Playing it safe with land lease agreements
by Enrico Villamaino
A recent webinar hosted by Cornell Cooperative Extension of Oneida County aimed to help both landowners and farmers protect themselves when entering lease agreements.
“Learn How to Put Together a Lease That Makes Sense” was the latest in the “Accessing Farmland” series of interactive online workshops. The presentation was led by Myron Thurston, an agriculture economic development specialist for CCE Madison County.
“Most agreements between farmers and non-operating landowners (NOLs) are sealed by a handshake rather than a signature,” said Thurston. “A lease agreement can be very important, because neither the farmer nor the landowner are secure without one in place.” The absence of a proper lease agreement can create financial liabilities for both parties and leaves issues like insurance unaddressed.
When NOLs envision goals for their land, Thurston recommends they consider a few basic points. “Where do you and others involved in the decision making about the property stand on land ownership and the division of rights and responsibilities? Do you need to derive net income from the use of the property or just cover the costs?” He also told NOLs to decide whether or not they want to take a chance on a first-time farmer and where they stand on resource stewardship and their responsibility to the community.
Farmers, on the other hand, were advised to consider their own concerns. “Access: How will the farmer access the property? Does the site have adequate entry and exit for the necessary equipment in every season? How far is the property from hardware stores? How about feed suppliers? Or mechanics?” Thurston also counseled farmers to establish whether or not housing is included in the lease agreement, as well as to definitively spell out what the boundaries of the property are. “It sounds like a little thing, but it’s an important one.”
The type of agreement is just as important as having an agreement in the first place, according to Thurston. A cash rent lease sees a conventional transfer of money in exchange for land use. A crop-share lease is an agreement where the NOL and tenant split the expenses of farming as well as the production, with each receiving an agreed upon percentage of the profits. A fixed bushel lease sees the tenant giving the landlord a fixed number of bushels of their crop as rent. A net share lease differs from the fixed bushel lease in that the NOL receives a percentage of the crop. In this case, the rent paid by the tenant can rise or fall, depending on the season’s crop yield.
Cash leases are most common, but they have advantages and drawbacks for both parties. “For landowners, a cash lease frees them from any managerial, financial and marketing responsibility. Another benefit is that income under the lease does not constitute self-employment income subject to Social Security tax and will not reduce the Social Security benefits of retired landowners. For the farmers, a cash lease gives them a free hand to manage the operation as they see fit, they do not have to worry about the division of crops and they can benefit from any windfall profits from unexpected crop price increases or unusually high yields.” However, this type of lease has its pitfalls. For NOLs, a cash-rate rent can be difficult to determine and can keep them from realizing higher profits in high performing years. For tenants, there is increased risk from price and yield variations, and farmers must supply all the operating capital needed to purchase crop inputs.
Prior to entering into a lease agreement, Thurston emphasized that both NOLs and farmers should have a checklist of issues they must address before signing an agreement.
“Landowners should ensure that their tenant has the proper insurance coverage. They should also plan for the contingency of tenant default or other undesirable outcome, including a plan to manage the property in the sudden absence of the tenant,” Thurston advised. “Farmers should engage in basic due diligence and determine if the property is appropriate for their intended farming operation.” Farmers might also want to see an appraisal of the land to make sure the rent is based on the true fair market value of the property.
As for the actual language in the agreement, Thurston enumerated several points that must be spelled out plainly. “There are things that should be clear and unambiguous,” he said. “The time period of the lease, including beginning and ending dates. The rental amount in a cash lease. When and how rent will be paid and penalties for late payments. Who will carry insurance on the property and the crop. A statement that the landowner and operator do not intend to create a partnership by entering into the agreement, so that neither party will obligate the other for debts, liabilities or damages. Conditions under which the operator may or may not sublease the property. When and how the lease may be terminated. Which acts of the operator would constitute default of the lease. What rights the operator has if the property is transferred or condemned during the lease period. Reimbursement for a crop still in the ground when the lease is terminated. These should all be laid out in the agreement.”
He concluded by reiterating the importance of moving away from handshake agreements to an official documented agreement. “It’s better for all parties. Protect yourself.”