Lease Agreement Considerations for Farmer and Landowner
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[Editor’s note: the narrative below is printed in the draft publication So You Inherited a Farm. An accompanying lease template – which includes an option to purchase – is also printed in that workbook.]
Many farm tenancy arrangements are based on family or neighbor relationships and are often not in writing. Because land changes hands through sale, gift and inheritance, such verbal arrangements create uncertainty regarding the farmer’s tenure – and investment in – the land. Arguably, a verbal ‘permission to farm’ made by someone now deceased is not renewable under the state agricultural tenancy statute, which provides for no such succession of verbal permissions, only protection from ouster in the year such permission was verbally granted. That said, land changing hands between generations provides opportunity to change the way farmers and landowners have been doing business together.
Heirs and legatees inheriting rights in land may want to hold on to title but are seeking a more formalized agreement with the farmer who has been tending the land. In this changing demographic environment – with more landowners living out of the area – it is to the farmer’s benefit to have a more secure tenure relationship than the traditional handshake.
[Note, this narrative refers to the farmer working the land under written agreement as a Lessee, whose interest is a leasehold. A farmer without a written agreement is a tenant, whose interest is nonetheless protected by statute for the crop year]
Basic Types of Leases
In North Carolina most rental arrangements are for a set price per acre for a set time, normally per year. The farmer pays the landowner the total of the rate per acre multiplied by the number of acres farmed. Under this arrangement the lessee bears most of the costs – and thus most of the risks – of preparing the land for production and growing and harvesting the crop. Thus, the lessee still owes rent in the event of crop or market failure. Some cash leases provide for an amount paid tied to the price of the crop, actual yields, or a combination of both, and can offer a lower base rent to protect the farmer in bad years while rewarding the landowner in better years.
A crop share arrangement – more common in the Mid-Western United States – allocates risk between landowner and lessee, splits the costs and the proceeds of production according to agreement. Share leases can give the landowner a specified share of the crop (which the farmer can buy for a set price or the landowner can sell on the open market), so when the farmer does well the landowner does well. Though crop shares have elements of a partnership venture, NC law is explicit that such leases are not to be considered partnerships.
Thoughts for Landowners
There are several issues to consider before the landowner enters into a lease to create a multi-year working relationship with a farmer, either someone in their family, a neighbor, perhaps someone new to the area. For those landowners without experience renting or leasing land to a farmer, this narrative is meant to provide some ideas and elements for putting together an effective farmland lease agreement that provides clarity and tenure security.
A landowner should take stock of their land and take a look at what they have to offer, as well as consider their goals for the property. Determining the amount and quality of land available – even if under current verbal tenancy – is an obvious place to start. Keep in mind that not all land is created equal, and rent comparisons are difficult, particularly outside of the larger open areas of Eastern North Carolina.
Poor land, very small parcels, or land with poor access and/or obstructions may not even be worth considering, as these may be too difficult to farm and may be better suited to forest management. Parcels too small to accommodate ever larger planting and harvesting equipment, yet remote from direct market opportunities may not be marketable for farming use. If it has not been farmed within the past few years, the work (cost) to rehabilitate it may be considerable.
Landowners can turn to several sources to “discover” their land if indeed they do not already have a recent relationship with it. Many will have recreational relationships with their parents’ land (e.g. hunting, fishing or horseback riding), but may be less familiar with how it is managed for income production through farming or forestry. Landowners can inquire for their records through the county Farm Service Agency (FSA) office, which may include crop production history, aerial photos, NRCS program participation. Google Earth is a great way to get a recent aerial view of your land in great detail. Landowners can also request assistance from their county Cooperative Extension service who may have a working knowledge of how their particular parcel has been managed over the years, or the county Conservation District office, who might be available to walk the land and point out important soil and hydrological features, as well as certain restrictions pertaining to environmentally sensitive tracts of land.
Probably the best first person to help educate a new landowner about their land is the farmer who has farmed it. In many cases, this will help lay the foundation for a continuing, if more formalized, legal relationship.
For the landowner, a clear appreciation of values, goals and needs – as well as their own desired role in decision-making – for the farm will form the foundation of work on the agreement with someone who will farm it, whether that person is related to the landowner by blood or not. Below are a few points to consider from the landowner side of the agreement:
The Written Lease
Lease agreements for farmland or other real property assets are always in writing; verbal non-written arrangements are subject to statutory definition and enforcement (See Verbal Farm Tenancies in North Carolina). The limited advantage of an oral, annual agreement is that the agreement can be terminated at the end of the season at landowner discretion, provided sufficient statutory notice is given. While flexible for landowner, such arrangements create instability for farmers, particularly if they need to make medium-term investments in the ground to ensure best yields in the current season. If the landowner has inherited land subject to a written lease, they should request a copy from the lessee and review it to understand the term and limits of the tenancy.
The language used by the farmer are those of their profession presents a learning curve for many landowners, terms that have everyday meaning to him or her. Landowners should not fear appearing at a disadvantage in asking even a basic question, as the interplay of education should help strengthen the basis for agreement.
Be flexible (and clear) on involvement
Most often, landowner involvement is passive. In some cases though, personal values that the land be farmed and well-taken care of will drive a landowner’s desire to rent the land to a particular type of producer, perhaps one with a certified organic marketing plan. For those landowners particularly enthusiastic about emerging local food systems and environmental stewardship, they should be prepared that a farmer may have concerns with sharing daily operational decisions if the landowner has no farming experience to offer. For thise folks it may be best to consider the investment of land into the rental equation as the contribution, and defer to the skills of the producer in managing that contribution (again, subject to the landowner’s goals, etc.). Even in share-lease situations, the landowner should understand that a lease is not a partnership and should not entitle them to to weigh in on day to day decisions (unless both have so agreed), this is a breeding ground for frustration and disagreement.
Stay informed of market conditions
This applies to both the market for land rents, as well as what is going on with either commodity prices or input market conditions. The landowner should be prepared to respond to the situation where the current rental rate agreement is jeopardizing the farmer’s operational abilities. Also, if the landowner feels rent is low in a period of rising commodity prices, they should consider that many of the farmer’s inputs may rise with crop prices, so a lessee’s margin for increased rent payment may still be limited.
Schedule annual meetings
The landowner should annually plan for a business meeting with the farm lessee to overview the season that has ended. Here is a place to raise issues that lessor and lessee want to bring up about the condition of the land and important changes that will have an impact on the next year. If there is something the landowner sees they have questions about or want addressed, this is the time to discuss it.
Weigh new offers rationally
Smooth working relationships between farmers and landowners can span generations. A stable farm lessee, when a landowner considers their management options for the land, should be considered an asset. Landowners should therefore be reasonable when offered a higher rent and improvements by a new and untested lessee, and allow the current lessee to address any issues where their work may appear deficient compared to what someone new is offering. In some areas, competition for land can be fierce, and though the landowner may strive for a higher monetary return from the land, a revolving door of lessees may have costs that exceed any marginal increases in rent.
Basic Elements of a Lease Agreement
Below are the very basic elements of a lease agreement. As alluded to earlier in this narrative, there are many variations of the themes below.
Identity of the parties
The lease must be signed by the actual owner(s) of the property or those with proper authority to bind the property to the terms of the lease. Keep in mind that property that has been inherited may have more than one owner. If property is held in a trust, the trustee must sign. If land is held in a limited liability company, the person with management authority must sign. Failure to secure the signatures of the proper owners leaves the lease vulnerable to being voided by owners who did not consent to the agreement.
Description of property
The property description in the agreement identifies the land both parties intend to be farmed. The lease should identify the land area, buildings, and equipment (if applicable). Land can be described by inserting appendices to the agreement (properly referenced in the document) that contain either the deed description or a portion thereof, and/or aerial photos of the property from FSA or county Geographic Information System (GIS) website or Google Earth, with fields and access marked on the photograph. Access should clearly be set out, especially where access crosses other land or to structures not in the leased premises.
Term of lease
The lease should specify when it begins and when it ends. In coming to an agreement, the farmer will readily be able to calculate the amount of time necessary to recoup their input investments in the land. Multi-year leases can offer a set term that binds the property for that period, with a renewal clause that should be clear on how renewal takes place or notice of termination is given (ie. time period and manner). For example, it is probably reasonable to both parties to allow a minimum six-month period to announce an intent not to renew a three-plus year lease.
Amount and terms of rent
For a cash rent lease, the amount of rent is normally paid in one payment by a particular date which vary (traditionally, rent was paid at year’s end from crop proceeds). For more diversified operations with earlier market harvests, the parties can agree to an installment schedule for preparation of the land, spring crop harvest and fall crop harvest. Determining a fair rate is often a challenge, but there are several methods to consider.
Allowable and prohibited uses
The lease normally limits use to agricultural production. Some landowners may want to specify prohibited uses, such as chemical application. Landowners should consider the practicalities of limiting certain activities that would otherwise reduce the productivity of the operation. Remember that all prohibited uses can be qualified by written consent if the lease so declares.
Below is a partial list of use issues to address:
- The lease should address protection of conservation program features, including buffers and grass waterways.
- State and federal regulations and laws should be incorporated by reference. If the landowner will allow application of chemicals (pesticides, herbicides, etc.) to be applied to the land (indeed essential to many production areas), the lease should state that only EPA approved chemicals be used and applied according to federal and state regulations. (Chemicals are one issue in support of an indemnity clause should the landowner get caught in a pesticide dispute with a neighboring farmer.)
- If the landowner intends to reserve mineral rights to the property, extraction activities such as removal of sand or gravel should also be expressly prohibited.
- Though the creed of any good farmer, it is prudent for the landowner to require the property to be left in the same condition as when the lease began, and include a redress for documented damages to the property (a photographic baseline can be made at the beginning of the lease). Though a prudent would-be farm lessee will have inspected the land, the soils and water availability before choosing to farm that property, the landowner should make clear that he or she offers no warranty as to the production capabilities of the land.
- Any land clearing should be discussed beforehand, and burning should be reserved to consent of the landowner upon showing of proper permits if applicable to the area.
- The lease should address whether the farm lessee or his or her family will have hunting rights on the property. If so, hunter limits and insurance should be addressed.
Repairs, maintenance and improvement costs
Maintenance of property should be allocated between the parties, including responsibility for routine repairs and those caused by extreme weather events or fire. Be sure to list items such as fencing, gates, wells and drainage pumps, etc. In many farm situations there are structures that the Lessee installs but intends to remove, such as hoop houses, moveable cattle fencing, etc. Be sure to identify in the lease that these are not fixtures and the Lessee will be removing them at the end or termination of the lease for clarity (though these items are removable as trade fixtures of the farmer/lessee). Likewise, if items such as grain bins are anchored to cement pads and such, be sure to agree what happens to the bin and the padding at the end of the lease, whether it is left in place or the Lessee must dig it up and repair the ground.
Rights and obligations of both parties
Issues that can be addressed can include prohibitions on the right to sublease, payment of utilities, right of entry and inspection by landowner. A statement binding the heirs and assigns (ie. subsequent purchasers) to the terms of the lease agreement should be included (see Recording of Lease Memorandum below). The lease should also contain a clear indemnity clause, requiring parties to pay for liability attributed to one party for the actions of another. It is common sense to require that both parties keep insurance policies at a designated level for just such a purpose.
Termination of the lease and default
Default means that one of the parties has not lived up to the obligations attributed to them in the lease. Numerous events can trigger default: failure to pay rent, failure to abide by any use prohibitions, maintain liability insurance, comply with laws and regulations, bankruptcy, etc. Default does not necessarily trigger termination, but should trigger a process for recognizing and curing the default if possible. If the default cannot be cured, a process should be spelled out for repossession of the property by the landowner, including reserved rights to crops and removal of personal property by the farmer. Disagreements should be subject to a clear dispute resolution process such as a mediation requirement. (For absentee landowners, be cooperative and do not insert any litigation venue clause inconvenient to the land and farmer.)
Payment of property taxes and insurance
Though many landowners might agree to a rental rate that covers their carrying costs (property taxes and insurance) on the land, be sure to spell out who has responsibility for these expenses (the landowner is responsible for taxes and insurance on the land).
A common type of farm lease – particularly where the lessee farmer is individually a co-tenant on the land or an entity owned by the landowner(s) – is a “triple net” lease. The three payment obligations under this lease are the rent, the annual property tax bill, and the cost of liability insurance on the land (which may be distinguished from a liability policy for the farm operation.)
Lastly, the lease should contain a clause requiring the lessee to provide information on income when requested, if not to the owner, to the property tax office. This is to ensure that the landowner can provide proof of farm income to keep land enrolled in the present use value property tax regime when audited for compliance by the county.
Recording a Lease Memorandum
A written lease of any term is an enforceable contract between the lessor and lessee, as well as successors of either (particularly if the lease so states). However, under NC statute, a lease for a term in excess of three (3) years is not enforceable against lien creditors or a purchaser for value of the leased property.3 This means a lease for 5 years is enforceable by farmer/lesee against the heirs of the original lessor until the end of its term; however, if the heirs were to sell or otherwise put up the property as collateral for a loan (and thereafter foreclosed), the lessee is without recourse to remain on the land. Additionally, unpaid property taxes pose a threat as well.
To signify the lease, a lease memorandum may be recorded in the county register of deeds that need not disclose the rent amount, but must disclose the following:
(1) The names of the parties thereto;
(2) A description of the property leased;
(3) The term of the lease, including extensions, renewals and options to purchase, if any; and
(4) Reference sufficient to identify the complete agreement between the parties.
The statute provides a form of memorandum for recording, and an example is provided on a page following the lease example following this article. The lease example provided following this narrative includes the basic terms of an option to purchase the property subject to the lease, which must be noted in the memorandum.
If the lease agreement includes a residential dwelling and includes an option to purchase the dwelling, such documents and memorandum have more specific requirements.
General Guidelines for Lessees
For farmers, particularly newer farmers, take a look at what you have to offer. Be clear about what type of farming you want to do on the land. You should be prepared to answer basic farming questions. Landowners – especially new purchasers or inheritors – may be extremely inquisitive about your farming practices simply because they may not be familiar with agriculture. Indeed, if you have been farming the land for a time, you may have had a fairly straightforward verbal rental arrangement with an elderly couple, perhaps a retired farmer, then his widow, now only to find that those who have inherited the land are raising new questions about production practices and rent. Farmers may consider that the inquiry may bring changes to how they have operated the land, and should be prepared to offer a basic and open education in farming practices. Remember that a little education will go a long way in creating a satisfying longer-term relationship with a supportive landowner.
The end goal for most farmers is a delicate combination of stability, affordability and flexibility. Many of the suggestions below for farmers are soft approaches, but experience has shown that solid relationships can sometimes transcend economic and competitive issues normally associated with how much rent you can pay for use of the property.
The Lessees Perspective
The following points should be included in the farmer/lessee’s landholding strategy:
Ask for a written lease
Oral leases can provide opportunities for disagreement, even based on innocent misunderstandings, which once crops are planted become more difficult to resolve. Further, your investments in the land – such as a three-year lime application – are not protected under an annual oral lease, only your right to harvest planted crops is protected by state statute. North Carolina law requires that leases (or referring memorandum) of three years be recorded in the county deed registry to be valid against transferees of the land. Many successful farmers have a form lease that they have developed to present to landowners as a basis for discussion.
Clear language will resolve many issues, but a lease can also provide a dispute resolution scheme for when disagreements occur due to actions of either party during the lease. Further, should the land change hands during the term of the lease – due to death of the landlord or sale or gift of the property – a written lease offers protection to the farmer lessee. It is a good idea to record lease memoranda of any term length with the county Register of Deeds in order to warn purchasers of the land that there is a lessee with farming rights on the land. (Note: in order to protect the confidentiality of elements of the agreement, such as the rental rate, a Memorandum of Lease can be recorded to satisfy this requirement).
Provide a resume
When approaching landlords that you have not worked with before, you should provide an overview of your farming operation and experience, including philosophies on production practices, business objectives, education, tillage practices, equipment use, financial strength and other land tenure relationships. Some prospective landlords might not agree with your philosophies and practices, so it is good to know earlier as this will only cause problems in the arrangement as time moves forward, causing stress on the success of the operation.
Agree on a cropping plan
Open dialogue early on a cropping plan, which should include input and field operation specifics. For new and/or younger farmers interested in smaller-scale, high-intensity production for direct market, be prepared to have your business plan ready for review. You must build this landowner’s confidence in your ability to continue a business on their land.
Keep communication open
Providing regular updates on crop conditions, markets, and planned activities such as cropping and harvesting, conservation implementation (if authorized), general cattle rotations, etc. will help visiting landowners (who will sometimes visit the property in the farmer’s absence) understand changes they are seeing on their property. A report can give you a baseline to refer to when asked later about something they have seen happening on their property. Consider including cost information in these communications, as this will help the landowner understand certain issues that may become relevant regarding rent amounts, landowner contributions (if applicable), etc. When on-farm problems occur, notify the landowner.
Educate the landowner
As noted above, just by virtue of time and rural demographic changes, more farmers will be working with more non-farmer and absentee landowners. Ohio State’s Moss and Erven suggest regular mailings of farm journal articles and even developing a website which can both educate the landowners and their potential heirs while demonstrating the farmer’s interest in their knowledge. In some cases, particularly nearer to urban direct markets, it may be helpful to educate the landowner in how their land is part of a larger farming and food system, one in which they are a key player. Some inheritors of land, themselves urban dwellers with an interest in “local foods,” express the interest that their land be farmed “organically” without understanding the technical nature of the term. Your ability to provide them with a bigger picture, while helping them understand the “technical” nature of organic production may serve you well.
Improve the farm
Experienced farmers often state a goal of leaving a farm in better shape when they got it. The farm’s appearance – maintenance of roadways, fences, clearing brush around old houses and structures – is usually the first impression other landowners get of the farmer’s reputation in the neighborhood, which will correlate directly to the perception formed on that farmer’s abilities and value as a land manager. Consider this a visual resume of your abilities.
Pay attention to the current owner
Acknowledging life events – holidays, birthdays, the passing of close relatives – of landlords improves a farm lessee’s longer term access to the ground. When receiving honors for conservation or other practices, it sends a strong message – if the venue is right – to also invite and recognize the landowners you work with.
Don’t forget about the future owners
Land is going to change hands, in many cases sooner rather than later. This workbook encourages owners of land to engage their families (ie. children or other potential heirs) if planning needs to be done for the future of the land. Farmers should look for ways to include the “next generation” owners where possible in their passive communications with the landowner while being sensitive to established lines of communication within the family.
As a practical matter, a lease is only as good as the parties’ willingness to enforce it in court. The more thorough and open the agreement process, the less likely a disagreement will occur in the first place. Although it is likely impossible to build a lease agreement that will provide for all contingencies that might occur, both parties should try to anticipate foreseeable occurrences and identify the procedure for what the parties do should something unforeseen occur. Because both landowner and farmer benefit from a written lease agreement, both should take care in developing an agreement that supports each other’s goals.
Content loaded to Agricultural and Natural Resource Law portal, including this narrative, is supported by The North Carolina Tobacco Trust Fund Commission (TTFC) (Grant award 2019-001-16), titled “So You’ve Inherited a Farm: An Heirs Guide”).