Court Improperly Reformed Farm Leases

On November 30, 2020, the Iowa Court of Appeals issued an opinion regarding a district court’s order modifying farm leases. The court reversed the lower court’s order because the leases were not subject to judicial revision, nor was there evidence that court reformation was necessary.

Background

A farmer owned 18,000 acres of farmland. He leased approximately half of the land to family members, including his daughter, at discounted rates. Family members did not know what rate the farmer charged other family members. The farmer did not use written leases.

After suffering from a stroke, the farmer was incapable of managing his affairs and a bank was appointed as his conservator. After some resistance, a “Family Settlement Agreement” was created. The agreement created the “Family Council” which consisted of the farmer’s daughter and two sons. The Family Council would give guidance which the conservator would take under advisement providing it did not conflict with the farmer’s intent or the conservator’s fiduciary duties.

The Family Council attached several recommendations to the Family Settlement Agreement regarding the farm leases. These recommendations included that all current farm leases should remain in effect; all leases should be extended to year 2030; and the rents should be calculated at $40 less per acre than the Iowa State University cash rental rate (ISU rate) per past course of dealing.

The court authorized the agreement. Soon after, the conservator asked the court to allow it to enter into agreements and take any action necessary to manage the farmland. The court granted the conservator’s requests. The conservator then entered into various leases with family members to remain in effect through 2030 at a rate of $40 per acre below the ISU rate.

Several months later, disputes had arisen between a few of the family members and the conservator. The conservator asked the court to adjust the family leases to fair market value or affirm the rental reduction. The farmer’s two sons also filed a motion to review the farmer’s finances. After a hearing, the district court made several modifications regarding the terms of the lease and revised the discounted rental rate to $25 less than the ISU rate per acre. The daughter appealed, claiming that the district court did not have the authority to modify the leases.

Scope of Conservator’s Authority to Enter into Leases

A conservator must have court authorization to enter into leases. Iowa Code § 633.647(2). The conservator should consider the best interest of the ward when determining whether to enter into an agreement on the ward’s behalf. Because due diligence should be used when entering and forming a contract, the enforcement should also be in the ward’s best interest. The conservator represented the farmer when it asked the court for permission to enter into the farm leases and when it executed the leases. The farmer was also represented by a guardian ad litem who approved the Family Settlement Agreement and Family Recommendation. Therefore, the farmer’s best interests were represented.

The court next considered whether a procedural misstep would invalidate the district court’s order authorizing the conservator to execute leases. A conservator has the authority to enter into leases on behalf of a ward “subject to the approval of the court after hearing.” Iowa Code § 633.647. The farmer’s new GAL claimed that the conservator did not have the authority to modify the leases because a hearing was not held.

Without deciding whether the lack of a formal hearing was a procedural misstep, the court determined that this was not an automatic showing that the order or leases were invalid. Section 633.647 does not state the consequence of failing to hold a hearing. Additionally, the farmer’s then-GAL told the court that the conservator’s request to enter into farm leases appeared to be in the best interest of the farmer. Because section 633.647 did not address penalties for failing to hold a hearing, the court found it did not invalidate the order.

The current GAL also claimed that the conservator did not have the authority to execute leases at a discounted rate because the district court’s order lack specific findings on the issue. Under court order, a conservator may make gifts on behalf of a ward to those who regularly received gifts before the start of the conservatorship so long as it does not impair the ability to provide for the ward. Iowa Code § 633.688.

The court, finding it unlikely that discounted rental rates qualified as gifts direct from the farmer’s assets, disagreed that the order required specific findings. While many other statutes require specific findings, section 633.688 does not. Additionally, the statute allows gifts to those who “such gifts were regularly made prior to the commencement of the conservatorship.” Id. The court found there was substantial evidence that the farmer’s family regularly received discounted farm rental rates before the conservatorship. Because of the farmer’s extensive assets, it was unlikely the discounted rates would impair the ability to provide for the farmer. Therefore, there were no statutory grounds to show that the leases were improperly entered or were subject to revision by the court.

Court Authority

A conservator has the duty to protect and preserve an estate. Iowa Code § 633.641. The district court believed that its duty to supervise conservatorships in order to protect the best interest of the estate permitted the court to modify the leases.

In rejecting the district court’s ruling, the court found that Iowa Code section 633.641, entitled “Duties of Conservator,” does not address the power of the district court or authorize it to modify a contract. A court generally can only enforce a contract as written; it cannot modify the terms of the agreement. Greene v. Heithoff, No. 10-1608, 2011WL 5515167, at *7 (Iowa Ct. App. Nov. 9, 2011).

Contract Reformation

A court may reform a written contract if there is clear evidence of “fraud, deceit, duress, or mutual mistake.” Reformation can be used to change the terms of an agreement to accurately reflect to what the parties actually agreed. It cannot change the terms of the contract.

The district court did not make any findings to support reformation. The Court of Appeals also did not find any evidence in the record of fraud or misrepresentation regarding the lease terms or that the discounted rental rate was a product of fraud, deceit, duress, or mutual mistake.

Additionally, the discounted rental rate did not conflict with any prior agreement between the farmer and his family members. The only prior agreement was the Family Settlement Agreement which listed the same rate as used in the farm leases. Because there was no evidence of fraud or mutual mistake, the court reversed the district court’s modifications.