Cover all bases in land lease

Among other things, a good agreement should cover compensation for building and fence repair

Farmers rent about 22.7 million acres of land in Alberta.

Five million acres of that is crown land used primarily for grazing, but that figure still indicates about 45 percent of the agricultural land in the province is rented.

That’s a lot of property on which to calculate lease arrangements, and there are many things to consider when doing that calculation.

Ted Nibourg, farm economics specialist with Alberta Agriculture, said 21,015 farms in Alberta rent land, and the average acreage is 1,080.

“The average farm in the province is only 1,160 acres, so you can almost assume that there are a number of farms out there that … own a quarter and the bulk of their operation is leased,” said Nibourg.

He fields a lot of questions from farmers about lease rates and rights, and he outlined various aspects during a recent webinar.

For tenants, leasing land can be a way to free up capital for uses other than land payments, said Nibourg. For example, buying land at $4,000 per acre at a 2.9 percent interest rate would mean payments of about $260 per acre per year. The same land might rent for one-quarter of that amount, making more money available for crop inputs.

Leasing can allow for greater efficiency in machinery use, better use of labour, sharing risk with the landowner and fostering a new generation of farmers.

“It’s also great for allowing the younger generation, the second generation, to come into the farm business,” said Nibourg, while providing a retirement income for the landowner.

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The disadvantages of leasing include lack of security of tenure. Nibourg said this is particularly a problem in leases of three years or less because the tenant may not be inclined to make improvements or change crop rotations. Leases of five years provide more security for the tenant.

In short-term arrangements, some tenants won’t be as efficient or as attentive to soil conservation as landowners might wish.

“What we see is the tendency for the tenants to maybe mine the soil and just take everything they can because they know they’re not going to have it in the future,” Nibourg said.

A down side of renting land is the effect on the renter’s access to credit because lenders usually want owned land as collateral.

Other disadvantages include lack of bargaining power and managerial control; lost opportunities for capital gains and the ever-possible people problems.

As for types of leases, the cash lease is most common, but a flexible cash lease is another option.

As an example, the two parties could agree on a set amount of crop priced at the Oct. 1 spot price and the rest at the going rate when the crop is sold, and one lease payment made before seeding and the second after harvest.

Crop shares are also common, said Nibourg. Among those, the most common share is one-third, two-thirds.

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Joint ventures are also possible, in which both landowner and tenant are farmers for tax purposes.

Besides the essentials of lease length and rate, a good agreement should cover compensation for repairs to fences or buildings, indicate who has to pay for any damage and have a clause preventing sublet of the lease without written consent.

Nibourg also recommended information on expected production practices, crop rotation, marketing, straw management, right of entry for the landowner, causes for termination and any details relating to rights of the tenant to rent or buy the land in the future.

If grain storage on the lease property is involved, it can add $5 to $8 per acre over the basic rental rate.

Nibourg said communication and trust between the parties is essential to a good arrangement.

Increasingly farmers are dealing with people who have inherited farmland and wish to lease it without having much knowledge about agronomics or production practices.

Covering the bases in a comprehensive lease is even more important in such cases.

An Alberta Agriculture publication called Leasing Cropland in Alberta is a good guide, said Nibourg. He also recommended CropChoice, a software program on the government website that can assist in setting land rental rates.

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Contact barb.glen@producer.com