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F A L L 2 0 1 3
related risks. The cooperative may see
this lack of control as a disadvantage;
however, the contract between the
member and the cooperative may
alleviate some of the cooperative's
concern by specifying the quality of crop
that will be accepted by the cooperative
under the agreement.
Successful performance of marketing
contracts is the "life-blood" of a
Because of the dependent
relationship between members and
cooperatives, courts are more willing
to order specific performance in the
event of breach by a member, even
when there are ascertainable money
damages or the contract contains a
liquidated damages clause.
The courts
reason that the breach by one member
undoubtedly affects all members,
including the members' ability to carry
on business, and the general credibility
of the cooperative. The availability of
specific performance is an advantage
for a biomass supply contractor to a
cellulosic ethanol plant because there
is less concern that the steady stream of
biomass feedstock will be hindered by a
member's breach of his or her marketing
Cooperatives may prove to be
extremely valuable in biomass
production because of the close
relationship between the cooperative
and its members, which in turn fosters
a reliable source for a large quantity of
biomass feedstock.
Leases of Farmland
The farmland lease is both a contract
and a conveyance of an interest in
real property.
The tenant, as grantee
of a leasehold estate, has the right of
exclusive possession and control of the
land for the term of the lease.
There are
two major categories of farmland leases:
the crop share and the cash rent lease.
Under a crop share lease, the
landlord receives a specified share of
crop proceeds in return for providing the
land and a share of input expenses.
tenant provides labor, management and
the remaining input costs.
This type of
lease gives the landlord an enhanced
return if production or market value of
the crop increases; however, the landlord
also shares with the tenant the risk of
crop failure and declining market prices.
Provisions commonly found in crop
share leases include: method of crop
splits, responsibility for payment of input
expenses, and responsibility for storage
of the crop.
Because rent is paid by
collecting a share of the crop proceeds,
the landlord will typically perfect a
security interest in the crop.
The tenant
will be required, by the terms of the
lease, to grant to the landlord a security
interest in the crop, and the landlord will
perfect its interest by filing a financing
Under a cash rent lease, the landlord
receives payment for use of the land. The
landlord typically pays real estate taxes
and for major repairs on the premises,
but pays no portion of input costs. The
tenant pays for all input costs, retains
the entire harvested crop, and provides
the labor and management. In this
arrangement, the landlord has a fixed
return and assumes no risk as to crop
yield or market price fluctuation. The
landlord does, however, carry the risk of
non-payment as well as the risk that the
tenant will use farming practices or grow
a crop that damages the leased land.
Cash rent leases, like crop share leases,
usually require that the tenant grant the
landlord a security interest in all crops to
ensure payment of rent.
Clauses commonly found in both
crop share and cash rent leases include:
rights of entry after termination of the
lease, land use obligations, upkeep of the
leased property, type of crop permitted,
actions of the tenant that require consent
of the landlord and general maintenance
It is common for farmland leases to
be year-to-year leases that automatically
renew unless one party terminates the
agreement as specified in the lease
documents. However, with respect
to biomass, the contractor supplying
feedstock to the biorefinery owner will
likely want, or be required by the project
owner, banker, or investor, to enter into
relatively long-term leases. The character
of biomass feedstock will often require
leases for ten years or more in order to
realize the full benefits of the crop. With
this in mind, if the landowner is already
leasing his or her farmland, the decision
to grow biomass instead may be chiefly a
financial one, based on the return offered
by the contractor compared to available
The discussion of appropriate terms
to include when contracting for biomass
is one that must be continued among
farmers, feedstock suppliers, bankers
and biomass conversion facility owners
as the industry progresses, to eventually
find a middle ground on which all parties
can agree.
1 For example, whether a particular crop is an annual or
a perennial, or grows from a seed or a rhizome.
2 Tenn. Code Ann. 43-16-133. Note that this statute
does not specifically prohibit an auto-renew contract.
In fact, in 2004, the "Tennessee Processing Coopera-
tive Law" was enacted, which specifies that five-year
auto-renew terms are permitted. Tenn. Code Ann.
3 Some state statutes may provide caveats to this general
rule. For example, in Tennessee, "title to crops is
transferred to the cooperative upon delivery unless
the contract expressly provides for transfer at another
time." Tenn. Code Ann. 43-38-114.
4 Donald B. Peterson & Keith G. Meyer, Agricultural
Law in a Nutshell 285 (1995).
5 Id.
6 Donald B. Peterson & Keith G. Meyer, Agricultural
Law in a Nutshell 95 (1995).
7 Id. at 96.
8 The share of proceeds will likely depend on local
custom and the landlord's total input contribution.
Shares generally range from a quarter to a half of all
crop proceeds.
9 Input costs refer to seed, fertilizer, chemicals, pesti-
cides, fuel, machinery, and the like.
10 Peterson & Meyer, supra at 97.
11 Id. at 103.
12 A security interest will only be appropriate if the tenant
retains title to the entire harvested crop until delivery
to the landlord of its share.
13 Peterson & Meyer, supra at 103.
14 Certain crops are more invasive than others (e.g.,
switchgrass) and may require contracts to be more
specific as to liability for damage to farmland and ob-
ligations of the tenant to return farmland to its original
condition upon termination of the contract.