The leasing of land is defined as a financial agreement where the land is rented for an extended period of time.
Leasing land can provide a steady return to a landowner without them having to do the actual farming. This may be valuable when the majority of your income and commitments require you to be away from the property.
Leasing can also allow a person to get into farming or expand their existing business without the high capital costs of land ownership.
Length of the lease
The length of a lease can vary from a couple of months to several years. Longer leases can pose additional risks for both the landowner and the lessee (the person leasing the land).
For instance, if the price of land increases during the period of the lease, the landowner can miss out on potential income, or if the lessee has a poor season then the rental price may be too high.
Cost of the lease
The rental price depends on many factors including the location of the property, carrying capacity of the land, soil type and available water.
Before setting the rental price, it is a good idea to research past prices, seasons and yields and to draw up a budget to determine a fair price for both parties involved.
An economic valuation, which places a price on the pre-determined return and productivity of the land, can also be sought to help decide the lease price.
For the lessee, rent expenses are fully tax deductible. For the lessor, any rent received is not considered as primary production income for the reason of income averaging for tax purposes.
What to consider
When entering into a lease there are a number of things that both landowners and lessees will commonly provide.
For the landowner this comprises the land, buildings and fences; the payment of council rates and insurance on fixed assets. Alternatively, tenants will usually provide the labour, machinery and livestock, the operating costs, repairs and maintenance on fixed assets and the insurance for their machinery.
Tenants will also bear the responsibility for any accidents associated with their farming operations.
When determining the terms of the lease and the responsibilities of each party, legal advice should be sought. Below is some of the information that should be included.
Expenses
Expenses that should be considered include:
- price to be paid per hectare per year
- bond
- payment methods
- plan if rental fees are not paid on time
- legal advice (if sought).
Responsibilities
Responsibilities that should be considered include:
- paying power, water, gas, telephone and other utilities associated with the leased land
- maintenance of fences and watering facilities, including the supply of labour and materials
- weed control
- livestock monitoring (for example supplementary feeding and provision of clean water, and checking for wandering stock) and animal husbandry activities (e.g. drenching)
- unloading and loading of stock.
Restrictions on the property
Any restrictions on the property should be considered, such as:
- use of herbicides, fertilisers and other chemicals
- types of crops that can be grown
- buildings or other infrastructure not part of the agreement
- grazing of animals (for example stocking rate)
- type of livestock that can be brought onto the property
- the quality of supplementary feed to be brought onto the property (in relation to weed seeds).
Other details
Other details may include:
- option for lessee to appoint a local person to have access to the property to monitor the stock if they are unable to do it themselves
- description on how the property shall be returned at the conclusion of the lease (for example the condition of the pasture on the property or any improvements that need to be made)
- a dispute resolution process in case of a disagreement.
Lease defaults
A default on the lease can occur when either party fails to adhere to the terms of the lease.
A default may include:
- late rental payment or failure to pay utility bills
- use of chemicals or products that are deemed to be restricted on the property
- equipment not used or repaired as agreed
- overstocking of paddocks
- activities taking place that were not agreed to in the contract.
The lease contract should clearly define a plan of action in the event of a default and determine the consequence.
This may include compensation to either party, agreed replacement of damaged equipment or property, or termination of the agreement.
Leasing at a glance
A few key points about leasing:
- legal advice should be sought when drawing up a lease agreement
- consider the cost and length of the lease
- leasing land makes more efficient use of labour, land and capital for both parties
- landowners can retain ownership of land and still earn an income from it without all the hard work
- farming business can be expanded and/or diversified
- use of leased land needs to be considered by both parties — will it be for grazing, cropping, use of chemicals, machinery, weed control and other considerations.
What happens when the lease expires?
The lease agreement can also state each party’s intentions once the lease expires.
At the conclusion of the lease, the lease can be renegotiated and a new agreement drawn up to specify the new terms and conditions. This must still occur even if all details remain the same.
A first option to buy the leased land after the term has concluded can also be written into the agreement. An already agreed price is generally stated in the contract along with a note that the lessee has the first right to buy, but no obligation.
The agreement should clearly state whether or not the rent paid during the term of the lease is to be deducted from the overall purchase price.
Leasing land can be a great way to get into agriculture or expand your existing business without the high capital cost of purchasing land. For the landowner, it can also provide a steady income from land they are not currently farming.
However, before you enter into any agreement, legal advice should be sought to help determine each parties' responsibilities and in drawing up the final lease agreement.