"Whether a farm lease meets the technical definition of a 'cash' lease or a 'share' lease under federal regulations determines whether the farm operator, alone, or both the operator and the landlord is to receive certain USDA farm program payments," explained Donald L. Uchtmann.
"Improper division of farm program payments can result in ineligibility for farm program payments, and in some circumstances, a need to pay back previous payments."
The complete report, "Is Your Lease Compatible With Your Division of USDA Farm Program Payments Between Landlord and Tenant?," is available on U of I Extension's farmdoc website at: http://www.farmdoc.uiuc.edu/ .
Uchtmann explained the differences between a "cash" lease and a "share" lease under federal regulations.
A lease is a "cash" lease if it provides for only a guaranteed sum certain cash payment, or a fixed quantity of the crop, he said, quoting the Code of Federal Regulations.
"For example, a farm lease calling for rent payments fixed at $X per acre or Y bushels of corn per acre, and nothing more, would fall within the technical definition of 'cash' lease," he said. "Thus, 100 percent of the farm program payments must be paid to the operator."
In practical terms, a "share" lease is probably any lease that is not a "cash" lease as previously defined, he added. In a "share" lease situation certain program payments must be divided between the farm operator and the landlord--neither can receive 100 percent of the payment.
However, the requirements become more complicated when "flexible" or "adjustable" cash rent provisions are factored in.
"These provisions may change the character of the lease from 'cash' to 'share,'" Uchtmann said. "This can happen even though the lease has some characteristics of a cash lease, is labeled a cash lease on the lease form, and is viewed as a variant of a cash lease by farm managers."
As an example, Uchtmann used a situation in which a landlord and a tenant honestly believe they have a cash lease and agree that the operator-tenant should receive all of the farm program payments.
"This '100 percent to tenant-operator' payment allocation WOULD be required by the federal regulations IF the lease IN FACT met the technical definition of a 'cash' lease,'" he said. "However, if the lease stated that the rent is the greater of a fixed sum--the pure cash rent component--or a certain chare of the crop, it technically would be a 'share' lease requiring a sharing of the program payments between landlord and tenant, even if it was labeled a 'cash' lease.
"Similarly, if the lease provided for 'flexible' cash rent in the form of a fixed cash rent that would be adjusted upward or downward depending on actual crop yields or a combination of crop yields and crop prices, it might be viewed as a 'share' lease under federal regulations."
Under federal regulations, Uchtmann noted, it is the technical SUBSTANCE of the lease that determines distribution of program payments, not the label on the lease.
Where existing farm leases are not compatible with the division of farm program payments desired by the landlord and tenant, there is a problem, he added.
"It may be wise to discuss this problem with legal counsel before taking any other action," he said.
"Looking to the future, the landlord and tenant may decide to revise the lease to avoid any future disputes about whether program payment allocations are proper, or they may decide to revise the allocation of farm program payments."
Farm operators and farmland owners need to be aware of the issue and review their particular situation.
"Failure to properly allocate payments between the operator and landowner, in the light of the lease terms and federal regulations, can make a person ineligible for future farm program payments and trigger a demand that improperly allocated past payments be paid back," Uchtmann said.