Tips for Good Farmland Leases for New Landowners
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Tips for Good Farmland Lease Agreements
for New Landowners
Do Your Due Diligence.
Farmers should be professional–don’t waste time with farmers or aspiring farmers who aren’t. When searching for a farmer to rent your land, you shouldn’t necessarily agree to terms with the first farmer who contacts you. Instead, it’s a good idea to treat a farmer search like a job search, batching the best candidates, interviewing them for the best fit, and asking them for supporting documents like a reference list, resume, or business plan. Before agreeing to terms with a farmer, one question every landowner should ask is, “Is this farmer qualified and capable of taking care of my land?”
Use a Lease Agreement as a Communication Tool to Make Sure Everybody is on the Same Page—literally.
Often when things go bad between a farmer and landowner, it’s because the two parties had different expectations, and each person just assumed the other party agreed with his or her expectation. For instance, a new landowner who just bought a rural property may have different ideas about chemical use or manure use than a landowner who grew up in a rural area. Taking the time to review a lease, clause by clause, page by page, with the farmer can help set expectations and prevent a lot of headaches down the road. Although a lease is a legal document, it’s also a communication tool that both parties can use to make sure everyone is on the same page.
Don’t Jump into A Long-term Lease Too Soon.
In many ways, long-term leases are a win-win for both farmers and landowners. Long-term leases not only give farmers some security in their rented land base, but also ensure that their long-term investments in land, like fertilizer, lime, and cover crops, aren’t rented out from underneath them. Thus, farmers are often more willing to improve and invest in land when they have some surety that they will work that land in the future. Also, farmers may pay a premium for long-term leases compared to annual year-to-year leases.
That said, annual year-to-year leases have their place, especially when farmers and landowners are just getting to know one another. Because a long-term lease is a long-term commitment, it’s often a good idea for a farmer and landowner to have a “get-to-know you” proving period of at least one growing season or year, after which if both parties feel comfortable with how things are going, they can move to a long-term lease. Just be aware, in NC, any long-term lease over three years must be recorded with your local register of deeds for it to be legally valid.
Fair is Negotiable.
What’s a fair rental rate? It’s whatever the landowner and farmer decide is fair. That said, conventional pasture and cropland usually rents from anywhere from $30 to $100 per acre per year in North Carolina. And in some instances, landowners may rent land to farmers for “free,” just to keep the property from growing up—if you think about the cost of bush-hogging, there is certainly an economic value in that.
Also, for small-scale organic farms, where a landowner maybe renting less than ten acres, it’s not unusual for that land to go for $200 to $500 per acre per year, especially if there is infrastructure like barns, sheds, or irrigation in place, and the property is near an urban market. For information on rental rates, check out this NC FarmLink page with more in-depth information on rental rates.
Beware of Profit-Sharing Agreements and Bank-Rolling New Farmers.
One pitfall new landowners may fall into is the desire to help farmers out too much, especially new farmers. This new-farmer/new landowner combination can be especially precarious, as both sides “don’t know what they don’t know.”
Sometimes new farmers may ask landowners for a profit-sharing agreement. It some cases this could be fair, if farmers are also willing to share the expenses and costs of farming, but landowners should think twice about bank-rolling major farm purchases if farmers don’t have any skin in the game. It can take anywhere from 5 to 10 years for a farm to reach profitability, which is a long time for a landowner to wait for a return on investment—and plenty of time for resentment to grow.
Remember: if a farmer can’t pay a simple rental rate to lease the land, that could be a red-flag. A good young farmer should have more than just ideas, they should have a business plan for how they will achieve profitability—a business plan that doesn’t involve you bank-rolling their operation.
Include a PUV Records Disclosure Clause.
In NC, the Present Use Value (PUV) Program is a tax deferral program that reduces landowners’ property taxes if they have at least five acres of horticultural land (vegetables, berries, fruit trees, etc) or ten acres of pasture or cropland. When buying a property already in the PUV program, landowners have 60 days to apply for this program or else they must wait three years before they reapply.
Landowners must also meet an income requirement that shows that the land in PUV averages $1,000 per year per parcel in gross income from crops produced on that parcel. According to state law, property enrolled in PUV must be audited every eight years to ensure the property is still used for farm use and the income requirement is still being met. The income requirement does not allow rental rates to be used as farm income; instead, income is determined by the cash value of crops produced on the property, meaning farmers will need to disclose production information to the county tax office. Thus, it’s a good idea to add a clause like the following to a lease:
“The landowner shall be responsible for real estate taxes on the property. If the landowner is audited for present-use tax, the tenant agrees to provide the necessary documentation to the county tax office proving that the property is used for farm use and meets the income requirement.”
Include a Mediation Clause in the Lease.
The NC Agricultural Mediation Program is a program funded by the USDA that provides free mediation for disputes between farmers and landowners. It’s rare that a dispute over a farm lease ever ends up in court, but if it does it can be costly to litigate. Mediation with an objective third-party can prevent disputes from escalating to costly legal battles. An example of a mediation clause would be the following:
“In the event that a dispute occurs between the landowner and tenant, both parties agree to engage in mediation through the NC Agricultural Mediation Program, which is a cost-free mediation program funded by the USDA.”
Don’t Reinvent the Wheel.
You don’t have to create a lease agreement from scratch. In fact, there are lots of good lease templates that you can use to build a lease that fits your needs and situation. Feel free to mix and match clauses from the following lease agreements to fit your needs:
NC FarmLink Lease Templates (these are simple templates for less complicated situations and may provide a basic starting point for building a lease)
Simple Farmstead Lease (a simple lease template for renting a farmstead with both land and a house).
Simple Pasture Lease (a one page lease template for renting pasture to a farmer)
Simple Cropland Lease (a one page lease template for renting cropland to a farmer)
NC FarmLaw Templates (more thorough lease templates with many provisions and clauses)
Begin with the End in Mind.
Make sure you specify what condition the land should be left in at the end of the lease. For instance, if a tomato farmer is renting the land, the lease should probably specify that all plastic mulch and tomato stakes must be removed from the field and hauled off to the landfill by the end of the growing season and a cover crop must be planted.
When in Doubt, Ask for Help.
Here at NC FarmLink, we’re glad to help landowners and farmers with general advice on farmland leases, and we can often help you find resources to fit your situation. You can find NC FarmLink staff’s contact info online.
Still, there are times when you should consult an attorney, especially for long-term leases or leases with options to buy. Remember: an ounce of prevention is worth a pound of cure, and hour of an attorney’s time reviewing a draft agreement may be well worthwhile. Although you don’t need an attorney to craft a lease, it’s doesn’t hurt to have one review your lease if you’ve drafted it yourself or used a template. Also, NC FarmLaw has many resources and fact sheets on the legalities of farm leases.