Farm Tenancy: Issues to Address Before Contracting to Sell Farm Land
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[Editor’s note: Questions about termination of tenancy, apportionment of rent, and removal of installed fixtures should be addressed prior to contracting for the sale of real property during a verbal farm tenancy. Extension Agents across North Carolina – in the Editor’s experience – are asked these questions “not infrequently.” The following is an edited excerpt from a longer draft piece on verbal farm tenancies printed in North Carolina as part of the So You Inherited a Farm handbook, and reflects author’s ongoing research on the topic.]
Though there are no hard survey numbers to demonstrate, anecdotally a majority of rented farmland in North Carolina is still done on a “handshake.” Such verbal tenancies – not reduced to writing or a term lease – are protected under North Carolina state law. Without written agreement, details of the tenancy – in the event of dispute – would have to be testified in court by the party seeking to either prove the tenancy (the farmer) or terminate the tenancy (landowner). One key detail is often the allocation of rent and renewal of tenancy in the event land is sold or devised to new owners during the crop year.
Notification to Terminate Tenancy
Under NC General Statutes §42-23, verbal agricultural tenancies are generally considered year to year (a “periodic tenancy” in legal terminology) will automatically renew for another year unless the landowner notifies the tenant thirty (30) days prior to the expiration of the traditional crop year, stating “[i]n all cases of such tenancies a notice to quit of one month as provided in G.S. 42-14 shall be applicable.” In reading the statute, it may appear unclear whether this year-to-year periodic tenancy is a presumption a landowner must overcome if they wish to oust a tenant prior to years end, and North Carolina case law suggests that a farmer and landowner can verbally agree to a tenancy shorter than the calendar year (see Lewis v. Lewis Nursery, Inc., 342 S.E.2d 45 (NCApp. 1986).
The §42-23 statute acknowledges agricultural tradition to declare the end of the agricultural year to be January 1, with the exception of twenty-five counties whose end of agricultural year is December 1. In these 25 counties (link to list), notice to quit must be made no later than November 1. Thus, in all other counties the tenant must be notified no later than December 1. Neither §42-14 or §42-23 state that notice must be in writing, because notice must be established in a legal attempt to oust the tenant, a certified letter would be a good practice. As a matter of evidence in the event of a dispute, a landowner is advised to send the letter to ensure delivery by October 31 or November 30 depending on the county. A return receipt will ensure that the farm tenant has received the notice as required by statute.
In the absence of notice, the farm tenancy renews for a like period of one year under the same landowner. Therefore, if the landowner’s notice to quit falls inside the 30-day notice period (after October 31 or November 30 depending on the county), the farm tenancy is renewed for another full year to December 1 or January 1 (again, depending on the county). Consider this illustrations:
Joey farms land owned by Dee Dee in Pender County. Sometime in August 2021, Dee Dee is approached by Johnny – another farmer – with a verbal offer of $10 more an acre. However, Dee Dee does not inform Joey until November 3, 2021. Because Pender County recognizes an agricultural year ending December 1, Dee Dee has failed to give Joey 30 days’ notice to quit. Joey therefore has another one year periodic tenancy, which ends December 1, 2022.
Note that Dee Dee has given Joey notice more than 30 days prior to December 1 of the following year, and need not take further action for Joey’s tenancy to terminate on that date. If the county above is changed to Pasquotank, Dee Dee has timely notified Joey of the tenancy termination, as that county retains January 1 as the customary end of the annual tenancy.
Though §42-23 is ambiguous whether failure to notify can be held only against the owner who granted the tenancy. Because the statute focuses only on notification of the tenant without reference to the landowner, one should assume that failure to notify can be held against the current title holder (i.e. one who purchased or inherited the property during the crop year). However, N.C.G.S. § 42-7 requires that when the estate of the lessor is “determined” by death or sale (i.e. ownership in that individual ends), the tenant remains in possession of the land until the end of the year, and “shall then give up such possession to the succeeding owner of the land.” This suggests that a verbal tenancy agreement ends with the owner who gave permission, and such permission is not imputed to a succeeding owner. Again, depending on the county, the “end of the year” is either December 1 or January 1 per N.C.G.S. §42-14. (How rent is divided between owners in a year is discussed below.) The farm tenant must seek permission from the new owner to enter the property and farm the following year.
Apportionment of Rent Upon Transfer of Property
Land is often transferred to another owner during a verbal tenancy, either by death, gift or sale. In this event, a question arises whether rent payment must be apportioned between the previous owner (or their estate) and the transferee. The critical issue is the timing of the due date for the rent payment.
N.C.G.S. § 42-7 suggests that if an annual rental payment is still due after the transfer of the rented land, the rent must be apportioned between the “lessor” (the original owner who granted verbal permission to farm) and the new owner. When the “lessor” sells the property before the rent is due, a best practice would be to insert an apportionment clause into the purchase contract to clear up any ambiguity. At closing, the annual rent bill should be multiplied by the fraction of the year up to the closing date, with the seller/lessor’s fractional portion of the rent indicated on the closing statement as a credit to the seller (i.e. an addition to the sale price). This is much like apportionment of property taxes at closing, except the money is credited to the seller rather than the buyer. Consider this illustration:
Jack owns 100 acres and has given verbal permission to Gary to farm the parcel for the year, with payment of $60/acre due on December 1. (Assume this in a county where the annual tenancy is January 1 to January 1) In April, Jack receives a cash offer on the land from Allen that he cannot refuse, and enters into a contract for the sale of land. In the contract, Jack and the seller agree that Jack’s portion of the rent up through the closing date will be paid to him at closing. If closing is on June 15, 2022 – 166th day of the year – Jack should be paid [$60 x 100] x [166/365] or $2,728 at closing. Gary can pay the full rent to Allen when it is due.
If a landowner dies – their estate is determined – during the year when rent is due, the rental payment accruing to the period prior to the landowner’s death becomes personal property to be distributed under the landowner’s estate, either in a specific bequest or as residual. Consider the following illustration, with the same ownership and rent facts as above:
Jack – who is divorced without children – executed a will in which he devises his 100 acre parcel to his friend, Neal, and bequeaths all personal property to his girlfriend, Helen. If Jack dies on June 15 (per the above illustration), $2728 goes to Helen, with the balance paid to Neal by Allen when due. (Note that this may require the probate estate to remain open until Allen has paid rent, upon which Allen will write two checks, one to Jack’s estate and one to Neal).
Ownership of Crops and Fixtures at Termination
At common law, growing crops are considered real property belonging to the landowner, but once harvested – even if remaining in storage on the land – became personal property of the farmer. NC General Statutes Chapter 42 modified this rule, and crops raised on the land are “vested in possession” of the landowner until rents are paid. This applies to harvested crops, and illustrates the lien in favor of the landowner on the farmer’s crop for the amount of agreed rental payment, which is superior to all other liens against the crop even after harvest “against any other person who may get possession of said crop.” Such is true for verbal farm tenancies or written leaseholds, and lien is automatic and no writing, filing or recording is required to establish the lien. Once rent is paid, the crop legally belongs to the farmer. As noted, the lien is enforceable against purchasers of the crop, unless such purchasers can present evidence that the landowner waived the lien.
North Carolina law appears clear that a lessee (a tenant under a written estate for years with a hard termination date; i.e. a written lease agreement) has no right to grow crops unharvested at the termination of the lease term.15 As for crops still growing at the termination of a periodic tenancy where proper notice is given, the farmer’s right to harvest the crop still in the field – the “way going crop” in 19th century legal parlance – is less clear. Consider the following illustration:
Joey is farming in Pasquotank County on Dee Dee’s land under an annual periodic (and verbal) tenancy. Joey harvests his fall crop of corn, and then sows wheat for harvest the following May. Dee Dee sells the land in August, and the new owner, Johnny, notifies Joey on November 15 (after Joey has sown the wheat) that his tenancy will terminate this year (on January 1 customary in Pasquotank). Johnny has plans for his own crop to start in the ground prior to May.
Did Dee Dee risk his costs and potential profit by planting a crop on land where his tenancy renewal was uncertain? Or, because the verbal permission effectively terminated upon transfer of the property, did Johnny even have to notify Joey of termination? Unfortunately there is no clear answer to this not-improbable situation as to whether Joey has any right to harvest the crop, or get paid back his costs if the crop is plowed under by the next operator. And if the new owner (and operator) Johnny at his own cost harvests and sells the wheat, is Joey due a share, and if so how much? If a court applies the rule of Lewis v. Lewis Nursery, Inc. (see above), Joey has no right to enter the land to harvest his crop, nor does he have a right to its emblements (or profits from sale); this harsh result would rest on the logic that his periodic tenancy had a hard termination date as of the proper termination notice.
At the very least, a farmer should consider costs forfeit for applications to the ground whose benefit extends beyond the termination of a lease for years or a periodic tenancy properly noticed and terminated. For example, an operator making a lime application on a verbal tenancy that is properly terminated loses the future benefit of the application. Likewise would apply to a cover crop planted as soil enhancement.
The rule is different when it relates to the farmer’s equipment and implements, and trade fixtures. Long ago, the North Carolina Supreme Court summarized the rule as follows: “Whatever things the tenant has a right to remove ought to be removed within the term; for, if the tenant leaves the premises without removing them, they then become the property of the reversioner. But where the tenant holds over, even so as to become a trespasser, he will not be considered as having abandoned the things he had a right to remove.” (see Smithwick v. Ellison, 24 N.C. 326, 330 )