Mary SobbaAgriculture Business Specialist

Equitable Leases and Business Agreements

Disclaimer

I am not an attorney.

This presentation is for information only and is not a substitute for competent legal counsel.

Definitions

• Contract – an agreement between two or more parties (offer, acceptance, consideration)

• Lease – a contract granting use of property during a certain amount of time, in exchange for something

Types of Contracts

• Oral

• Written

• Cash

• Crop Share

• Flex Rental

• Recreational• Livestock• Building & Equipment• Timber

Reasons to Lease

• Land is an expensive resource

• Return on investment

Oral Leases

• Tenancy at will (<1 year)

• Periodic tenancy (year-to-year)– Continuous unless termination notice

• A verbal lease for longer than one year is invalid under the statute of frauds.

• Farmland is in a year-to-year tenancy

The tenancy begins on the day of the verbal agreement,

NOT on the day possession is given.

Oral Lease Termination

Under Missouri law:

• Written notice to terminate

• Month-to-month tenancy– One month’s notice required

• Year-to-year tenancy– At least 60 days notice before

the end of the lease

Oral Lease Problems

• Establishing the starting date– NO “standard” date

• Invalid lease

• Sale or Death

• What did you say?

Oral vs. Written Lease

• Leases are legal contracts – State specific– Average tenancy is 12 years– 35% of leases are written

• Agriculture is changing• Good business practices• “Trust” issues

Written Leases

• Increase in absentee landowners

• Be proactive, not reactive

• FSA requirements– Crop-share vs. cash rent– Risk in growing crop

• Tax issues– Material participation

Five Essential Parts of a Lease

1) Names and description

2) Terms of lease

3) Rental rates and arrangements

4) Right of entry

5) Signatures and Dates

The “Complete” Lease

1) Names and description

2) Terms of lease

3) Rental rates and arrangements

4) Operating Expenses

5) Conservation practices

6) Improvements and repairs

7) Records2002 Farm Bill

8) No partnership

9) Right of entry

10) Arbitration

11) Additional agreements

12) Signatures and Dates

Goals

• Highest potential return in both short and long run

• A fair return to each party

• Continuity of income from year to year

• Meeting Conservation Compliance requirements

Examples:

Goals

• Tenant who will take care of property

• Freedom from management and marketing

• Peace of mind

Examples:

Next Step

Developing a lease which will combine the goals and resources of landlord and tenant into an economically acceptable package for both parties.

Choosing a Lease Type

Communication is the key to good leasing.

Cash Lease - advantages

• Simple

• Owner doesn’t have day to day decisions

• Owner has very little financial risk

• Tenant has freedom in choosing what to plant and rotation

• Tenant has fewer records to keep

Cash Lease - disadvantages

• May need to be renegotiated each yr• Cash rents may be too low in times of rising

prices and increasing yields and too high in times of low prices and low yields

• Tenants are required to supply more operating capital

• Tenants bear all price and yield risk

Cash Rent

• What’s a “fair” rate?– Share of gross income

(35-40%)

– Production capability

– Crop-share equivalent

– Percent of land value

– Other expectations or responsibilities

Crop Share - Advantages

• Price and yield risks are shared equally

• Owner is more involved in operating decisions

• Both parties benefit from new technology

• Farm payments are shared

Crop Share - Disadvantages

• Must decide how expenses will be shared

• Drying, custom operations, hauling must be determined

• Cropping plan must be agreed upon

• Landowner may be considered material participant and subject to self employment tax

Crop-share

• Rates– 1/2 - 1/2– 2/3 – 1/3

• Dividing Inputs – Depends upon split– Lime and application

Flexible Lease

• Flex on Price– Base rent x current price / base price

• Flex on Price and Yield– Base rent x current yield / base yield x

current price / base price

• Flex on Revenue– Base rent plus percentage of increased

value over set dollar amount.

Recreational Lease

• Types– Year-round– Limited Duration– Day Hunting– Guided Hunts– General Recreational Lease

Livestock Lease

• Livestock Ownership Cost

• Livestock Owner Net Share Rent

• Operator’s Net Return To Livestock

Building and Equipment

• Depreciation

• Interest

• Repairs

• Taxes

• Insurance

“The Dirti 5”

Timber Contracts

Types

Lump Sum

Shares

Scale

Doyle

International

Discussion Items

• Use of buildings

• Use of grain storage

• Who pays for lime?

• Who pays for fences?

• Who will mow the weeds?

Resources

• University of Missouri Extension

• Guidesheets available electronically www.outreach.missouri.edu

• Reports on AgEBB www.agebb.missouri.edu

• Ag Connection newsletter

Questions?

Mary Sobba(573) 581-3231sobbam@missouri.edu