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The Real Purpose of An Automatic Renewable Lease

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hand-signing-documentIf your leases have a clause that allows them to automatically renew each year, let’s make sure you are using that clause for the right reasons.

To be clear, many leases contain wording to the effect that after the initial or stated term of the lease, the lease shall be automatically renewed from year to year unless either party provides the other with written notice, usually within a stated timeframe, of the intent to terminate the agreement at the end of the existing term. This is typically referred to as “automatic renewal” or “evergreen lease.”

But what if your lease does not have such a clause? You should add it right away. This prevents you from having to get a new lease signed every time the current lease is set to expire, offering a small amount of protection and ensuring the written terms are still valid.

However, pay close attention to our verbiage: this clause “prevents you from having to get a new lease signed.” The purpose is not to let you just relax and not do what should be done. Generally, you should get a new lease signed. Ideally, a lease is multiple years in length. But this clause is to protect you if something unforeseen happens and you are unable to meet with the landowner or tenant in the appropriate timeframe for signing a new written lease.

Possible events that could prevent that meeting include the other party experiencing unexpected health issues like COVID-19 or having to go out of town for an extended period of time. Regardless of the reason, this clause is meant to be used as a stop-gap or a crutch, not a regular way of doing business.

But why is this the case? There are multiple reasons.

 

1) One-year leases present too much risk.

If all your leases are one-year contracts (which is what happens if you let all leases fall into the automatic renewable status and stay there) then you leave yourself open to the chance that they all become terminated in one year. While this scenario may be unlikely, it’s still a possibility. And if you have an incident of some sort that creates negative publicity for the farm—say an accidental chemical spill or someone gets severely injured—it is plausible that a competitor could persuade a certain number of your landowners not to renew.

The point is, there’s no use taking this risk when it is easily avoided by making sure you have written leases with staggering expiration dates spread over two to five years (or even longer).

 

2) Lease renewals force you to meet with your landowner.

You should meet with your landowner multiple times a year. One of those meetings should be a scheduled business meeting, so to speak, during which you discuss the lease, communication methods, potential farm improvements, and any number of other topics. Some farmers avoid their landowners, but landowners are your customers and, to maintain those relationships, farmers must become more customer-oriented. Meeting to discuss and renew the lease, if it is the year the lease is set to expire, should be a normal part of your business.

 

3) Your lease may need to be revised.

Another mistake that farmers often make is assuming that the type and terms of the current lease are what the landowner wants and needs going forward. This may be the case, but it’s important not to make any assumptions. If the landowner has had a change in circumstances, they might want or need a different type of lease or different terms in the lease. This could be shifting from a crop share lease to a straight cash rent to provide guaranteed income, or it could be a desire to have rent paid quarterly or even monthly instead of once per year to help them better manage their cash flow.

There are numerous possibilities, and it is the job of the tenant to meet with their landowners and get to know their needs and wants, then collaboratively assemble lease arrangements that effectively serve both parties. Writing a new lease upon the pending expiration of the current lease is the only way to do this.

 

4) It is simply good business.

Having up-to-date, written leases is simply a smart and prudent practice to have in your professional farm business plan.

Be sure to work with your attorney to have your lease reviewed to ensure it represents your best interests and is fair to your landowner partners as well. To learn more about the proper ways to manage your farming business and streamline your operations, subscribe to our blog. 

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Written By

Dave Bryden

Dave Bryden

Manager of Business Development | dbryden@familyfarmsgroup.com

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