Court Construes Conflicting Terms In Farm Lease

April 24, 2010 | Erin Herbold

Many Iowa farmers use standard written form leases.  Sometimes farmers add additional terms to those standard forms that conflict with some of the standard terms.  When clauses conflict in a farm lease, how do the courts determine the parties’ intent in the event of a dispute?  What if the lease is perpetual?  This case demonstrates the importance of executing a clear and concise written farm lease agreement, and discusses the problem of perpetual farm leases.

Here, a married couple owned a residence plus an additional 126 acres of farmland. Eventually, they experienced marital difficulties and listed the home for sale with a realtor. Another couple made an offer on the home, with the intent that their son would live there. The offer was contingent on the buyers’ right to farm the additional 126 acres. Thereafter, a farm lease was drafted and entered into by the parties. 

The lease specified a beginning date, but the lease did not specify the duration of the lease or when it terminated – other than the standard form language that the lease would automatically renew upon expiration from year-to-year unless the tenancy was terminated by September 1.  The additional provisions added to the form by the tenants specified that “the lease shall continue until such time as the tenants no longer wish to rent the farm ground or until such time as they purchase the property from the landlords.” Obviously, those two provisions were in conflict.

When the sellers divorced and the farm land was subsequently divided, problems arose between landlord and tenant. The wife decided to sell her share of the farmland and offered the tenants the first right of refusal. After a failed attempt to gain an appraisal by both parties, the sale fell through and on August 28, 2008, the wife served the tenants with notice of the termination of the farm tenancy. 

At trial, the court found that the additional terms were not clear and attempted to create an unconstitutional perpetual lease. Thus, the land would be unmarketable if the landlords ever wanted to sell.   So, the standard farm lease termination provision was upheld - the court determined the lease was a year-to-year lease. 

The appellate court disagreed.  The court noted that the parties failed to fill in the blanks for the duration and expiration of the lease, thus, the court looked to other indicators of the parties’ intent under the farm lease. The court found that the farm lease clearly intended to create a perpetual lease in favor of the tenants. The agreement was not “unconscionable,” because both parties accepted the terms and were awarded some benefit from the contract. 

The court went on to state that unconscionability involves both procedural and substantive elements- meaning that there was a lack of understanding or inequality between the parties as to the specific terms or that the lease was just plain harsh, oppressive, or one-sided. Here, the bargaining process was fair and each party had ample opportunity to review the lease before signing. Thus, the appellate court ordered that the farm lease be “reformed” to a term of no more than 20 years. The Iowa Constitution (Article I, Section 24) provides that “no lease or grant of agricultural land… shall be valid for a longer period than twenty years.” Basically, a lease is not unconscionable simply because it is perpetual- it just needs to be reformed consistent with the parties intent. 

When a contract contains both general and specific terms that conflict, the specific terms control. Since the parties used a form contract, the specifically-added provisions were more indicative of the parties’ intent.