In Iowa we see a large variation in the way farm leases are structured. Many are oral, one-year leases that automatically renew from year to year. Others are written, five-year leases that must be recorded. And still others have their own unique approach. The Iowa Supreme Court recently reviewed one such lease and found it constitutionally infirm.
Article I, section 24 of the Iowa Constitution states that no lease of agricultural lands “shall be valid for a longer period than twenty years.” While it is apparent that this provision would invalidate the portion of a written lease that extends beyond 20 years, it is not clear how this provision would apply to a lease that exceeds the 20-year limitation only because of a renewal provision in the lease. That was the question before the Court in Gansen v. Gansen, No. 14-2006 (Iowa January 22, 2016).
The lease[i] in Gansen provided for an initial five-year term. It then automatically renewed for four additional five-year terms[ii] unless the tenant provided notice to the landlord “in writing not less than 180 days before the termination of the then current lease term, or within 30 days of the commencement of the new lease term.” In other words, the landlord was locked into the lease as long as the tenant wanted to farm the property (up to a period of 25 years). The lease also provided an interesting provision stating that the rent “shall be adjusted each year by the mutual agreement of the parties.” If the parties were unable to agree, the current rent was to continue. Prior litigation had questioned the validity of this phrase, and the courts had ultimately set a fair rental rate for the remaining lease term.
But in the case currently before the Iowa Supreme Court, the question was whether this auto-renewal provision that could extend the lease beyond a 20-year term violated article I, section 24. The Court found that it did. The Court first noted that any lease that violates the constitutional provision at issue is not infirm from its inception, but will only become invalid after its 20-year term expires.
The Court found it key to the analysis that only the tenant could terminate the lease. The landlord was locked into the lease for a 25-year term unless the tenant decided to cancel. Given the illusory rental rate provision, that was not likely to happen. Although lease law as a whole was designed to protect tenants, the Court ruled that if either party could be locked in for a period of time exceeding 20 years, article I, section 24 would be violated if and when that contingency occurred. Such a lease, the Court ruled, “is valid for twenty years but is constitutionally infirm after the twenty-year period has expired.”
The Court was also careful to point out that parties were not prevented from mutually agreeing to renew agricultural lease for periods of time that would ultimately exceed 20 years. Article I, section 24, the Court stated, does not prohibit landlord-tenant relationships that exceed 20 years. Rather, it prohibits “a lease for agricultural purposes that continues in effect for more than a twenty-year term.” And again, only the portion of the lease exceeding the 20-year term is unenforceable.
Although this type of lease arrangement may be rare, the principles discussed by the Court are helpful for any attorney drafting agricultural leases.
[i] There were actually two identical leases at issue in this case, but for simplicity, the issue will be discussed in the singular.
[ii] Although this is the way the lease is described in the first paragraph of the opinion, the opinion later states that “the leases in question provided for an initial five-year term with five additional five-year terms.” Because the Court later states that the lease provided up to a 25-year term, it assumed that the facts in the first paragraph are correct.
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