Farm Leases: NC Court of Appeals Opinion Provides Cautionary Tale on Lessee Improvements

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An unpublished* NC Court of Appeals opinion has provided a rare glimpse into a landlord (lessor) and tenant (lessee) dispute concerning a farm lease contracts and lessee’s actions under the lease. The case demonstrates the hazards of making capital improvements to a leasehold, and/or making same to a parcel during a purchase contract due diligence period. [Note that appellate court decisions only address facts in the trial court record that are relevant to their legal conclusions; one would likely find more detail about the transaction and parties’ minds in the trial case file.]

The case  – Payne v. Raynor, No. COA23-780, 6 February 2024  – concerned a “farm lease” for a 3 acre area of a 6 acre parcel in Chatham County and contains helpful detail from the trial record (20 CVS 418) concerning facts of the case, how these were supported by evidence, and the trial judge’s conclusions of law. The case opens a window into how a court will interpret evidence regarding a landowner-lessor’s permission to improve the leasehold (a common lease requirement). The case also demonstrates how a court will interpret language regarding lessee fixtures. Lawyers advising lessees should take note of the impact of such language on their client-farmer’s decision to install certain fixtures to support an enterprise.

Sketch of the Facts

The plaintiff’s owned a 6 acre parcel, and leased the “northern half” (i.e. 3 acres) to the defendants. The lease term was for one year, with a holdover clause converting to an “at will” month to month tenancy. The plaintiff and defendant also executed an agreement to purchase one acre out of the leasehold. (Though the opinion states a fact of the plaintiff spent money on a survey to subdivide out the acre, its location within the lease is not addressed or disclosed in the opinion, and the contract ultimately failed upon discovery of the septic system to an existing house on the parcel.)

The lessee/defendants also  – with lessor’s permission  – filled in an existing pond to open ground for farm production. However, the defendants for reasons undisclosed in the opinion scraped new fill from atop the plaintiff’s septic field  – which lay outside the leased area (i.e. in the ‘southern’ 3 acres)  – to fill the pond, instead of utilizing the piles of excavated fill already surrounding the pond. They also cut and cleared trees and bushes from outside the leased area, removed some fencing, installed other fencing outside the leasehold and built a road that ran across plaintiff’s property outside the leasehold.

Regarding the lease itself, the lease agreement executed between the parties contained two key provisions regarding improvements and fixtures:

  • One clause stated that “the tenants would keep all structures, pastures, and watercourses in good repair and not make alterations, additions, or improvements without Plaintiffs’ consent.”
  • Another, that “all permanent improvements made by the tenant would become the landlord’s property and be surrendered to the landlord when the Lease terminated.”

The defendants also installed greenhouses and placed them atop the septic field supporting plaintiff’s house in the “southern half” of the parcel, which was damaged as a result, and made roofing, electrical and other improvements to a “chicken shed.”

The Bench Trial

In response to plaintiff’s complaint for damages, defendants claimed an offset against plaintiff’s damages for the cost of their improvements and fixtures. The court – in hearing testimony of the plaintiff’s alleged permission to build greenhouses atop the septic field  – found that the plaintiff’s denial that he granted permission to scrape soil was plausible, considering that the damage caused by such scraping of soil would have have been “against his interest.”

When the defendants vacated the property, they removed several items the court considered fixtures, including a “pipe in the stream bed” and doors and an electrical box installed on the “chicken shed,” all of which should have remained on the parcel at lease termination. They left behind the roofing.

The trial judge considered and denied defendants’ set off claim due to the language in the lease regarding surrender of improvements to lessor upon termination. With a fixed date in a written lease, the installed improvements could have no value to the defendants given they had agreed to surrender them, and thus could not be used to calculate a set off. The court stated: [t]he … defendants’ setoff defense is without merit because such permanent improvements—that became plaintiffs’ property under the contract—are incapable of reducing plaintiffs’ damages.” There is no further mention of the greenhouses in the opinion, so one can assume the farm tenants were able to remove these. [The case does not explore the issue of trade fixtures, or calculate the damage award based on any removal of the chicken shed fixtures.]

The appeals court affirmed the trial judge’s conclusions of law in its opinion.

Practical Takeaways

A few lessons from the case:

  1. Avoid ambiguous description of leased premises. Though identifying a portion of an un-subdivided parcel with accuracy is not possible, it appears in this case there was only a general description of three acres in the northern part of the parcel. Whether defendants’ actions of trespass were intentional is not knowable (ie going building fencing, a road, and soil removal outside the leased area), a map may have helped prevent such incursions.
  2. Never build permanent improvements on a leasehold, or during a purchase contract due diligence period. The facts of the case seem to suggest  – because the parties had executed some form of sales contract – that defendants invested money in the property in anticipation of its purchase. Given how events unfolded – with the septic system making sale of a subdivided parcel impossible due to clouding the title (it is a subsurface encroachment and impacts well placement) – one should not be overly optimistic about closing on a parcel when all discoveries have yet to be made during due diligence.
  3. Map the septic field. The lack of knowledge by the lessor/landowner of where the septic field lay certainly contributed to how things unfolded as they did. The facts in the record showed that the landowner was unable to tell his lessee with any specificity where the field was, and even allowed them to erect greenhouses atop the actual field. Giving the defendants the benefit of the doubt (the record states they asked repeatedly about the septic fields location), their decisions about the scraping the soil from and placing greenhouses on top of the septic system may have been different had they known. The case record does state that the defendants hired a contractor to locate the field during their purchase contract due diligence. That said, maps of old septic systems are not always ready at hand.

Here is a link to a video on using ground penetrating radar [GPR] to discover the field.

Here is another video from a young couple’s perspective on their discovery of the field on purchased property.

Depending on its age, the septic system required a permit from the county environmental health department for its construction (see 15A NCAC 18A .1900), so landowners and contracted purchasers can check there (the department likely has a hand drawn map of the drain field and piping that accompanied the original permit application).

*Unpublished opinions do not serve as legal authority or precedent, but may be cited under Rule 30(e)(3) of the NC Rules of Appellate Procedure.