Land rental major issue for retiring farmers

Many landlords and tenants remain comfortable with a handshake deal, but more people are using written contracts

Dean Dyck of Alberta Agriculture knows what to expect when the topic turns to land rental.

When farmers and landowners want information about renting land, it always comes around to the same question.

“How much do I charge?” said Dyck, farm business management specialist with the province’s Ag Info Centre.

“That’s the number one thing.”

Pricing land or determining a rent isn’t an exact science, but Alberta Agriculture staff use a land-rental calculator to come up with an amount.

The key factors are crop yields and crop price.

“We have a tool that helps us look up average yields in the area, through crop insurance, then we can discount for risk,” Dyck said.

“It’s fair for both parties.”

Renting agricultural land is becoming more common in Alberta and across Western Canada. Retired producers, and those nearing retirement, may want to retain their land and maintain an income stream. Or the folks inheriting the land live in a city but don’t want to sell the family farm.

“The percentage of (farm) land that’s owned either by the retiring farmers or passed on to the non-farming inheritance is growing,” Dyck said.

A Saskatchewan Agriculture document on land rental says there are three common land leasing arrangements:

  • Cash rent, where the tenant receives all income from crop sales and pays a fixed rent.
  • Crop share, where the landlord and tenant split crop sales revenue (usually 25 percent/75 percent).
  • A flexible cash rent, where the amount paid to the landlord varies from year to year, according to the price of grain and yield.

Of those three, crop share is becoming less popular.

“Out of every 10 calls we get about land rentals … maybe one is crop share,” Dyck said.

The story is similar in Saskatchewan, where landlords and tenants are moving away from crop share.

“Cash rents provide an easy, clean contract for landowners,” said Craig Klemmer, an agricultural economist with Farm Credit Canada.

“And for the producer side of things, it limits the cost.”

Crop share may be less popular, especially for producers, because for a long time the split between landlord and tenant was one-third/two-thirds.

That split doesn’t make financial sense for renters now that the cost of fertilizer, seed and other inputs has gone through the roof.

Also, many landowners don’t like the uncertainty of crop share because their share will vary from year to year, depending on yield and price, Klemmer said.

In Alberta a large proportion of the leasing agreements are flexible cash rent. Prior to the growing season, the producer and landlord will negotiate a rental amount per acre for that year.

“They (may) have a three-year agreement but they agree to re-visit the amount (rent) every year,” said Dyck, who described such deals as “rolling agreements.”

“There’s one crop — you know what it is — that kind of drive rents, and it’s canola.”

The landlord may ask for a higher rent if canola prices are $14 a bushel. If the producer can’t grow canola on the rented land because of crop rotation, he may request a lower rental rate.

Another trend in land rental is written agreements, Dyck said.

Many landlords and tenants are still comfortable with a handshake deal with a relative or neighbour, but more people are realizing the value of a written contract.

“We encourage that,” Dyck said. “Get it in writing because you never know what’s going to happen.”

Saskatchewan Agriculture, in its Land Rental Arrangements document, has a similar message.

“Verbal agreements may be binding, but they do not document all of the details and terms required or agreed upon. This may result in unnecessary future disputes,” the report says.

“A written agreement is preferable so that each party knows what is expected. This will not only prevent misunderstanding, but it will encourage both the tenant and landlord to “think through” an equitable and reasonable lease.”

The Saskatchewan Agriculture document says a written agreement should include a number of provisions:

  • Right of entry, which means the landlord has the right, at all times, to inspect the rented property.
  • An arbitration clause, in which a third party can resolve disputes.
  • An option to buy clause or right of first refusal, which gives the tenant the right to buy the land at the same terms and conditions offered by another purchaser.

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