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Where Agriculture Means Business

A well-written lease may be worth its weight in gold

The end of the calendar year is typically when a lot of farm land leases are up for renewal in the Northeast, making it a good time for producers and landowners to take stock of their agreements and make changes if necessary.

The majority of land leases in the Northeast remain good faith “handshake deals” without a written lease. That’s true especially with leases for bare farmland, though written leases are slightly more common with properties that include buildings or facilities that are used for production, like machinery shops and barns.

What goes into a good written lease

It’s important to think of a written lease as more than simply the document that mandates the terms of a land lease. A written lease starts with outlining the key parts of a lease agreement — start date, end date, financial compensation/payment terms and what happens if the lease is prematurely terminated or the terms aren’t met — and should be seen as a mechanism that facilitates communication on those lease terms and how they affect both landowner and lessee. It not only clearly spells out terms of the lease, but it also creates an opportunity for dialog between landowner and lessee on things like rental rates, field operations and any improvements either party can make to the rented land or facilities. These topics can often be tough to have conversations about without a written lease as a guide.

Written lease solutions

Putting a lease down in writing doesn’t eliminate all the problems that could pop up during the terms of a land lease, but it can minimize them. A written lease can prevent misunderstandings that can come up during the lease terms. For example, if a renting farmer employs a custom fertilizer applicator, those arrangements can be outlined in the written lease so the lessor knows that the custom applicator may be on the leased land from time to time.

Outlining things like this helps prevent circumstantial misunderstandings like these that can lead to the termination of a lease. In other words, a written lease helps provide protection for the tenant by addressing key parts of how he or she will manage the leased land while keeping the landowner apprised of what might be happening on the land.

While writing down a lease may seem like a time-consuming and sometimes costly process, the outcome is valuable to both parties. In general, the higher the dollar amount of the lease, the more important having a written lease becomes.

When a written lease is needed

Lease terms should always be written down. A lease is a contract and it is generally a good idea to have the lease reviewed by an attorney. If you are leasing land from a family member or business partner, for example, a written lease is critical to avoid inadvertently creating a partnership that could have additional tax implications.

The same is true when leasing land from different business entities you own in order to avoid any additional tax liability. If a producer has different business entities for his or her operation — a land-holding corporation and separate operating corporation, for example — that structure was likely built for tax planning and liability purposes. If land is rented between those business units via a “handshake” lease without the documentation a written lease provides, there may be negative tax consequences.

Finding the right terms

When revisiting a lease to prepare for renewal, it’s a good time to review not just these types of terms, but the lease price itself. In some cases, years or decades may pass between when the lease is established and when its terms are revisited. When renewing a lease, it’s important to adjust prices to account for current market conditions and ensure they are appropriate for both lessor and lessee.

If the lease price hasn’t changed in 20 years, a simple bump in lease rate may be justified. And, that bump may be the difference in renewing that lease if or when the leased land has a change in ownership. If a price bump makes that land unattainable from an expense standpoint, it could foreshadow more structural issues within an operation.

Though written leases are not as common as “handshake agreements” for Northeast farmland, writing down at least the most basic details is a good idea when revisiting those agreements at year-end. Looking for help in drafting a lease? Contact your local Farm Credit East office.

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