Equitable Leases and
Business Agreements
Mary Sobba
Agriculture Business Specialist
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)
2)
3)
4)
5)
Names and description
Terms of lease
Rental rates and arrangements
Right of entry
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) Records
2002 Farm Bill
8) No partnership
9) Right of entry
10) Arbitration
11) Additional agreements
12) Signatures and Dates
Goals
Examples:
• 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
Goals
Examples:
• Tenant who will take care of property
• Freedom from management and marketing
• Peace of mind
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) 581-3231
sobbam@missouri.edu