The Basics of Farm Leasing
Farm Management Update, August 13, 1996
By Frank E. Smith of the Department of Agricultural and Applied Economics, Virginia Tech
Any farm lease that is made should be written. The value of a written contract is in helping the landowner and the tenant think about and agree upon the essential considerations of leasing and operating the farm.
To arrive at an equitable lease, the interested parties should talk over the basic considerations involved in the leasing arrangement and in managing the farm. They should then make a contract, preferably written, based on the following minimum considerations: 1) names of parties and description of property; 2) term of lease; 3) rental rates and arrangements; and 4) signatures.
The length of the lease is important. The lease agreement can be for either one year or longer, as desired. Most agreements include an automatic renewal clause and also allow some flexibility in the terms of the lease if the parties under contract give adequate notice. However a long-term lease is often necessary to develop a profitable business because of the need for permanent capital investments. The tenant will not want to share in the investment in permanent facilities on a short-term lease. Usually, landowners favor a short-term lease on the basis that a longer-term lease lowers the market value of the farm because it cannot readily be sold. This problem can be solved by including a termination clause that would apply in the case of sale.
Basically, there are three methods of paying rent: cash rent, crop-share rent, and livestock-share rent.
Cash lease. The cash lease is normally uniform and relatively simple. The tenant pays the landowner a cash sum per acre or a lump sum for his or her investment in farm resources. For example, the landowner may have some restrictions on the use of land or fields for certain crops. Or, the agreement might state the degree of productivity to be maintained. Provisions should also state the amount and method of paying rent.
Crop-share lease. Characteristics of this lease are that each party receives a share of the crop as earnings for his contribution in agricultural land, labor and capital. Normally, crop-sharing involves crops such as corn, tobacco, vegetables, or Christmas tree/nursery crops. Remaining areas used in producing forages (hay and pasture) are normally cash rented.
The landowner's share of the crop generally depends on the contribution made toward production of the crop. When crops are divided 50-50, the landowner normally pays 50 percent of the cost of fertilizer, seed, and chemicals in addition to providing the land. In other instances, the landowner may or may not share in cash production costs and receives one-fourth to one-third share of the crop as a return to land.
Livestock-share lease. These leases vary considerably because of differences in contributions made to the business by each party. The owner normally furnishes land and buildings, while the tenant furnishes major portions of the crop machinery. Livestock is owned jointly. Production costs such as feed, veterinary and medicine, other livestock expenses, fertilizer, seed, and chemicals are shared equally.
Livestock machinery and equipment may be jointly owned. Labor costs are shared according to the agreement as are repairs and upkeep on permanent buildings. The landowner usually pays for construction of permanent buildings, or arrangements are made to reimburse the tenant in case the lease is terminated. Livestock and crop sales are divided according to the terms of the agreement.
Other sections which may be included in the lease are:
Additional agreements and modifications. It often is necessary to change or add to contractual arrangements, and one of the tests of a good lease is its flexibility for changing the operating plan. Any changes made after the initiation of the original contract should be made a part of the written contract and signed and dated.
The rental arrangement for each specific farm should be developed to fit the farm and the planned operating procedures. These conditions are known best by the landowner and prospective tenant, so they should work out the most satisfactory arrangement between them.
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