Should be more specific
Leasing of farms, orchards and cropping land is becoming more common. It is a good way for farming operations to expand without capital commitments involved in buying land. For landowners, it can be a useful way to retain ownership of the capital but give away the day-to-day farming operations, either through a desire to semi-retire or to hold the farming asset for a period while family or continued ownership issues are resolved.
In the past, some rural leases have been less formal than, for example, leases of commercial buildings, particularly in the cropping area. These days, however, due to compliance issues there is a need to consider the terms of these leases much more carefully than in the past. Three issues in particular are:
- Resource management/environmental
- Biosecurity, and
- Health and safety.
Until recently, most leases (and this is in common with leases of commercial buildings) contained a clause simply requiring the lessee to comply with all relevant statutory or regulatory requirements, sometimes enumerating the various acts and regulations in a non-exhaustive list.
Today, those general clauses are no longer good enough and leases should be much more specific in the compliance obligations of each party.
The advent of the farm environmental plan (FEMP) regime has substantially increased compliance obligations in respect of resource management issues.
All local authorities must now implement a farm environmental management plan regime. Generally speaking, it is the landowner who has the responsibility to prepare these plans; but obviously with the lessee being the farmer and in day-to-day control of the land, it is the lessee who needs to comply. Accordingly, there needs to be clear provision in the lease as to whose responsibility it is to prepare that plan, who is required to comply with the plan, who bears the costs of compliance and also where the costs of any failure to comply with the plan lie. The lease should also contain a warranty from the lessee to comply with the FEMP including monitoring and reporting obligations.
The Mycoplasma bovis outbreak brought into sharp focus the need to comply with biosecurity rules. Rather than having a lease containing just a general obligation to comply with biosecurity legislation, a lease — particularly of farms that might be specifically affected by biosecurity issues such as dairy farms, orchards and cropping farms (with the issue of pests imported from overseas) — should be clear about the lessee’s obligations to comply with specific statutory provisions and regulations such as, for example, NAIT.
Health and safety
Once again the compliance regime for health and safety is significantly more onerous than in years past. Health and safety clauses in leases must be significantly more specific than a mere obligation to comply with health and safety legislation.
The lessor, for their part, would need their own health and safety manual as well as the ability to see and approve their lessee’s health and safety plan.
The lease should also confirm that the lessee is the ‘PCBU’ on the land for the purposes of the Health and Safety At Work Act 2015, and to have a warranty from the lessee that they have a health and safety management system applicable to the type of work to be carried out on the land.
Other provisions may need to be altered
Some of the other provisions of leases may need to be modified to cope with these more onerous compliance issues.
The essence of a lease is that a lessee has ‘exclusive possession’ and ‘quiet enjoyment.’ In a nutshell, this means that the lessor cannot enter onto the leased property except in certain circumstances and cannot do anything that derogates from the lessee’s right to use and occupy the land exclusively for the term of the lease.
There are limited exceptions to these rules — the usual one being that if the lessee fails in their repair or maintenance obligations then most leases will provide that the lessor can enter onto the property, on notice, to remedy the lessee’s default.
It would be appropriate now for leases to contain specific provision for lessors to have access to the property where the lessee is not complying with some of the statutory or regulatory requirements of resource management, biosecurity, and health and safety legislation coupled with the ability of the lessor to remedy areas of non-compliance at the lessee’s cost.
In addition, it may be that a lessor would also require the right for access for monitoring purposes and also to receive technical data and reports from a lessee or to require periodic formal reporting meetings.
Some leases will provide a list of matters that the lessor and the lessee agree are ‘essential terms’ of the lease. It would seem appropriate for some of these breaches of specific regulatory requirements to be included in this list due to the potential significant adverse consequences of the lessee failing to comply with their obligations in relation to these matters. A breach of an essential term gives a party greater rights if it wishes to terminate the lease for breach.
For the above reasons, if you are entering into a rural lease, it is more important than ever to talk with us before signing on the dotted line.