March 25 2011

Leasing the Farm

Leasing a farm, an orchard or cropping land is becoming more common and has attractions for both the land owner and the tenant farmer. We consider below the reasons why leasing could be a practical solution for both parties, and what should be considered in a lease.

For a land owner, leasing provides a fixed return and gives protection against the fluctuations in returns – which are inevitable in the farming sector. During the lease tenure, the capital (the farm) is protected for another day.

Situations where leasing might be considered are:

  • When the farm is being held for future generations who are not yet of an age to take over
  • Where working capital is not available to the farmer for whatever reason, and
  • Illness or other incapacity.

If the land has been farmed by the same family for some time (maybe even for several generations), the concept of parting with possession of the property and allowing someone else to farm it is not easy.

It necessarily means a loss of control and sometimes that is hard to accept. The leasing of farms also has the added difference from commercial leasing in that the land owner might well still live on the property and the tenant’s farming operations are conducted with the land owner watching on!

For a tenant, leasing provides the ability to:

  • Use the land for a fixed rate but without having to supply the capital that might not be available
  • Increase economies of scale without increasing the fixed capital that might ordinarily be required, and to
  • Add flexibility which enables the size, type or location of the land to be varied for a fixed term prior to making more permanent decisions.

The lease

The relationship between the land owner and the farmer tenant is governed by the lease. While there may be ‘standard’ clauses that lawyers use in preparing leases, there is no such thing as a ‘standard’ lease. There are, however, some specifics that any lease must have. These are:

  • Correct names of the parties
  • Area of land to be leased
  • Term
  • Rent, and
  • The lease must be in writing.

Other matters that will need to be addressed include:

  • The type of farming activity to be carried on. The land owner might wish to restrict the use to which the land can be put. For example, ‘sheep and cattle farming’ is a very wide term – a land owner might not want the land to be used for bull farming and, if so, a restriction such as this should be included
  • Fertiliser/spraying requirements or obligations
  • Repairs and maintenance. This can be a difficult issue. The distinction between what is a repair and what is a replacement (a capital item) is important. For longer term leases, capital expenditure may be agreed as part of the leasing proposal. If so, that agreement should state who pays for the capital item and what effect that capital expenditure will have on the rent
  • Ownership of improvements. If the tenant is making capital improvements to the farm, for example, constructing new yards or in the case of an orchard planting trees, who owns those improvements and is the tenant compensated at the end of the lease?
  • Rent review. What matters are taken into account at the rent review? If a tenant is making improvements to the farm by way of farm management, additional fertiliser or improving capital items, should their rent be based on the improved farm or on the farm in the condition that it was when they took over?
  • Reservation of some rights to the land owner. Leases give ‘exclusive possession’ to the tenant. It may be, however, that the land owner wants to reserve some access rights, such as the right to hunt or duck shoot or a ‘right to roam’, and
  • Mortgagee’s consent. If a mortgagee has not consented to a lease, then it is not binding on them. This puts the tenant’s investment at risk in the event the land owner defaults on loan obligations.

Handled properly leasing can benefit both parties, but it is critical to think carefully through the arrangements and to ensure they are documented properly.