As we enter the 2024 crop season, it’s time for an update on economic and legal information that affects Ohio farmland leasing. Join our Farm Office team members on March 1, 2024 from 10 a.m. until noon for a special edition of our Farm Office Live webinars. In the Ohio Farmland Leasing Update, we’ll be sharing the latest information on these leasing topics:
Cash Rent Outlook – Key Issues and Survey Data
Negotiating Capital Improvements on Leased Farmland
Dealing with Conservation Practices in a Farmland Lease
Executing and Recording Farm Leases
Legal updates and new Farmland Leasing Resources
Our speakers for the webinar include:
Barry Ward, Leader, OSU Production Business Management
Peggy Hall, Attorney, OSU Agricultural & Resource Law Program
Robert Moore, Attorney, OSU Agricultural & Resource Law Program
There is no cost to attend the Ohio Farmland Leasing Update, but registration is necessary unless you’re already registered for our Farm Office Live webinars. To register, visit go.osu.edu/register4fol.
In the previous post “Artificial Intelligence – What Is it and How to Use It” (May 31, 2023), I briefly discussed AI, how it works and some of its potential uses. There is no doubt that AI will have profound effects on each of us and our society in general. In this post, I am going to examine how AI works for a specific task related to agricultural law and measure its performance.
Surveys by Ohio State University indicate around 50% of farmland in Ohio is leased. Therefore, farm leases are an important legal document for many Ohio farmers. While some farm leases are still only verbal, many tenants and landowners recognize the benefits of a written lease and have at least a basic written lease in place. Some leases are written by the tenant or landlord while other leases are written by attorneys. The issue addressed in this article is: is AI ready to draft your farm lease?
The Process
To address the above question, ChatGPT and Google Bard, two of the more prominent AI interfaces, were each tasked with the following: “draft a cash farm lease”. This command was broad and vague but would likely reflect what a tenant or landowner might request. This exercise was performed on May 30, 2023 and each AI tool provided a cash farm lease. The exercise was again performed on October 4, 2023 to assess if AI’s capabilities changed over time.
To measure the effectiveness of AI, the drafted leases were compared to the recommended lease terms provided in OSU Extension’s bulletin “What’s In your Farm Lease? A Checklist of Farm Lease Provisions”. This bulleting was written by Peggy Hall and provides 26 key terms that should be included in most farm leases. Each draft lease was scored based on the number of terms that were included.
The Results
The following is the score for each draft, with the score reflecting the number of recommended terms from the lease bulletin that were included in the lease drafts:
ChatGPT, May 2023 8
Google Bard, May 2023 10
Chat GPT, October 2023 9
Google Bard, October 2023 7
As the scores show, neither ChatGPT nor Google Bard included even one-half of the recommended terms and the best was 10 out of 26 or 38%. Two important items of note. First, no drafts included terms to prevent the tenant from assigning the lease to someone else – an extremely important provision to include in farm leases. Second, no drafts addressed landowner or tenant signatures needing notarized1.
I would describe these drafts as “bare minimum” leases. They are probably better than having no lease at all, but they could be much better and do not include several key terms. Also, there was no significant improvement of performance over time. In fact, the Google Bard score was lower in the later draft. Asking ChatGPT or Google Bard to “draft a farm cash lease” is not going to provide a satisfactory lease.
Providing Input to AI to Improve Output
As I discussed in my prior AI post, one of the benefits of AI is the ability to chat with it. That is, you can provide feedback to the AI to assist it in providing a better outcome. So, that’s what I did. After reviewing the first two rounds of lease drafts, I asked ChatGPT and Google Bard to draft a third cash farm lease and to specifically include the 26 recommended terms from the lease bulletin. The resulting leases were better and scored as follows:
ChatGPT 16
Google Bard 20
As you can see, the scores increased significantly. So, the feedback provided to AI was integrated into the resulting drafts and made the leases better. This is one of the major advancements of AI. It allows someone like me that has little computer proficiency to provide untrained input that causes a significantly better result.
While the scores did increase, there were still some major issues with the drafts. I was probably generous in the scoring and gave credit if an issue was addressed, even if somewhat incomplete. For example, in its first two drafts, ChatGPT did not include a term addressing who receives FSA payments, the tenant or landowner. ChatGPT did address this issue after being prompted but stated that the landowner would receive all FSA payments. According to FSA rules, the tenant must receive at least some of the program payments and it is customary for the tenant to receive all FSA payments. So, while ChatGPT included a term about FSA payments, the included term was not completely accurate or correct.
Google Bard also had similar issues. In its first two drafts, it did not address what happens in the event of eminent domain takes a portion of the leased property. A typical lease term would say that the tenant is compensated for any crop damage caused by eminent domain and the landowner would keep the acquisition proceeds. Google Bard included a provision about eminent domain but stated the tenant would receive all eminent domain proceeds. Allowing the tenant to keep eminent domain proceeds would be very unusual and not something a landowner should agree to.
I would assess these leases as “better but still not good”. These drafts did include more of the recommended terms but included many of them in an insufficient or incomplete manner. The third round of leases did show that AI can learn and improve with feedback but also that it has a long way to go. The craft and nuance of drafting legal documents still seems to belong to the domain of people.
Conclusion
There are some well-known people, such as Elon Musk, who claim that we should have serious concerns about AI eventually taking over the world. Their concerns may be valid, but as of now I don’t believe AI is going to take over farm lease drafting anytime soon. An experienced attorney can do a much better job of drafting a farm lease than today’s AI. For a tenant or landowner who are unwilling to hire an attorney or may not have the resources to pay an attorney, a farm lease drafted by AI may be better than nothing but that’s about it. The best source of legal services remains to be attorneys and likely will be for the foreseeable future. AI is not ready to replace your attorney – yet.
1Leases for more than three years must be notarized.
A new Ohio law took effect last year that impacts some landowners who want to terminate their farm crop leases. If a farm lease does not include a termination date or a termination method, the law requires a landowner to provide termination notice to the tenant by September 1. The law was adopted to prevent late or otherwise untimely terminations by landowners that could adversely affect tenants.
It is important to note that the law only applies to verbal leases or written leases that do not include a termination date or method of notice of termination. If a written lease includes a termination date or method of notice, the terms of the lease apply and not the termination notice law. Also, the law does not apply to leases for pasture, timber, farm buildings, horticultural buildings, or equipment.
The notice can be provided to the tenant by hand, mail, fax, or email. If termination is provided by September 1, the lease is terminated either upon the date harvest is complete or December 31, whichever is earlier. While no specific language is required for the termination notice, it is good practice to include the date of notice, an identification of the leased farm and a statement that the lease will terminate on the completion of harvest or December 31. If termination is provided after September 1, the lease continues for another year unless the tenant voluntarily agrees to terminate the lease early.
A tenant is not subject to the new law and can terminate a lease after September 1 unless the leasing arrangement provides otherwise. Because it is generally easier for a landowner to find another tenant, even on short notice, the law protects only the tenant from untimely terminations, not landowners.
It is well known among Ohio farmers that installing subsurface drainage in poorly drained soil is a good investment. However, some landowners are not aware of the value of drainage or may not share the same level of commitment to improve the land. Furthermore, even if landowners do understand the benefit of subsurface drainage, they may not be willing to pay the substantial cost of installing drainage. To overcome this obstacle, tenant farmers will sometimes offer to install and/or pay for the drainage tile rather than imposing the cost on the landowner. This strategy can be a good way to improve the land without burdening the landowner with the entire cost. If this strategy is used, the lease between the landowner and tenant becomes critical to protect the interests of both parties.
There are three potential strategies for landowners and tenants to implement when installing drainage tile. The strategies are:
Landowner pays entire cost
Tenant pays entire cost
Landowner and Tenant share costs
In the following discussion, the legal implications of each strategy will be analyzed as well as provisions to include in a written lease to protect both parties’ legal interests.
Landowner Pays Entire Cost
As noted above, some landowners are reluctant to pay the entire cost for subsurface drainage. However, there are landowners who will choose to pay for subsurface drainage. Before deciding upon paying for the tile, the landowner may want to negotiate a higher lease payment with the tenant. The higher lease payment can be justified by the newly drained farmland being more productive. The lease should clearly state that the tenant will agree to pay a higher lease payment provided the landowner installs drainage. An example term to include in the lease could be something similar to:
In the event Landowner installs systematic drainage tile in the leased property, the annual lease rate shall be increased by $______. The systematic drainage tile shall be installed by a contractor approved by both Landowner and Tenant.
Including a provision like the one above will ensure that the tenant is aware that they will be required to pay a higher lease rate due to the installation of the drainage system. Also, by having a say in the contractor selected, the tenant can have some assurance that the drainage system will be well designed and properly installed. Because of the high demand for leased land, it is probably not necessary for the landowner to enter into a long-term lease. If a tenant opts out of the lease, the landowner will likely have no problem in finding another tenant.
Tenant Pays Full Cost of Drainage Improvement
A more common strategy for drainage improvements on leased land is for the tenant to pay the entire cost. When the tenant pays for the entire drainage improvement, the tenant should insist on including terms in the lease to protect their investment. These terms should create a long-term lease and provide for a means for the tenant to recoup their investment outlay for the drainage improvement should the landowner terminates the lease early.
The length of the lease should be long enough that the tenant recovers their investment in the drainage. Lease terms of 10-15 years are often used when the tenants pays the entire cost but the term can be longer or shorter depending on the situation. The tenant should calculate the increased revenue expected from installation of new drainage to determine the term of lease needed.
For example, Tenant agrees to pay for a new systematic subsurface drainage system. Tenant expects the new drainage to increase revenue by $100/acre. The drainage will cost $1,000/acre. Tenant should be sure to have at least a 10-year lease to recoup their investment. Perhaps the Tenant should ask for a 12 or 15-year lease to not only recoup costs but to enjoy some of the windfall from the installed drainage.
A provision should be included in the lease that requires the landowner to pay for at least some of the drainage tile in the event the lease is terminated early by the landowner. An example term could be something similar to:
In the event this Lease is terminated prior to the scheduled termination date, for any reason other than due to Tenant’s breach of terms of this Lease, Landowner shall compensate Tenant the pro-rata cost of the tile paid for by Tenant. The pro-rata share of the tile cost shall be calculated as follows: (length of lease – number of years installed)/length of lease
As an example, let’s assume Landowner and Tenant enter into a 10-year lease and the drainage costs $1,000/acre. Landowner terminates the lease in year 4 to put the land in a solar project. Using the above formula in the lease provision, Landowner would be required to pay $600/acre to Tenant.
In the example, the Tenant will no doubt be disappointed that the lease is being terminated early, but at least they will recoup their remaining investment in the drainage. Without such a provision, an early termination of the lease could lead to a Landowner refusing to compensate the Tenant for the drainage or causing a dispute between the parties as to how much is owed the Tenant.
Note: In this example, Landlord will also likely owe Tenant for lost profits on the remaining 6 years of the lease as well as compensation for fertilizer applied and field operations performed in anticipation of continuing the lease through its full term.
Landowner and Tenant Share Cost
It is possible for the tenant and the landowner to share the cost of new drainage. Sharing the cost might be particularly applicable in a share lease arrangement where the tenant and landowner are already accustomed to sharing costs. In this scenario, the most important issue for the tenant and landowner to agree upon is how much each party will pay towards the drainage improvement. The share of the cost is important not only for payment of the initial cost but also to determine what expensing or depreciation is available to the landowner and landowner.
An example term to include in this lease could be something similar to:
Tenant and Landlord agree to cooperate on the installation of new subsurface drainage on the Property subject to the following conditions:
Tenant and Landlord shall mutually agree upon the contractor to install the drainage
Tenant and Landowner shall, by mutual consent, determine the placement of the tile, design of the tile system and materials to be installed
The drainage shall be installed on or before (date).
Tenant and Landowner shall share in the costs of the new drainage installation. Costs shall include all labor, material and any other related costs.
Tenant shall be responsible for ___% and Landlord shall be responsible for ____% of the total costs.
Each party shall be entitled to expense or depreciate their share of the cost
Again, the tenant should require a long-term lease to be sure they gain the benefit of their investment. The lease should also include a provision to protect the tenant in the event of an early termination as discussed in the previous example.
Maintenance and Repair
Regardless of who is responsible for the costs of installing drainage systems, the lease should clearly state who is responsible for maintenance and repair of drainage systems. There are many ways to address this issue. In some cases, the landowner may be entirely responsible for maintenance while in other situations the tenant may be solely responsible. Additionally, the landowner and tenant can agree to share in the maintenance costs. Establishing who is responsible for maintenance and repair will help alleviate potential conflicts between the landowner and tenant.
Seek Legal Counsel
Attorneys with experience in agricultural leases can be a good source of ideas to incorporate into a lease. Additionally, an attorney can ensure that the lease is drafted and executed properly to protect both tenant and landowner. A small investment of time and money with an attorney can avoid conflicts and unwanted surprises.
Solar and wind energy development is thriving in Ohio, and most of that development will occur on leased farmland. Programs in the newly enacted federal Inflation Reduction Act might amplify renewable energy development even more. The decision to lease land for wind and solar development is an important one for a farmland owner, and one that remains with a farm for decades. It’s also a very controversial issue in Ohio today, with farmers and community residents lining up on both sides of the controversy. For these reasons, when a landowner receives a “letter of intent” for wind or solar energy development, we recommend taking a careful course of action. Here are a few considerations that might help.
Purpose and legal effect of a letter of intent. Typically, a letter of intent for renewable energy development purposes is not a binding contract, but it might be. The purposes of the letter of intent are usually to provide initial information about a potential solar lease and confirm a landowner’s interest in discussing the possibility of a solar lease. Unless there is compensation or a similar benefit provided to the landowner and the letter states that it’s a binding contract, signing a letter of intent wouldn’t have the legal effect of committing the landowner to a solar lease. But the actual language in the letter of intent would determine its legal effect, and it is possible that the letter would offer a payment and contain terms that bind a landowner to a leasing situation.
Attorney review is critical. To ensure a clear understanding of the legal effect and terms of the letter of intent, a landowner should review the letter with an attorney. An attorney can explain the significance of terms in the letter, which might include an “exclusivity” provision preventing the landowner from negotiating with any other solar developer for a certain period of time, “confidentiality” terms that prohibit a landowner from sharing information about the letter with anyone other than professional advisors, “assignment” terms that allow the other party to assign the rights to another company, and initial details about the proposed project and lease such as location, timeline, and payments. Working through the letter with an attorney won’t require a great deal of time or cost but will remove uncertainties about the legal effect and terms of the letter of intent.
Negotiating an Option and Lease would be the next steps. If a landowner signs a letter of intent, the next steps will be to negotiate an Option and a Lease. It’s typical for a letter of intent to summarize the major terms the developer intends to include in the Option and Lease, which can provide a helpful “heads up” on location, payments and length of the lease. As with the letter of intent, including an attorney in the review and negotiation of the Option and Lease is a necessary practice for a landowner. We also recommend a full consideration of other issues at this point, such as the effect on the farmland, farm business, family, taxes, estate plans, other legal interests, and neighbor relations. Read more in our “Farmland Owner’s Guide to Solar Leasing” and “Farmland Owner’s Solar Leasing Checklist”.
New laws in Ohio might prohibit the development. A new law effective in October of 2021 gives counties in Ohio new powers to restrict or reject wind and solar facilities that are 50 MW or more in size. A county can designate “restricted areas” where large-scale developments cannot locate and can reject a specific project when it’s presented to the county. The new law also allows citizens to organize a referendum on a restricted area designation and submit the designation to a public vote. Smaller facilities under 5-MW are not subject to the new law. Several counties have acted on their new authorities under the law in response to community concerns and opposition to wind and solar facilities. Community opposition and whether a county has or will prohibit large-scale wind and solar development are additional factors landowners should make when considering a letter of intent. Learn more about these new laws in our Energy Law Library.
It’s okay to slow it down. A common reaction to receiving a letter of intent is that the landowner must act quickly or could lose the opportunity. Or perhaps the document itself states a deadline for responding. A landowner shouldn’t let those fears prevent a thorough assessment of the letter of intent. If an attorney can’t meet until after the deadline, for example, a landowner should consider contacting the development and advising that the letter is under review but meeting the deadline isn’t possible. That’s a much preferred course of action to signing the letter without a review just to meet an actual or perceived deadline.
The idea to use income tax incentives to help Ohio’s beginning farmers gain access to agricultural assets floated around for several years in the Ohio General Assembly. The idea became a reality when the Beginning Farmer Bill sponsored by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville) passed the legislature, was signed by Governor DeWine and became effective on July 18, 2022. The law is now in the hands of the Ohio Department of Agriculture (ODA), charged with implementing its provisions.
The new law sets initial eligibility criteria for certifying “beginning farmers,” directs ODA to establish the certification program, and authorizes two types of income tax credits for certified beginning farmers and those who sell or lease assets to certified beginning farmers. According to ODA, the income tax credits will be available for 2023, once the certification program is up and running.
Here’s a summary of what to expect from the new law.
Certification of beginning farmers. The ODA will establish a process for designating a farmer who meets the eligibility criteria to be a “certified beginning farmer.” The law sets initial criteria for beginning farmers designation but also allows ODA to create additional requirements. ODA may seek participation from Ohio State and Central State in the certification of beginning farmers. The initial certification conditions are:
Resident of Ohio.
Seeking entry to or has entered farming within the last 10 years.
Farms or intends to farm on land in Ohio.
Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
Provides majority of daily physical labor and management of the farm.
Has adequate farming experience or knowledge in the type of farming for which seeking assistance.
Submits projected earnings statements and demonstrates profit potential.
Demonstrates farming will be a significant source of income for the individual.
Participates in a financial management program approved by ODA.
Financial management programs for beginning farmers. ODA must approve financial management programs that meet the certification requirement, in consultation with Ohio State and Central State. The list of approved programs will be available on ODA’s website.
Income tax credits for certified beginning farmers. An individual who attains certification as a beginning farmer may apply for a state income tax credit equal to the cost incurred during the calendar year for participating in an ODA approved financial management program or a substantially equivalent financial management program approved by the USDA. The tax credit is nonrefundable. If the tax credit exceeds the beginning farmer’s tax liability in the year granted, the excess can carry forward for not more than three succeeding tax years.
Income tax credits for owners who sell or rent assets to certified beginning farmers. An owner who sells or rents “agricultural assets” to a certified beginning farmer during the calendar year or in either of the two preceding calendar years may apply for a state income tax credit. The credit will be equal to 3.99% of the sale price or the gross rental income received during the calendar year for either a cash or share rental agreement. “Agricultural assets” includes agricultural land (at least 10 acres and in agricultural production or earning $2500 in average yearly gross income from agricultural production if under 10 acres), livestock, facilities, buildings, and machinery used for agricultural production in Ohio. The owner cannot be an equipment dealer, however, nor can the certified beginning farmer receiving the assets be a partner, member, shareholder, or trustee of the owner of the assets. Rented assets must be rented at prevailing community rates, as determined by ODA in consultation with the Ohio tax commissioner. The tax credit is nonrefundable but may be carried forward for seven succeeding tax years if it exceeds the owner’s tax liability.
Time to plan. As we await ODA’s rules and procedures for the new tax credits, beginning and existing farmers can use this time for planning. Review the new law with your attorney and accountant to determine how the income tax credits could affect you. If you are a beginning farmer seeking agricultural assets, spend time trying to connect with an existing farmer who is ready to sell or rent agricultural assets. Although the 3.99% credit for those transfers may not sound significant, run the numbers and see how they could play out. The hope of the new law is that those numbers will be enough to help a beginning farmer have greater access to those important assets that are critical to farming in Ohio.
Information on House Bill 95, the Beginning Farmer bill, is available at this link.
Is it time to start thinking about your farmland lease for next year? We think so! There are new legal issues and updated economic information to consider for the upcoming crop year. That’s why we’ve scheduled our next Ohio Farmland Leasing Update for Thursday, August 11 at 8 a.m. Join the Farm Office team of Barry Ward, Robert Moore and Peggy Hall for an early morning webinar discussion of the latest economic and legal farmland leasing information for Ohio.
Here are the topics we’ll cover:
Ohio’s new statutory termination law for verbal farmland leases
Using a Memorandum of Lease and other lease practice tips
Economic outlook for Ohio row crops
New Ohio cropland values and cash rents survey results
Rental market outlook
There’s no cost to attend the Zoom webinar, but registration is necessary. Visit https://go.osu.edu/farmlandleasingupdate for registration. And if you’re already thinking about your next farmland lease, also be sure to use our farmland leasing resources on https://farmoffice.osu.edu.
It’s time for another roundup of legal questions we’ve been receiving in the Agricultural & Resource Law Program. Our sampling this month includes registering a business, starting a butchery, noxious weed liability in a farm lease situation, promoting local craft beer at a farmers market, herd share agreements, and agritourism’s exemption from zoning. Read on to hear the answers to these questions from across the state.
I want to name my farm business but am not an LLC or corporation. Do I have to register the name I want to use for the business?
Yes, if your business name won’t be your personal name and even if the business is not a formally organized entity such as an LLC. You must register the business with the Ohio Secretary of State. First, make sure the name you want to use is not already registered by another business. Check the name availability using the Secretary of State’s business name search tool at https://businesssearch.ohiosos.gov/. If the name is available, register the name with the Secretary of State using the form at https://www.sos.state.oh.us/businesses/filing-forms–fee-schedule/#name. If there is already a business registered with the name you want to use, you might be able to register a similar name if your proposed name is “distinguishable” from the registered name. The Secretary of State reviews names to make sure they are not already registered and are distinguishable from similar names. See the Guide to Name Availability page for examples of when names are or are not distinguishable from one another.
I am interested in starting a small butchery. What resources and information are helpful for beginning this endeavor?
There are legal issues associated with beginning a meat processing operation, and there are also feasibility issues to first consider. A good resource for initial considerations to make for starting a meat processing business is this toolkit from OSU at https://meatsci.osu.edu/programs/meat-processing-business-toolkit. A similar resource that targets niche meat marketers is at https://www.nichemeatprocessing.org/get-started/. On the legal side, requirements vary depending on whether you will only process meat as a custom operator or fully inspected operator, and if you also want to sell the meat through your own meat market. The Ohio Department of Agriculture’s Division of Meat Inspection has licensing information for different types of processors here: https://agri.ohio.gov/divisions/meat-inspection/home. If you also want to have a retail meat market, you’ll need a retail food establishment (RFE) license from your local health department. To help you with that process, it’s likely that your health department will have a food facility plan review resource like this one from the Putnam County Health Department.
Is Ohio’s noxious weeds law enforceable against the tenant operator of my farm, or just against me as the landowner?
Ohio’s noxious weed law states that the township trustees, upon receiving written information that noxious weeds are on land in their township, must notify the “owner, lessee, agent, or tenant having charge of the land.” This language means that the trustees are to notify a tenant operator if the operator is the one who is in charge of the land where the noxious weeds exist. The law then requires the notified party –which should be the tenant operator—to cut or destroy the noxious weeds within five days or show why there is no need to do so. The concern with a rental situation like yours is that if the tenant does not destroy the weeds in five days, the law requires the township to hire someone to do so and assess the costs of removal as a lien on the land. This puts you as the landowner at risk of financial responsibility for the lien and would require you to seek recourse against the tenant operator if you want to recover those costs. Another option is to take care of removing the noxious weeds yourself, but that could possibly expose you to a claim of crop damages from the tenant operator. A written farm lease can address this situation by clearing shifting the responsibility for noxious weeds in the crop to the tenant operator and stating how to deal with crop damages if the landowner must step in and destroy the noxious weeds.
Can we promote local craft beers at our farmers market?
Ohio established a new “F-11” permit in H.B. 674 last year. The F-11 is a temporary permit that allows a qualifying non-profit organization to organize and conduct an event that introduces, showcases, or promotes Ohio craft beers that are sold at the event. There are restrictions on how long the event can last, how much beer can be sold, who can participate in the event, and requirements that food must also be sold at the event. The permit is $60 per day for up to 3 days. Learn more about the permit on the Department of Commerce website at https://com.ohio.gov/divisions-and-programs/liquor-control/new-permit-info/guides-and-resources/permit-class-types.
Can a goat herdsman legally provide goat milk through a herd share agreement program?
Herd share agreements raise the raw milk controversy and whether it’s legal or safe to sell or consume raw milk. Ohio statutory law does clearly prohibit the sales of raw milk to an “ultimate consumer” in ORC 971.04, on the basis that raw milk poses a food safety risk to consumers. But the law does not prohibit animal owners from consuming raw milk from their own animals. A herd share agreement sells ownership in an animal, rather than selling the raw milk from the animal. Under the agreement, a person who pays the producer for a share of ownership in the animal may take their share of milk from the animal. The Ohio Department of Agriculture challenged the use of herd share agreements as illegal in the 2006 case of Schitmeyer v. ODA, but the court did not uphold the ODA’s attempt to revoke the license of the dairy that was using herd share agreements. As a result, it appears that the herd share agreement approach for raw milk sales is currently legally acceptable. But many still claim that raw milk consumption is risky because the lack of pasteurization can allow harmful bacteria to exist in the milk.
Can the township prohibit me from having a farm animal petting zoo on my hay farm?
It depends whether you qualify for the “agritourism exemption” granted in Ohio law. The agritourism exemption states that a county or township can’t use its zoning authority to prohibit “agritourism,” although it may have same zoning regulations that affect agritourism buildings, parking lots, and access to and from the property. “Agritourism” is an agriculturally related entertainment, recreational, cultural, educational or historical activity that takes place on a working farm where a certain amount of commercial agricultural production is also taking place. If you have more than ten acres in commercial production, like growing and selling your alfalfa, or you have less than ten acres but averaged more than $2,500 in gross sales from your alfalfa, you qualify under the agritourism exemption and the township zoning authorities cannot prohibit you from having your petting zoo. However, any zoning regulations the township has for ingress and egress on your property, buildings used primarily for your petting zoo, or necessary parking areas would apply to your petting zoo activity. If you don’t qualify as “agritourism,” the township zoning regulations could apply to the petting zoo activity, and you must determine whether a petting zoo is a permitted use according to your zoning district, which could depend upon whether or not you want to operate the petting zoo as a commercial business.
By: Jeffrey K. Lewis, Esq., Program Coordinator OSU Income Tax Schools & ANR Extension
One of the core principles of the American legal system is that people are free to enter into contracts and negotiate those terms as they see fit. But sometimes the law prohibits certain rights from being “signed away.” The interplay between state and federal law and the ability to contract freely can be a complex and overlapping web of regulations, laws, precedent, and even morals. Recently, the Ohio Supreme Court ruled on a case that demonstrates the complex relationship between Ohio law and the ability of parties to negotiate certain terms within an oil and gas lease.
The Background. Ascent Resources-Utica, L.L.C. (“Defendant”) acquired leases to the oil and gas rights of farmland located in Jefferson County, Ohio allowing it to physically occupy the land which included the right to explore the land for oil and gas, construct wells, erect telephone lines, powerlines, and pipelines, and to build roads. The leases also had a primary and secondary term language that specified that the leases would terminate after five years unless a well is producing oil or gas or unless Defendant had commenced drilling operations within 90 days of the expiration of the five-year term.
After five years had passed, the owners of the farmland in Jefferson County (“Plaintiffs”) filed a lawsuit for declaratory judgment asking the Jefferson County Court of Common Pleas to find that the oil and gas leases had expired because of Defendant’s failure to produce oil or gas or to commence drilling within 90 days. Defendant counterclaimed that the leases had not expired because it had obtained permits to drill wells on the land and had begun constructing those wells before the expiration of the leases. Defendant also moved to stay the lawsuit, asserting that arbitration was the proper mechanism to determine whether the leases had expired, not a court.
What is Arbitration and is it Legal? Arbitration is a method of resolving disputes, outside of the court system, in which two contracting parties agree to settle a dispute using an independent, impartial third party (the “arbitrator”). Arbitration usually involves presenting evidence and arguments to the arbitrator, who will then decide how the dispute should be settled. Arbitration can be a quicker, less burdensome method of resolving a dispute. Because of this, parties to a contract will often agree to forgo their right to sue in a court of law, and instead, abide by any arbitration decision.
Ohio law also recognizes the rights of parties to agree to use arbitration, rather than a court, to settle a dispute. Ohio Revised Code § 2711.01(A) provides that “[a] provision in any written contract, except as provided in [§ 2711.01(B)], to settle by arbitration . . . shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.” What this means is that Ohio will enforce arbitration clauses contained within a contract, except in limited circumstances. One of those limited circumstances arises in Ohio Revised Code § 2711.01(B). § 2711.01(B)(1) provides that “[s]ections 2711.01 to 2711.16 . . . do not apply to controversies involving the title to or the possession of real estate . . .” Because land and real estate are so precious, Ohio will not enforce an arbitration clause when the controversy involves the title to or possession of land or other real estate.
To be or not to be? After considering the above provisions of the Ohio Revised Code, the Jefferson County Court of Common Pleas denied Defendant’s request to stay the proceedings pending arbitration. The Common Pleas Court concluded that Plaintiffs’ claims involved the title to or possession of land and therefore was exempt from arbitration under Ohio law. However, the Seventh District Court of Appeals disagreed with the Jefferson County court. The Seventh District reasoned that the controversy was not about title to land or possession of land, rather it was about the termination of a lease, and therefore should be subject to the arbitration provisions within the leases.
The case eventually made its way to the Ohio Supreme Court, which was tasked with answering one single question: is an action seeking to determine that an oil and gas lease has expired by its own terms the type of controversy “involving the title to or the possession of real estate” so that the action is exempt from arbitration under Ohio Revised Code § 2711.01(B)(1)?
The Ohio Supreme Court determined that yes, under Ohio law, an action seeking to determine whether an oil and gas lease has expired by its own terms is not subject to arbitration. The Ohio Supreme Court reasoned that an oil and gas lease grants the lessee a property interest in the land and constitutes a title transaction because it affects title to real estate. Additionally, the Ohio Supreme Court found that an oil and gas lease affects the possession of land because a lessee has a vested right to the possession of the land to the extent reasonably necessary to carry out the terms of the lease. Lastly, the Ohio Supreme Court provided that if the conditions of the primary term or secondary term of an oil and gas lease are not met, then the lease terminates, and the property interest created by the oil and gas lease reverts back to the owner/lessor.
In reaching its holding, the Ohio Supreme Court concluded that Plaintiffs’ lawsuit is exactly the type of controversy that involves the title to or the possession of real estate. If Plaintiffs are successful, then it will quiet title to the farmland, remove the leases as encumbrances to the property, and restore the possession of the land to the Plaintiffs. If Plaintiffs are unsuccessful, then title to the land will remain subject to the terms of the leases which affects the transferability of the land. Additionally, the Ohio Supreme Court concluded that if Plaintiffs were unsuccessful then Defendant would have the continued right to possess and occupy the land. Therefore, the Ohio Supreme Court found that Plaintiffs’ controversy regarding the termination of oil and gas leases is the type of controversy that is exempt from arbitration clauses under § 2711.01(B)(1).
Conclusion. Although Ohio recognizes the ability of parties to freely negotiate and enter into contracts, there are cases when the law will step in to override provisions of a contract. The determination of title to and possession of real property is one of those instances. Such a determination can have drastic and long-lasting effects on the property rights of individuals. Therefore, as evidenced by this Ohio Supreme Court ruling, Ohio courts will not enforce an arbitration provision when the controversy is whether or not oil and gas leases have terminated. To read more of the Ohio Supreme Court’s Opinion visit: https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2022/2022-Ohio-869.pdf.
Bills establishing new legal requirements for landowners who want to terminate a verbal or uncertain farm lease and income tax credits for sales of assets to beginning farmers now await Governor DeWine’s response after passing in the Ohio legislature this week. Predictions are that the Governor will sign both measures.
Statutory termination requirements for farm leases – H.B. 397
Ohio joins nine other states in the Midwest with its enactment of a statutory requirement for terminating a crop lease that doesn’t address termination. The legislation sponsored by Rep. Brian Stewart (R-Ashville) and Rep. Darrell Kick (R-Loudonville) aims to address uncertainty in farmland leases, providing protections for tenant operators from late terminations.
The bill states that in either a written or verbal farmland leasing situation where the agreement between the parties does not provide for a termination date or a method for giving notice of termination, a landlord who wants to terminate the lease must do so in writing by September 1. The termination would be effective either upon completion of harvest or December 31, whichever is earlier. Note that the bill applies only to leases that involve planting, growing, and harvesting of crops and does not apply to leases for pasture, timber, buildings, or equipment and does not apply to the tenant in a leasing agreement.
The beginning farmer bill – H.B. 95
A long time in the making, H.B. 95 is the result of a bi-partisan effort by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville). It authorizes two types of tax credits for “certified beginning farmer” situations. The bill caps the tax credits at $10 million, and sunsets credits at the end of the sixth calendar year after they become effective.
The first tax credit is a nonrefundable income tax credit for an individual or business that sells or rents CAUV qualifying farmland, livestock, facilities, buildings or machinery to a “certified beginning farmer.” A late amendment in the Senate Ways and Means Committee reduced that credit to 3.99% of the sale price or gross rental income. The bill requires a sale credit to be claimed in the year of the sale but spreads the credit amount for rental and share-rent arrangements over the first three years of the rental agreement. It also allows a carry-forward of excess credit up to 7 years. Note that equipment dealers and businesses that sell agricultural assets for profit are not eligible for the tax credit, and that an individual or business must apply to the Ohio Department of Agriculture for tax credit approval.
The second tax credit is a nonrefundable income tax credit for a “certified beginning farmer” for the cost of attending a financial management program. The program must be certified by the Ohio Department of Agriculture, who must develop standards for program certification in consultation with Ohio State and Central State. The farmer may carry the tax credit forward for up to three succeeding tax years.
Who is a certified beginning farmer? The intent of the bill is to encourage asset transition to beginning farmers, and it establishes eligibility criteria for an individual to become “certified” as a beginning farmer by the Ohio Department of Agriculture. One point of discussion for the bill was whether the beginning farmer credit would be available for family transfers. Note that the eligibility requirements address this issue by requiring that there cannot be a business relationship between the beginning farmer and the owner of the asset.
An individual can become certified as a beginning farmer if he or she:
Intends to farm or has been farming for less than ten years in Ohio.
Is not a partner, member, shareholder, or trustee with the owner of the agricultural assets the individual will rent or purchase.
Has a household net worth under $800,000 in 2021 or as adjusted for inflation in future years.
Provides the majority of day-to-day labor and management of the farm.
Has adequate knowledge or farming experience in the type of farming involved.
Submits projected earnings statements and demonstrates a profit potential.
Demonstrates that farming will be a significant source of income.
Participates in a financial management program approved by the Department of
Agriculture.
Meets any other requirements the Ohio Department of Agriculture establishes through rulemaking.
We’ll provide further details about these new laws as they become effective. Information on the statutory termination bill, H.B. 397, is here and information about the beginning farmer bill, H.B. 95, is here. Note that provisions affecting other unrelated areas of law were added to both bills in the approval process.
It’s time for another roundup of legal questions we’ve been receiving in the Agricultural & Resource Law Program. Our sampling this month includes registering a business, starting a butchery, noxious weed liability in a farm lease situation, promoting local craft beer at a farmers market, herd share agreements, and agritourism’s exemption from zoning. Read on to hear the answers to these questions from across the state.
Ohio Agricultural Law Blog 