Oral Agreements Can Be Messy

There was a case in Iowa involving tenant/landlord relationships that turned sour over a purported “oral” agreement.  A retired farmer agreed to lease about 700 acres to a tenant farmer.  The written lease called for a cash rent payment of $200 per acre.  Due to increasing prices in 2007 and 2008, the tenant agreed orally to pay a bonus to the landlord based upon a 50/50 split of the profits.

This bonus continued for a couple of years until 2009 when the cash rent paid exceeded the profits.  This 50/50 split of the profits bonus was never put in writing and starting in 2010, a new written lease was not done each year.  The relationship turned sour and the landlord sued the tenant farmer claiming that the arrangement was a 50/50 crop share while the tenant claimed it was simply a cash rental arrangement with the tenant electing to pay a bonus to keep farming the ground.

As you can guess, this got messy and the District Court ruled in favor of the landlord and awarded about $204,000 to him.  This was appealed to the Iowa Court of Appeals and that court found in favor of the tenant and indicated the tenant should pay the landlord about $80,000 (the cash rental had never been accepted by the landlord).

The moral of the story is that all lease agreements should be in writing and as the Court indicated the written lease should spell out all terms of the lease and should not have ambiguities that cause these types of cases to proceed to court.  Now, if a party feels they have been wronged, it does not prevent them from suing, however, a properly written agreement would help prevent these types of cases more times than not.

Paul Neiffer, CPA