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Northeast Missouri Ag Connection
Volume 6, Number 10 – October 2019
This Month in Ag Connection
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Developing a Sound Farm Lease Agreement
Farm lease agreements can be cash, share or flexible. Each type has some unique characteristics, but some items should be in all types of written leases.
Names and signatures of all parties is essential. This means if one or both parties are married, then the spouse should sign. It is recommended to include the addresses of each party, as well as, date when signed. A notary is not required, but can be used.
A description of the property to be leased should be included. This can be the legal description and/or the Farm Service Agency farm and tract number. If the property is known by something else such as the “Brown Place” then it should be included. Producers and landowners are more likely to be familiar with the farm and tract number or the common name for the property rather than the legal description. Another reason to include the common name of the property and the farm and tract number is for easy reference in case the main business operator is incapacitated.
The lease period should be clearly stated. Is the lease term for one year, two years or longer? The start and end date including the year should also be stated. Some leases will state a 30, 60, or 90 day written notice period if either party wishes to terminate the lease on the end date. This is not required, but done to allow each party time to find new ground or a new tenant. It also helps manage expenses for the tenant, specifically prepaid items and operating loans. For the landowner, they may rely heavily on the rent income so they may use the time to secure another renter. In Missouri, unlike our neighboring states of Iowa and Illinois, written farm leases can start and end on any date designated by both parties. This is another reason the length of the lease should be clearly spelled out.
Rental rates and arrangements are another essential part of a good lease. Rental rates are often determined by the going market rate for that area. Before arriving at a price based strictly on the area’s going rate, look at yield history of the ground. Some of this will be determined by the tenant’s inputs, but over time, especially with different tenants, a trend line should emerge. Knowing yield data benefits both the landowner and the tenant so the sharing of yields could be incorporated into the lease. When looking at a rental rate, from the producer side, determine how much can be paid for rent based on individual cost of production. Iowa State University Extension has a tool that does this and can be found at https://www.extension.iastate.edu/agdm/wholefarm/html/c2-20.html
From the landowner viewpoint, decide if this is a financial investment with the highest price in mind. On the other hand, are there other factors that make a difference, such, as does the tenant keep the farm looking good? Do they watch over the place in your absence? Are they responsive when contacted and communicate well? What is important will vary according to the situation.
Along with the rental price, the timing of the payment or share should be specified. For a cash lease, this is often twice a year, but could be once a year or other specified times like quarterly. The date of the payment and amount due each time should be in the lease. For crop or livestock share agreements, this could be at the point of sale or a set number of days after harvest or sale. The producer should keep an accurate record of expenses. Sometimes these are split according to the percentages throughout the year and sometimes they are settled up after harvest or sale.
Another key element is right of entry. A landowner will not legally be allowed to enter their own leased property unless this right is reserved. This is usually done for inspection of the property or to accesso another piece of ground not leased. This point is not one that is often a problem, but should be discussed so crops are not damaged or livestock riled by excessive entry.
If the landowner wants to reserve the hunting and fishing rights, that should be added to the lease. Otherwise, those rights are transferred to the tenant.
Operating expenses need to be clearly stated. In a share lease, expenses are typically shared the same way as the crop or livestock income. Ideally, it is best to spell these out to avoid miscommunication and so that those expenses can be tracked. Sometimes an expectation exists by one party in a lease, but is not written. A common example would be the tenant expecting the landowner to supply lime on pasture and hay ground. While this is a common custom for short-term leases, it is not required.
Conservation practices is another point of discussion. Will growing crops have to be torn up to build terraces or will wheat have to be planted for the landowner to be eligible for terraces? Is there a place to move the cattle, while a pond is built? Do we agree on the conservation plan or is there a reason for a certain rotation such as a persistent weed problem?
Improvements and repairs are a part of any operation. Determining who is responsible for the decisions and labor; who will pay for what; and when will they be done is important when entering into the agreement. Issues may include fence or facility concerns to rill and gully repair to the installation of wider gates for bigger equipment. If something comes up unexpectedly during the lease period, an amendment can be added to the lease if all parties agree.
A statement such as “this lease does not constitute a partnership” clarifies the relationship and affords some liability protection. Arbitration is another item to consider including in the lease. This allows a way to settle issues that the parties cannot agree upon. The intent is to avoid legal proceedings and finish the lease term.
In summary, a good lease involves clear and concise communication. It is easier to do this if the agreement is in writing. An excellent resource for written lease documents is https://aglease101.org.
Source: Darla Campbell, Ag Business Specialist