Can I Sell My Farm With a Tenant?
A common question we hear at DreamDirt Farm Real Estate and Auction is, “My farm currently has a tenant. Can I still sell it?”
Now, as a farmland owner- are you aware of the tenancy deadlines in your state? It’s never too early to plan ahead for the next year.
We’ve come to that time of year again when we are down to just days before farm leases must be terminated in some states to clear the way for the sale of farmland this winter. This month, our recent Land Seller Seminar discussed many aspects of selling farmland with a specific focus on the upcoming tenancy termination deadlines and how sellers can navigate the process.
To answer this question in short, yes you can sell a farm with a tenant. The only change for the tenant would be the change of landlord - the buyer of the farm. However, many sellers that inherit farms falsely believe they cannot sell a farm with a tenant.
Selling Without a Lease in Place
Let’s shift our focus: Why is it important to sell your farm without a farmland lease in place (if possible)? The time of year you sell your farm tends to dictate whether you will terminate the tenant before or after the auction. In some states, such as Iowa, the date is set in stone for tenancy to start on March 1 and end the last day of February. Nonetheless, in order to terminate a lease you must serve the tenant termination notice prior to September 1 of the previous fall. You may be wondering why it is important to terminate the tenant prior to selling the farm? While it is perfectly fine to sell a farm with a tenant, as discussed above, many bidders prefer to purchase a farm with an open lease. As a seller, your goal is likely to attract the most money for your property, and there are typically two types of bidders for farms:
First, there are farmer bidders. The farmer is buying land because he wants to farm it now; they are not buying a farm in order to be a landlord for a year. As a landlord, the farmer would have to pay interest payments using the rent he receives from the other farmer for up to 18 months prior to getting to farm it – not an ideal situation for most farmer bidders! Secondly, there are farmland investors bidders. Depending on the return of the farm, the investor is going to bid on your farm based on the current lease in place rather than what they feel is possible to make out of the land.
Generally speaking, farms typically sell best when the land isn't rented by another person. This is not always the case, as a farm can still achieve top-of-market prices with a tenant on them; but, some mediocre quality and low quality farms can struggle and be limited to only investor buyers.
Ensuring that you serve proper notice by your state’s tenancy deadline means you will get possession of your farm back from the current tenant. For example, in Iowa, if you give notice before September 1 in any year, you will have an open lease come March 1 of the next year. These dates follow the crop cycle - they protect farmers and give them ample opportunity to harvest crops, move machinery, bale stalks, plan their inputs for the following crop year, and take other steps necessary to cease farming at a particular location.
I Failed to Provide Notice to The Tenant
Let’s say you failed to provide notice of tenant termination by the September 1 and you want to sell your farm in the upcoming year… There are a few different routes a seller can take. If you owned a farm in Iowa and missed the September 1, 2019 deadline and proceeded to serve notice on September 2, 2019 – the termination would then be effective for March 1, 2021. This gives the current tenant an additional cropping season on the farm before they must relinquish tenancy. Sometimes in these situations, landowners can negotiate a buyout of that lease from the tenant to get it back early. This may require legal or professional guidance if you are not very familiar with the process of achieving a written agreement.
More often than not, a potential seller knows they will offer a farm for sale this winter but have failed to mention it to anybody. They often subscribe to the thought to let the farmer harvest the crops first before notifying anyone, or even decide it will be best to wait for Thanksgiving dinner to discuss it with family first. Yes, this makes it too late to submit tenant termination notice for the following year… but, it is not an impossible situation. Many do not realize there are still options to:
#1 Negotiate with the tenant for possession
#2 Offer the buyer a cash rent credit where necessary to equalize the 1st year return with market conditions.
This is another reason we like clients to contact us early. We are here to help distribute the legal notice to tenants and put you in the best position to sell the farm.
Serving Proper Notice to Tenants
Once you have firmly decided to terminate a tenancy, the next step is to serve notice. Farm tenancy terminations must be submitted in writing. Text messages, emails and other electronic communications will not suffice. We get calls every year from landlords or new owners that have inherited farms wondering how to terminate farm leases.
(Download the Farmland Tenancy Termination Form)
If you are considering selling farm real estate in the Midwest, it is always best to contact us sooner, rather than later, so you don't miss any of the important deadlines. We offer many resources, free of cost, such as a market analysis of your farm, e-books, and more - all to help you become more knowledgeable about the asset you own!
In September, DreamDirt will be hosting a Land Seller Seller Seminar where we will be focusing on selling farmland with a current tenant. If you would like to learn more, or even attend, click below!