“Let the landlord beware ” is the rule in Ohio when it comes to getting paid by farm tenants. While some states protect agricultural landlords through legislation that creates a statutory lien in favor of landlords for unpaid rent, Ohio is not one of those states. Thus, an Ohio agricultural landlord generally is an unsecured creditor vis-à-vis other creditors of a farm tenant.
Are there ways for a landlord to protect his/her right to receive farm rental payments? The answer is yes, but it takes some work beyond the handshake or trust me habits of the past. In addition to having a written lease with the tenant, here are some general rules:
• Don’t be the tenant’s banker . Get paid up front. It may even be worth providing a discount for up front payment because higher cash rent that you don’t receive is much worse in the end.
• Financial Statements . If you aren’t getting paid up front, then you are extending credit to the farm tenant. Did you ask for a written financial statement? Would the bank extend credit to anyone without a financial statement? A written financial statement signed by the farm tenant lets you know what your chances are of getting paid. If the farm tenant refuses to give you a written financial statement, see Rule #1.
• Securing Payment . If a landlord is willing to extend credit and wants to have a secured claim in the event the tenant has financial problems, then the landlord needs to follow the formalities to create, perfect and enforce a security interest under Ohio law and, in the case of crops or other farm products, federal law.
• Crop Share Lease . An alternative to cash rent, of course, is a crop share lease (which has its own set of risks and rewards). In the typical crop share lease, the tenant owns only his/her portion of the crop. In such a situation, the tenant’s creditors should not have any legitimate claim to the landlord’s share of the crops. However, it is very important that a written lease be used in crop share situations to avoid disputes with the farm tenant’s creditors over ownership of the crops. If the lease is properly executed and notarized, it also can be filed of record with the local county recorder to bolster the landlord’s position vis-à-vis the tenant’s other creditors.
The Value in Being a Secured Creditor
A secured creditor has rights in specified collateral of a debtor should the debtor default on his/her obligations to the creditor. This holds true even if the farm tenant files bankruptcy. The typical landlord who decides to extend credit to a farm tenant might want to take a security interest in the farm tenant’s growing and harvested crops.
In order to have a legally enforceable security interest, the following (at a minimum) will have to be done:
A) A written lease outlining the parties’ rights and responsibilities needs to be signed by the parties;
B) An agreement in the written lease or in a separate document granting the landlord a security interest in the farm tenant’s growing and harvested crops and any other collateral that the landlord and the tenant agree upon (Other collateral could include crop insurance proceeds and federal farm program payments. Note that crop insurers and USDA have special forms that must be executed by the farm tenant in order to properly assign such payments.);
C) A UCC-1 financing statement needs to be properly completed and filed with the Ohio Secretary of State (this action is known as “perfecting” the creditor’s security interest);
D) It should be determined whether other creditors have previously filed financing statements on the same collateral (this can be determined by a search of the Ohio Secretary of State’s records and the local county recorder’s records; while financing statements are now filed with the Ohio Secretary of State, some older filings at local county recorders’ offices may still be in effect). If another creditor claims a security interest in the same collateral, it is prudent for the landlord to request a subordination of the competing creditor’s claims to the extent that rent is due the landlord; and
E) The landlord wanting to protect his/her secured claim needs to have the farm tenant provide a list of potential buyers of farm products that conforms with the requirements of Section 1324 of the federal Food Security Act of 1985, 7 U.S.C. § 1631. The written agreement with the tenant-debtor should contain language requiring the debtor-tenant to provide this information upon request. Ohio is a “direct notice” state under this federal law and secured creditors have to give notice to the debtor’s farm product buyers with instructions on how to pay the debtor. Typically, secured creditors ask farm product buyers to write joint checks to ensure that the debtor pays the creditor when crops are sold.
If all of the above seems complicated, see Rule #1 ( Don’t Be The Tenant’s Banker ).
IMPORTANT : This summary is being provided for educational purposes only and should not be used as a substitute for professional advice, as there are various detailed requirements that need to be carefully followed and there often are exceptions to the general rules.