Agricultural leases are an important tool heavily relied on by many farmers and ranchers across the U.S. agricultural industry. Because it is often difficult to own all the land needed to profitably operate a farm or ranch, leasing property provides producers with an opportunity to grow their operations without the added financial burden of purchasing property. These leases not only benefit the tenants who are putting the land into agricultural production, but also the landlords who receive a steady income stream from land they may otherwise not be using, especially in the case of absentee landowners. Like selecting the right tool for a job, selecting the right lease terms is equally critical.
Agriculture leases can be written or oral. Oral leases are often bound by a “handshake deal.” While many producers continue to operate under oral leases, a better practice is to memorialize all of the agreed-upon lease terms in a written lease agreement. If crafted correctly, the written lease will document the rights and obligations of each party with respect to the property being leased. If a dispute between the parties ever arises, one of the parties passes away or the landlord sells the property, the lease provides written, rather than oral, evidence of the parties’ agreement. Although the parties are free to negotiate a wide variety of terms, agriculture leases should, at minimum, contain the “Four P's”: the parties, property, period and payment.
Because the lease agreement outlines the respective rights and obligations of the parties, it is important to know exactly who these rights belong to and to whom these obligations are owed. Although it may seem intuitive, the lease should clearly identify the correct names for the landlord and the tenant. While many producers still own and operate their business in their individual capacity as a sole proprietor, it is not uncommon for farming and ranching operations to be structured as a separate and distinct legal entity, such as a limited liability company, partnership or corporation. Therefore, it is imperative the correct parties be listed in the lease agreement since they will each be legally bound to its terms. Along with the parties’ correct names, it is also good practice to include each of the parties’ contact information. This serves two roles. Practically, it keeps the parties’ contact information in one place in case one party needs to contact the other. From a legal perspective, it provides the correct address should one party need to serve a legal notice to the other party.
Next, the lease agreement should sufficiently describe the property’s location. This is commonly done by including the property’s legal description, whether by its section, township and range, or by its metes and bounds legal description. Some lease agreements may even include an aerial photograph of the leased premises. Regardless of the method used, it is also good practice to include the total number of leased acres for the purpose of calculating rent. While the landlord and tenant may both know which land is subject to the lease, including a written description of the property once again documents the actual area leased in case a dispute ever arises. And, if the parties decide to record the lease agreement in the county property records, this description also gives third parties notice of the existence and location of the lease.
The lease agreement should also specify the duration or length of the lease. There are generally two types of lease duration: a tenancy for a term of years and a periodic tenancy. A lease agreement with a tenancy for a term of years has a start and end date expressly written in the lease. For example, the lease may run from July 1, 2023, through June 30, 2024. Generally, neither the landlord nor the tenant is required to give notice to the other that the lease will terminate since it has a specific termination date. However, the parties are free to require some termination notice as a term in their lease agreement. A periodic tenancy, however, does not have a specific date the lease will terminate. The lease agreement will renew at the end of each lease term unless the landlord or the tenant gives notice to the other party of the intent to terminate the lease. The amount of time required to give notice to the other party of termination should be addressed in the lease but is generally between three to six months prior to the end of the current term. Providing notice of termination is just one example where the contact information discussed in the above section is used.
Finally, the lease agreement should specify the amount in rent the tenant will pay to the landlord. For pasture leases, tenants most commonly pay a fixed rate per acre. However, other methods of calculating rent could include a fixed rate per hundredweight per month, a fixed rate per pound of gain or a share of the total gain. Whichever formula the parties agree to should be clearly defined in the lease agreement. Along with the rent formula, the parties should also define when such payment is due, whether it is an annual, biannual, monthly or some other payment deadline.
Beyond the bare minimum of the “Four P's,” the parties are free – and generally encouraged – to add additional terms to the lease agreement. This could include stocking limits, fencing and gate obligations, hunting rights, insurance, property taxes, dispute resolution, indemnities or other negotiated-for terms. As with the terms discussed above, any additional terms agreed to by the landlord and tenant should be reduced to writing in the lease agreement. Because agriculture leases will continue to play a key role in farming and ranching operations, producers who are considering a lease agreement are encouraged to explore the resources available through their local land-grant extension office or consult with an attorney for guidance in the drafting process.