Selling Property with Leases: What do I Consider?

August 12, 2016

Quite often when we sell a property, the property is leased to a tenant. The majority of leases are verbal while some are written. Many leases have been in place for years, or even generations. When the decision to sell is made, both the tenant and the landowner make the following assumptions: 1) With a verbal lease, the landowner may terminate the lease at any time; and 2) Since the tenant has the lease, the tenant should have the right to buy the property.

When the time comes to sell leased land, the type and terms of the lease can affect the salability of the property. The following are situations and terms we often encounter. If these types of scenarios are dealt with early on, you can eliminate future misunderstandings and hard feelings. Remember, both landlords and tenants have rights.

  1. Written leases typically have expiration dates. We occasionally run into situations when a written lease expires and automatically renews unless a notice is served to terminate. With written leases, be clear on termination dates and/or when to serve notice.
  2. With verbal leases, March 1st is the expiration date in Colorado, Nebraska, and Kansas. To terminate a verbal lease for the 2017 crop year in:
    Colorado: The landlord must serve termination 90 days prior to March 1st (ex. December 1, 2016 for March 1,, 2017).
    Nebraska: The landlord must serve termination 180 days prior to March 1st (ex. September 1, 2016 for March 1, 2017).
    Kansas: The landlord must serve termination 30 days prior to March 1st (ex. January 30, 2017 for March 1, 2017).Things to watch for:

    • In Nebraska, the termination notice has to be in writing.In Colorado and Kansas, it is only recommended that the termination notice be in writing;
    • The dates above do not apply for pasture land;
    • Tenanti has the right to plant and harvest a crop when they have worked the ground to plant;
    • Due to changes in farming practices, be clear about possession (ex. Dryland used to be a 2-crop rotation; some tenants farm a 3-crop rotation).
  3. We often encounter situations in both written and/or verbal leases whereby the landlord gives the tenant “The First Right of Refusal” and/or the “First Right to Match.” The “First Right” means that if the landlord receives an offer to purchase from a third party, the tenant has the right to match the offer. In too many instances, “First Rights” are vague in that they do not define purchase terms or a timeline to respond. If the tenant has this “First Right,” why should they try to buy the property unless they are forced to do so when a third party submits an offer? It makes the property difficult to sell when potential buyers know their offer may be matched by the tenant. The “First Right” also makes it impossible to sell a property at auction.

Our recommendation is that if a landlord wants to give the tenant “The First Right”, be specific. Clearly state the timeline to respond but keep it short and reasonable. Match the same terms as the offer from a third party.  (Ex. third party submits a cash offer to purchase, tenant has to obtain financing but is questionable). As an alternative, we recommend a “First Right to Purchase Clause”, which states if the landlord decides to sell, he first notifies the tenant of their intent to sell and offers the property to them first. If a purchase agreement doesn’t take place within specified terms, the property goes on the open market.

We have also seen situations whereby a landlord has entered into a long-term lease with no provision of termination if they decide to sell before the lease expires. Without a termination clause, the landlord limits potential buyers for the property to either the lessee and/or an absentee owner who would buy subject to the lease. In this scenario, the largest pool of buyers (operators who would farm the property) is eliminated. If a long-term lease is important, then provisions should state that if the property sells, the tenant will be reimbursed for improvements and/or crops planted.

Knowing if and when possession of the property is available is crucial. When the terms of a lease are clear, it is easier to deal with the parties involved, negotiate the transaction, and preserve the relationships of all parties involved.

REMINDER: Based on our experience, we recommend putting leases in writing to prevent any misunderstandings and to always use legal consul.