The Farm Lease

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Many land owners and farmers need information about leasing farms. In addition to the actual lease process, the information most needed often deals with the actual decision to lease. The following documents discuss those prospects. Also attached is a checklist prepared by Asel Kennedy (Monongalia County), that will serve as a quick document for discussion with your prospective lessee. A committee comprised of Dave Workman (Hardy County), Asel Kennedy, Jennifer Ours (Upshur County), and Tom McConnell have started a project titled, "Farm Lease Rates and Considerations." This work will establish an annual lease/rental rate for West Virginia farms.

 

THE FARM LEASE

Leasing your farm is a very important decision. To many West Virginians faced with this prospect, it means placing in someone else's care your life's work and homeplace. Emotion is involved in making the decision to lease the farm. You are caught between the hope of seeing the place used and not grown up and maintained, and the fear that it will be torn up and destroyed.

After the decision is made however, it is a straightforward business deal. There is value in what you're "selling," i.e., the use of your farm and its improvements. You as the owner/manager, should be able to maintain the farm as you wish and still enjoy income from it.

To get started, you must decide what you want to achieve from a lease agreement. Ask yourself questions like: Are there operations I won't tolerate? Are there fields I don't want plowed? Or, do I not want plowing at all? Are there enterprises I definitely want on the farm? Should I lease the buildings and for what uses? Should I lease my machinery? You must also decide what you want the leased farm to look like, e.g., just like it does now or are you not that "picky"? Will it really bother you if your upland pastures are not clipped? Do you care if round bales are stored in the field?

Early discussions with your prospective tenant can help determine your compatibility. If possible, a visit to your prospective lessee's farm will likely answer many questions about his or her housekeeping and management skills. Minor differences usually can be resolved. Major differences will probably tell you that this deal will not work.

 

Lease Provisions

A good contract is the key to communication about and implementation of a good farm lease. The only good lease contract is a written one. Every lease should include at least the following items:

1. an accurate i.e., legal description of the property and specification of the property to be excluded;

2. the names and addresses of tenant and landlord;

3. a definite term the lease is in effect and provisions for renewal or termination;

4. designation of rent amount, time, place and method (mail, delivered, etc.) of payment;

5. important details and conditions (for example, hunting rights, posting rights and responsibilities, fence maintenance responsibilities, driveway use, etc.); and

6. signatures.

Item 5 allows both parties the opportunity to secure previously discussed and agreed upon management practices and conditions of use. This will avoid later disputes.

 

Value of a Written Lease

With the inclusion of the above mentioned items, a written lease:

1. will not only protect the original parties, but the heirs and assigns. Your wishes will be protected in your absence.

2. has been through a process of approval and signatures. This better assures that both parties have read and understood the lease and agree with its interpretation.

3. will preserve legally the specific date of renewal and specific provisions for renewal.

4. furnishes the landlord proof of his share if the lease contains profit share provision.

5. contains specific language about a termination procedure.

Probably the most important reason a written lease is so helpful is it allows both parties the opportunity to refer to the contract/agreement so both can comply.

 

Lease Requirements

Your goal in leasing is to put the care of your farm in someone else's hands and still have your needs met. So it makes sense that you want a good lease. For the tenant and the landlord to be satisfied, however, and for the business relationship to continue, the lease must be useful. A useful lease must meet at least these requirements:

1. arranges for a fair division of income and expenses between landlord and tenant;

2. allows the tenant to farm profitably;

3. provides assurance that the tenant will be able to continue the lease for a period of years;

4. gives assurance to landlord that the value of his land will be preserved; and

5. provides for all legal requirements to be met, measured, and defended.

 

Legal Issues

Get your lawyer, banker and insurance agent involved!
The guidelines and example are to get you started. Your family attorney knows your situation and knows how to protect your interests.

Several questions you must get an opinion on include:

1. Liability - Will you be liable for the activity with which your tenant is involved on your farm? If so, does your farm policy liability coverage provide for this?

2. How much liability do you need? If you still have debt against your farm, how is it affected?

3. Does your tenant have insurance to protect him, and ultimately you, if his livestock gets out and he is held responsible for damage?

4. How does your insurance policy cover you and/or your tenant against chemical spills and/or underground storage tank problems?

5. Will your farm policy pay for your buildings when he is doing the farming?

Rent Determination

Once you have made the decision to lease, and you have started the process in consultation with your family attorney, you must make the second hardest decision: What is this farm lease worth?

Issues that will have a direct bearing on the figure include:

1. the production contribution the farm can make to the tenant's operation. Is the farm productive? Are the improvements efficient to his operation? Is there water? Are the fences good? Answers to these questions will determine the suitability of the farm to the tenant's operation.

2. the cash value of the farm. Does the lease amount reflect, to some degree, the market value of the farm? At one time, corn -belt farmland cash leases reflected farm market value based on a 20-year payback. But it must be emphasized that market value used to be tied to yield potential. Now it tends to follow another demand curve. West Virginia grassland enjoys great demand -- so much that an attempt to tie lease figures to farm value would make the farm impossible to lease profitably. A relationship, however, exists between farm value and rental/lease figures and should be factored into your final decision.

3. comparable farm lease amounts in the area. This may require some investigation. A quick study will reveal several different leasing relationships and costs. Careful consideration of what each figure means will help the landowner correctly interpret the information. The logical sequence of lease value pricing includes comparing the estimated production value with the market value in a way to see where your farm should be priced relative to the average paid in the area. It's logical to assume the most fertile farms with the best improvements will cost more to lease. All of this has to be tempered with the knowledge that a good lease must be profitable to the tenant.

Types of Leases

General leases vary as widely as the parties writing them, but fall into four basic types.

1. Cash lease -- tenant pays a specified cash rent for use of the farm and its improvements.

2. Crop-share cash lease -- landlord participates in decisions about land use, seed, and fertilizer. He may share in fertility cost, crop expense and maintenance of improvements. Rent usually ranges from a third to half of the grain yield. This agreement can be adjusted so that cash rent can be paid for other parts of the farm and crop-share used elsewhere.

3. Livestock-share lease -- landlord owns half of the animals, feed, and livestock equipment, and receives half the income. Here, as in the crop-share lease, the landlord has more involvement in the operation. He or she will see much variation in the income received due to the price variation.

4. Labor-share lease -- landlord leases a fully equipped farm to a tenant. This arrangement allows the landlord the opportunity to transfer the use and responsibility of the farm to a deserving beginning farmer. Careful record keeping is very important.

All of these lease types require the landlord to "pencil it out" and make his own decision.

Fertility Maintenance

Seldom discussed in farm leasing decisions is this last issue -- the "farm fertility" bank. Most crop leases stipulate that the same amounts of fertilizer and lime be applied annually. Grass farm leases often fail to include this important element. A simple way to ensure that fertility levels are being protected is through the use of a soil test on every field being used. This could involve a flight map or farm plan map, matching soil tests with each field identified on the map. The landlord could specify a regular time interval at which to run soil tests again. If levels are low, the tenant would be required to correct the deficiency

Summary

When a landowner considers becoming a landlord, he or she must:

1. - engage the family attorney;

2. - discuss lease provisions with insurance agent and banker;

3. - arrive at lease price, knowing there are many ways to value a farm and its usefulness;

4. - determine the lease type most appropriate to the situation;

5. - articulate special needs, desires, conditions;

6. - put it all in writing; and

7. - communicate with the tenant before and during the lease period.

5 Year Renewable Farm Lease

Asel Kennedy (Monongalia County)

This lease agreement is between ____________________________

and _____________________________ and is dated _________________.

________ acres of pasture @ ________ per acre

and/or ________ acres of meadow @ ________ per acre

This lease is for five years with an automatic one-year renewal on November 1 of each year, unless the lessor provides written notice. If notice of termination is given, lessee is permitted to remain on the premises until May 1.

Should the contract be terminated and the lessee has applied lime and fertilizer, the lessor must refund a prorated share of the lime, fertilizer, and spreading expenses paid, using this repayment schedule:

1st year....80% refund

2nd year....60% refund

3rd year....40% refund

4th year....20% refund

Lessee is required to produce sales receipts as proof of application of lime and fertilizer.

Lessee and lessor agree to use the following checklist. The following activities listed below are allowed or not allowed.

LESSOR ALLOWS YES NO

Use of buildings ___ ___

Plowing of ground ___ ___

Hunting by lessee ___ ___

Hunting by guest ___ ___

Fishing by lessee ___ ___

Fishing by guest ___ ___

Cutting of posts for use on farm ___ ___

Cutting of firewood ___ ___

Cutting of timber ___ ___

Maximum number of animal units ___ ___ ____head

Subletting of any approved use ___ ___

Restricted-use pesticides ___ ___

Maintain chemical use records ___ ___

Use of sewage sludge ___ ___

Temporary fencing ___ ___

Temporary structures ___ ___

Required liability insurance ___ ___ ____$

Full access to land and buildings ___ ___

Required to file with assessor for farm use ___ ___

Required to pay taxes on his possessions ___ ___

Required to maintain fences ___ ___

Required to control brush ___ ___

Required to reseed plowed fields ___ ___

Required to make minor repairs ___ ___

May graze meadows ___ ___ from____to____

Lessor _______________________________

Lessee _______________________________

Date _______________________________