.

The 2019 floods and related natural disasters leave many landlords and tenants wondering how resulting damages will influence their agricultural properties across Nebraska. Contractual lease arrangements may have not fully accounted for these natural disasters.

Evaluating damages

Natural disasters on land may leave "minor" or "major" damages on an agricultural property. Documenting these issues for federal, state or local authorities remains critical to participate in various disaster recovery programs when available.

Minor damages may include various kinds of debris or foreign objects scattered across a field. There also may be minor erosion or washout issues. Use of common agricultural equipment and implements, in addition to hand labor, may be necessary to remedy minor damage.

Major damages may include major transformations to the land such as large washouts, extreme erosion and large deposits of foreign materials such as soil or debris. These issues may limit farmers or ranchers from using a portion or all the property. Specialized heavy construction equipment may be necessary to correct major damage.

Landlords have the primary responsibility for correcting natural disaster damages on rented land and remediating the sites to suitable states for farming or ranching. Depending upon the landlords or tenants engaged in these lease arrangements, the limited ability of one party over the other may require hiring outside resources to correct the issues.

Considerations for remediating land leases

The goal of remediating natural disaster issues on properties is restoring the land as close as possible to the condition before the major event. Depending upon the type of lease and provisions, this will influence the rights and delegation of duties for each party.

Lease types

Cash rent and crop share account for the majority of land lease arrangements across Nebraska. In cash leases, landlords receive a cash payment for use of crop or grazing land. Contractual language in the lease likely requires full payment for the use of the land unless other provisions specifically address the issue.

Under contract law, if an event renders the property unusable for the entire growing season, the tenant may have cause for vacating the premise and avoiding any lease payment obligations. Exercising this option may cause dire consequences between landlords and tenants. Tenants eligible for prevented planting with crop insurance may consider payment rates that at least allow landlords to cover property taxes for the land.

Producers operating on a crop share lease may not have to revise the provisions of the lease because of the inherent risk-sharing feature of the rental rate. As crop yield varies, the lease payment (crop yield) fluctuates in proportion to the yield.

Prevented planting and disaster assistance payments pay landlords and tenants in proportion to their respective share of the yield if both parties buy crop insurance or participate in a government program. Understanding the terms of crop insurance as part of a crop share arrangement remains crucial for both parties involved in a lease and a key factor to visit about with crop insurance agents.

Contributions of tenants

Many retired and absentee landowners may not have the ability or time to help correct damages on their rented property in the event of a major disaster. Tenants possessing the ability, time or equipment may be able to fix minor issues on properties. Some tenants may even be able to correct major damages if they own very large or specialized equipment.

Accounting for these contributions remain important for lease arrangements. Prudent landowners may consider negotiating a discount on cash rent when the tenants provide use of their time, skills or equipment in fixing a disaster issue.

In cases where tenants may be willing and able to correct minor or major damages, adjusting the effective cash rental rates may be an equitable method for incentivizing the other parties to help correct these issues.

The terms and obligations of each party must be documented as part of the lease arrangement. Depending upon the disaster event, various forms of financial assistance may be available from the federal, state or local government authorities to offset the expense of correcting issues.

Natural disaster lease provisions

Accounting for the unknown provides the greatest insurance policy for landlords and tenants engaged in an agricultural lease. Identifying the responsibilities, duties and role of the parties involved in the lease ensure activities happen in a timely manner.

Adjusting rental rates

Setting equitable rental rates that account for the requirements of parties engaged in a land lease agreement needs to be one of the parties' priorities when considering future adjustments.

Landlords have fixed expenses such as property taxes. Tenants may prepay for inputs on cropland or need forages each year for grazing livestock. Disruptions to the annual production cycle for landlords and tenants create difficulties for each party.

Provisions in the lease may outline the methods for adjusting the rental rate when a disaster limits the ability of a tenant to use a property. Provisions may also define compensation rates for tenants providing remediation services to a property.

Certain minimum rental rates on cropland may be designed to cover fixed expenses, such as property taxes, and be offset by prevented planting payments when applicable. In any case, the adjusted rental rate seeks to minimize the financial burden on landlords and tenants.

Documenting disaster

Documenting damages remains essential in understanding the extent of issues on the property resulting from natural disasters. Lease provisions can define the party responsible for documenting and communicating the damages to the other party or government agency.

Tenants may be willing to provide this service if landlords are absentee or have a limited ability to visit the land. Other terms to include in the lease may be the time frame in which the damages must be reported to the appropriate authority.

Correcting damages

Designating the responsibilities of each party to correct minor and major damages in a lease develops a plan for dealing with these unforeseen events. In cases where tenants provide remediation services to correct land issues, specific lease provisions may include the timeline for carrying out the work and reimbursement rates.

Amending the lease

Any changes made to the land leases to address disaster damages should be placed in writing and documented appropriately as an addendum to reduce any issues arising between landlords and tenants.

Jansen is a Nebraska Extension agricultural systems economics educator. Stokes is a University of Nebraska-Lincoln professor and Hanson-Clegg-Allen chair in agricultural banking and finance.

Source: Cornhusker Economics, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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