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Considering Leasing the Farm?
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By: David Haigh
Farm owners looking to retire or work less now see leasing as a viable alternative to sale. Leasing provides a fixed income and protection against the inevitable fluctuations in return in the farming sector. The farm is retained and the farm owner reaps the benefit of the capital gain during the term of the lease. Likewise, younger farmers or those needing run off land see leasing as an opportunity to build an asset base without the capital needs of ownership. It allows the tenant to increase productivity over a fixed term with flexibility as to size and location.
For the land owner, leasing is a major decision and requires clear boundaries to be set. The decision to give another possession of your farm and allowing them to farm it their way is not an easy one to make. It necessitates a loss of possession and control which is often tough to come to terms with. This is especially so if the land owner is to continue living on the farm as the tenant’s use and care of the farm will be within easy oversight.
The relationship between the land owner and tenant is governed by the lease. When it comes to documentation it is critical that all issues are out in the open and discussed. The lease is a binding document so it is very important to get it right the first time. Once the lease is signed, there is no going back.
There is no such thing as a "standard" farm lease. Although some specifics such as term, area, and rental must be addressed, other terms are optional and need be agreed between the parties.
The land owner may want to restrict the use of the land to certain farming activities. Allowing the land to be used for "pastoral farming" allows for very wide use. For example, does this allow the tenant to keep pigs on the property, or use the property for dairy grazing or bull fattening?
If the use of the property will place greater demands on the fertility, pasture or state of the property at the expiry date, then this needs to be considered at the outset.
In addition to the general position that the tenant pays the land owner’s cost of insurance relating to the property, the land owner needs to ensure that appropriate public liability insurance and cover under the Forest and Rural Fires Act is obtained relative to the permitted use.
This can often be a difficult issue as the distinction between what is maintenance and improvement (a capital expense) is important. The lease needs to clearly specify where the obligations lie. For longer term leases, often items of capital expenditure are agreed to at the negotiation stage and form part of the lease.
The maintenance obligations need to reflect the type of property subject to the lease. For example, if irrigation systems form part of the lease, who is responsible for maintenance?
What are the land owner’s requirements? The fertiliser requirements should be set relative to the tenant’s use of the property. For example, the fertiliser requirements will be greater where the property is used purely for a run-off block.
The land owner should have the ability to monitor that the fertiliser requirements are being adhered to, such as obtaining copies of invoices for fertiliser applied. Again, for longer term leases, consideration should be given to soil testing before the tenant takes possession. The results of the soil testing can then be used as the base fertility levels at the expiry of the lease.
Are there any specific limitations as to cropping that the land owner may require? In general, the land owner will require any cropped areas to be in permanent pasture at the expiry of the lease. In addition, what level of grass cover does the land owner require at the expiry of the lease?
Assignment / subletting
The land owner will generally require their consent to be given before the lease is assigned or part of the property is sublet. In some circumstances, the land owner may want to specify that there is to be no assignment or subletting.
If improvements are to be made to the property, for example building new cattle yards, who will own those improvements if the lease is terminated or on expiry of the lease? If they are to be purchased by the land owner, how is their value to be determined?
When and how are rent reviews to take place? The lease needs a clear mechanism to establish the new rental in order to remove any argument as to whether the correct basis has been used for establishing the new rental. More often than not this is an area where conflict develops, which can often escalate to involve matters outside the terms of the rent review. A clear rent review mechanism is a means of removing the possibility of conflict and maintaining a good relationship between land owner and tenant.
Where the tenant is to have the benefit and use of the land owner’s consent/s then the responsibility and liability in relating to adherence to the terms of the consent/s needs to be considered. If the terms of the consent/s are breached, who is responsible for the resulting claims or losses incurred?
The land owner needs to fully consider their future use of the property before possession is given i.e. does the land owner want to retain certain access rights for hunting, duck shooting, storage etc. If the lease contains a right for the tenant to purchase the property during the term or at expiry, has the land owner considered whether they wish to subdivide the homestead from the farm before sale? Careful consideration of all issues as they may affect present and future use of the property need to be addressed and documented.
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