Agricultural Tenants and Eminent Domain Proceeds

In Texas, a good deal of agricultural land is leased out to tenants that either farm or raise livestock on the land.  Recently, I’ve received a number of questions from agricultural tenants related to their rights in the event some portion of the leased property is impacted by eminent domain.

A condemning entity, like a pipeline company, is required to pay just compensation in order to condemn the property needed for the project.  Just compensation is defined as the fair market value of the property at the time of the taking.  Oftentimes, however, a pipeline company may not even be aware that a lease agreement exists on a property.  In that instance, the company may negotiate with the landowner, reach an agreement, pay the agreed upon fair market value to the landowner, without ever hearing word about there being a leasehold interest at stake. This can leave a tenant in an unenviable position of having paid to lease property that is now going to be disturbed due to the construction of a pipeline, and not receiving any portion of the proceeds paid by the pipeline company.

Generally speaking, in order to protect their rights and to be in the best position to obtain any portion of condemnation proceeds, there are a number of steps tenants should take long before condemnation is even an issue.

Have a Written Lease Agreement

All lease agreements should be in writing.  Period.

I know that this has not historically been the practice in the agricultural industry, but the need for written agreements cannot be overstated.  A written lease agreement is the best way to protect the rights of both the landowner and the tenant, and to preserve the relationship between them.  Leases do not have to be overly legalistic or complex, but should address key issues and set forth the responsibilities of each party to the agreement.

Include a Condemnation Provision

Given the number of pipeline projects occurring across the State of Texas, it is a good idea for all agricultural lease agreements to include a Condemnation Provision.  This provision simply addresses what will happen to both the lease agreement and to any proceeds obtained during the condemnation process.   What will happen to the proceeds from the condemnation?  Will the go 100% to the landowner, 100% to the tenant, or will they be divided somehow?  If the event they will be divided, how will that look?  Will the parties agree on a percentage for each?  Will the parties state that the proceeds for any crop damage goes to the tenant while all other compensation goes to the tenant?  There is no magic rule or specific formula here, but having an agreed upon plan for the parties to follow can help alleviate headaches and disputes later.  Regardless of the term agreed to by the parties, having everyone on the same page before any type of negotiations begins with a potential condemnor is valuable.

Record Lease in County Deed Records

There is no legal requirement that a lease be recorded in the county deed records in order to be a valid contract.  However, recording in the deed records is likely the only way to make the lease enforceable as against a third party.  This is because in order for a lease agreement to be enforceable against a non-party, that non-party must have notice of the agreement.

From the tenant’s perspective, it is important to record lease agreements (or memorandum thereof) in the deed records at the county courthouse.  Doing so puts the world on notice that the lease exists and the tenant has that interest in the property.  Thus, when a pipeline company conducts a title search to determine who it should reach out to in order to negotiate, the existence of the lease agreement will show up.  Hopefully, this will cause the pipeline company to reach out not only to the landowner, but to the tenant as well to begin negotiations.  Typically, condemning entities would not finalize an agreement to provide compensation to a particular landowner unless a tenant with a recorded lease had also signed off on such agreement.

Some people may not want to record their entire lease agreement in the deed records as it is a public record and they may not want the world to know details in a lease such as price charged or stocking rates, for example.  Rather than recording the entire lease, a “Memorandum of Lease” could be recorded that simply identifies the property, names the landowner and tenant, and states the duration of the lease agreement.  This “Memorandum of Lease” should be signed by both the landowner and tenant.  Typically, the filing and payment of filing fees is done by the tenant, but that is up to the parties.

Be in Good Communication 

For both tenants and landowners, maintaining a good relationship and staying on communication with each other is extremely important.  It allows the parties to anticipate any issues and work together to further both of their interests.  For example, in the event a pipeline company were to contact a landowner, it may be beneficial to both parties if the landowner communicates that to the tenant.  For the landowner, he may be able to increase the amount of payment due from the pipeline company because of the value of the tenant’s crops or other value that can be argued to exist due to a lease agreement.  On the other side, this communication allows the tenant to be involved in the negotiation process to ensure important terms like requiring fencing off livestock when pipeline construction occurs and allows the tenant to seek compensation for his interest in the leased property.

Consider Working Together in Negotiations

It may benefit both the landowner and tenant to work together in negotiations with the pipeline company.  By working together and seeking adequate compensation for the interests of both parties, this could result in a larger payment from the condemning entity.

Even if parties work together in the negotiation process, it is advisable for any proceeds paid by the pipeline company be paid directly to each party separately, rather than paid to the landowner, who then would turn around and make payment to the tenant.  This will avoid potential tax implications on the landowner for proceeds that were actually paid to the tenant.

What If the Ship Has Sailed?

What if all of this information is too little too late, meaning a landowner and pipeline company (or other condemning entity) already reached an agreement and proceeds were paid?  Unfortunately, that leaves tenants in a difficult position.  This would leave the tenant to seek to work out something with the landowner or even less likely, the pipeline company.  A landowner may be willing to pay some compensation to the tenant under the circumstances, especially in the event that there was a cash lease agreement involved and there was substantial damage or impairment to the tenant’s rights.  If not, the tenant may be left with the option of considering some legal action against the landowner, like breach of contract for example.  Of course, from a practical perspective, filing a lawsuit against your landlord is likely not an attractive option.  This is why taking the steps outlined above before an issue ever arises is so important.

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