As a farm operator, you may never have taken the time to think critically about each of your lease agreements. By thoroughly understanding your lease agreements and how they may or may not benefit you, you can take important steps toward greater profitability for your farm business. Whether your renewing an existing lease or adding acres, consider these factors before signing your next lease.
Is a crop share, straight cash, or a flex lease the best for the landowner? How do you know: did you talk with them about it? Which makes the most sense for your operation? Be sure both you and the landowner understand the advantages and disadvantages of the various lease types before you move forward. The 3 most popular forms of leases are
- A crop share lease, depending on its structure, ensures a certain amount of fairness because cost, risk, and profit are typically shared between landowner and tenant. This type of lease requires a great deal of record-keeping as well as great communication and cooperation between the two parties.
- A straight cash lease is very simple by comparison. The landowner enjoys guaranteed income, and the tenant has broad freedom to control their operation. Variability in yields and crop prices, however, can make a fair price difficult to determine. As a result, it may be best to negotiate rents annually.
- A flex lease combines a little bit of each of the other two types, providing for a base rent plus the potential for additional rent based on yield and/or market prices. Although simpler than crop share leases, flex leases must be carefully constructed to ensure fairness to both parties.
A lot of variables play into what constitutes fair lease terms. The amount of labor and other resources you must put into one piece of land and the yield you can derive from it can be very different from another piece of land that’s similarly sized. As a result, a true “going rate” can be difficult to determine. In fact, the “going rate” is a misnomer. Be sure to consider these factors when reviewing the terms of your leases:
- What is the farmability of the land? Consider access to the tract of land as well as its shape, size, location, and the level of maintenance it requires.
- What payment dates would be most advantageous each party?
- What restrictions does the lease place on your land use? What maintenance does it require you to perform?
- If you’re adding a new parcel of land to your farm, what needs to be done to bring the land up to your standards? This may pertain to fertility and soil tests, fence rows, ditch work, irrigation, terraces, waterways, or other items.
Although it’s the simplest thing to do, avoid using a lease produced for someone else or for general use, such as a university lease. If you’d like to use such a lease as a template, make sure to get rid of any language that isn’t relevant to your situation, and have your attorney review it and be sure it represents your operation professionally and contains your farm’s name and logo at the top of the first page. This extra bit of professionalism will be noticed. It’s also important to be sure that your lease complies with all of your area’s local regulations. These can include obscure restrictions that few people are familiar with. FamilyFarms Group provides state-by-state guidance for navigating these requirements to help you ensure that your leases are valid and enforceable.
It’s also important not to assume that the lease you sign one year will be the same as the one that you’ll sign the next. Circumstances and conditions change from year to year, so make sure to revisit each party’s choices and preferences each year.
- Does the lease type still make sense for both landowner and tenant?
- Is your landowner handing over control to heirs in the near future? Will payments need to be sent to a different person?
- Is the payment schedule still advantageous to both parties?
- Does the level of communication you’ve had with the landowner in the past still make sense for the coming lease period? Is more or less frequent communication appropriate going forward? Do the topics of communication need to change?
- Does the landowner plan to make changes to the land, such as adding or removing buildings, tiling, or even selling the land?
FamilyFarms Group Can Help
There are many other factors to consider when entering into lease agreements with landowners. For help ensuring that your leases are serving your farm business’ needs and supporting mutually beneficial relationships between you and your land partners, contact the experts at FamilyFarms Group. We provide financial training and advice for members across North America, helping families to stay on the farm. Our 20-point landowner relations program can help you take exceptional care of your landowners. Contact us to learn more, or click the link below to request a free needs assessment.