Published: Jun 1, 2020 | Printable Version (PDF) |
Steve Richards, Charlotte Maxwell and Adam J. Kantrovich
LGP 1065
A farm rental agreement is similar to a lease, and these terms are typically used interchangeably. In a farm rental/lease agreement, the farm owner landlord agrees to grant temporary possession and use of their farm, to a tenant, for an agreed-upon time and rental amount. All contracts should be in writing in case any future questions or disputes occur. Many leases are similar, but please refrain from using a general template as each lease may require details specific to your situation or local laws. You will be best served by having an attorney help you write a lease agreement.
In addition to lease generalities (such as naming the parties involved and describing the leased property in detail), the following is a checklist of discussion items between farm owners and tenants for negotiating a farm lease agreement.
The length of time for the lease, the beginning and ending dates, should be stated in the contract. Usually, landowners favor a short-term lease because they can more easily change tenants or sell the farm. Tenants generally prefer a long-term lease so that they feel more secure in developing their businesses.
Landlords and tenants should consider current value, depreciation, interest, insurance, taxes, and maintenance when agreeing on a rental rate. There are two common lease payment types in agriculture: cash rent and crop share. Cash rent is the most common; the tenant pays the landlord a cash amount per acre or a total amount for the property involved. Crop share rent can take on a variety of formats, but the most common is where the landlord and the tenant agree to share both the crop expenses and crop receipts (revenue) in a specified manner. Crop share is more common in states where there is a requirement of “material participation” to qualify for special agricultural tax treatment.
Prevent misunderstanding by agreeing ahead of time as to which repairs are the landlord’s responsibility and which are the tenant’s responsibility. Minor repairs and upkeep, such as replacing a broken fence board or post, are usually the responsibility of the tenant. Major repairs to the leased property, such as barn roofs, are generally the responsibility of the owner.
Typically, capital improvements made by a tenant necessitate a long-term lease with provisions that they are reimbursed for the cost of the improvement if the lease is terminated before the end of the lease term. One of the most common ways to handle this is to match the term of the lease with the estimated “life” of the capital improvement (usually matching the IRS tax depreciable life). For example, a tenant drills a well on the land and estimates it will operate for fifteen years, so the lease is written to be for fifteen years. If the lease is terminated after ten years by the landlord, then the landlord would have to reimburse the tenant for one third (5/15) of the cost of the well (since one-third of the “life” is still left in the well).
Every farm lease agreement should include a statement giving the landowner the legal right to enter the property. Sometimes, the landlord is required to give notice to the tenant about their planned visits to the property.
A lease does not create a partnership. A statement of this nature is advisable in any lease form. Neither party will obligate the other party for liabilities or damages outside of what is outlined in the lease agreement.
Usually, tenants are not allowed to lease the farm they are renting to another business or individual. There are exceptions, for instance, allowing hunters to sub-lease the land during hunting season.
Some lease agreements spell out general management practices. These might include the number of consecutive years a field might be planted in a specific crop, re-seeding of hay fields, conservation measures, noxious weed management, maintaining drainage ditches, and so on.
Some government program payments are made to the participants who grow the crops; others may be made to the owners of the land who commit to certain practices. There should be an understanding of which party will participate in federal farm programs, including responsibility for eligibility and receipt of payments. It should also be noted which documents each party is responsible for providing to each other and appropriate government agencies for purposes of programs such as through the USDA Farm Service Agency (FSA) or the Natural Resources Conservation Service (NRCS). This may require one party or the other to file an FSA-211 Power of Attorney Form.
Is it clear who pays these costs? Landlords generally pay real estate taxes. Typically, landlords have casualty insurance on buildings, while tenants have renter’s insurance, and both parties should have liability insurance. If the tenant pays the property tax on behalf of the landowner, it should be considered a rent payment for accounting and tax purposes.
The lease may need to have provisions on how to terminate the lease prematurely for both the landlord and the tenant. Often, it is a good idea to add a clause that both parties can terminate the lease, without penalty, if they mutually agree to do so.
The contract should include a provision that helps resolve landlord and tenant disputes through mediation before going to court.
State if the lease is to be binding on heirs (if a party to the lease dies) or future property owners if the farm is sold.
For added security, some tenants like to have language that gives them first option to purchase the leased property, should the landlord decide to sell it. Both parties may also agree on a purchase price and make that part of the contract – making it a lease/purchase contract rather than a straight lease.
Landlords should always have a hold harmless clause in the rental agreement that states that they are not liable for the business activities on the rented property.
The agreement becomes a contract when it is signed. All co-owners of the property, including husband and wife, should sign the lease agreement. All co-owners of the business leasing the property should also sign the agreement.
When a hurricane strikes, the owner is covered with their property-casualty insurance and the tenant by their renter’s insurance. However, there may be a number of trees down, fences damaged, and a lot of debris clean-up. Specify how these costs will be handled between the landlord and tenant ahead of time.
The landlord may be looking for a break on their property taxes by leasing their land to an agricultural business. Agricultural businesses larger than ten acres (five acres for timber) can qualify for a special agricultural use tax rate on their property tax. 1 The benefit to the tenant is that agricultural land rental rates can be kept low. If you have questions about this special tax rate, contact your local tax assessor’s office.
Townships in South Carolina are increasingly looking to maintain or increase tax revenue. They are sticking to the rule book for qualifying property for the special agricultural use tax rate. The rules generally state that to apply for an agricultural use property tax rate, the landlord will have to show proof of a written lease, and the tenant will need to have a USDA Farm Service Agency farm number for that parcel of land. The steps to getting a farm number are shown below.
There may be special considerations for your farm lease that are not included in this checklist. Some agricultural leases have unique characteristics as well, such as those concerning perennial crop plantings (i.e., orchards).
For questions about contract law, please contact your attorney.
There is a checklist form that can be downloaded with the publication PDF file. There are additional land use and lease articles on the Clemson Agribusiness Program Team website.
Charlotte Maxwell, Agribusiness Agent
Horry-Georgetown-Williamsburg
Cooperative Extension
1949 Industrial Park Rd, Conway, SC 29526
P 843-234-7719
Cell 843-653-4942
Steven Richards, Agribusiness Associate
P 843-473-602
Cell 315-573-8632
The Clemson Agribusiness Center
Sandhill Research and Education Center
900 Clemson Road, Columbia, South Carolina 29229
P 803-788-5700
F 803-736-4418
This checklist was updated and adapted from a similar article written by Andy Dufresne, a retired Cornell Cooperative Extension Educator.
Steve Richards, MBA, Agribusiness Extension Associate, Agribusiness Program Team, Beaufort County Cooperative Extension Office
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Charlotte Maxwell, Agribusiness Extension Agent, Agribusiness Program Team, Georgetown County Cooperative Extension Office, Horry County Cooperative Extension Office, Williamsburg County Cooperative Extension Office
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Adam J. Kantrovich, PhD, Extension Associate Professor of Agribusiness, Agribusiness Program Team, and Director of Clemson University Extension Income Tax School
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Richards S, Maxwell C, Kantrovich AJ. Farm Rental Agreement Checklist. Clemson (SC): Clemson Cooperative Extension, Land-Grant Press by Clemson Extension; 2020 Jun. LGP 1065. https://lgpress.clemson.edu/publication/farm-rental-agreement-checklist/.
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