Q: We inherited farmland that was leased. Last year, after paying taxes, insurance and other expenses, we ended up losing money. Simply put, what we received from the land was less than we paid out. Is there anything we can do about this? What constitutes a fair rental agreement?
A: Generally, rent on farm leases is calculated in one of two ways – cash rental or a crop share arrangement.
With cash rental the tenant pays a flat sum to the landlord. The actual rent will depend on how good the land is, rental rates in the area and the negotiating skills of the parties. Cash rent can be a one-time payment, or made in several payments during the year.
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From a landlord’s perspective, he will want to receive all or as much as possible of the rent prior to the tenant starting to farm the land. The tenant, for cash flow purposes, will want to pay as much of the rent as possible at the end of the growing season.
In a typical crop share agreement the landlord provides the land and pays the taxes and a portion of the input costs. Usually the division of crop and input costs will be 1/3 to the landlord, 2/3 to the tenant. While these are typical arrangements, there is nothing in law that requires this division.
A cash rental arrangement will be to the landlord’s benefit in a bad crop year or when prices are low. No matter how bad the crop is or how low prices drop, the landlord gets a fixed rent.
A crop share lease will generally be to the landlord’s advantage over a cash lease in a good crop year with the landlord benefiting from good yields or high prices. Of course, in bad crop years the landlord shares the risk and could end up out of pocket. Simply put, there is no guarantee.
The fact that a landlord loses money does not make it an unfair lease. Only if the tenant was clearly taking advantage of the landlord would the lease be unfair. Thus a lease in which a tenant offered $100 a year for a section of land to a landlord suffering from Alzheimer’s disease would be deemed unfair.
It sounds like you have inherited a crop share lease. Given your concerns, you might want to consider a cash lease. When the current lease expires it would be open to negotiate a different rental arrangement. If it is an oral lease, which has run from year to year, you should start negotiations in the fall before the tenant seeds a new crop.
There is also a hybrid lease arrangement called the flexible cash lease. Under this lease the rent is a cash payment but the actual amount depends on crop production and price. Thus the lease could provide that the tenant will pay an amount determined by multiplying the number of bushels produced times the price for the grain at Saskatoon on Nov. 1, 2003. The problem with this type of arrangement is that it can be complex to determine.
If you are seeking to educate yourself about farm leasing, I recommend Leasing Cropland in Alberta, available from Alberta Agriculture for $8.
The information is general enough to apply to all prairie provinces.
As well, check websites for the provincial departments of agriculture in Saskatchewan and Manitoba. Both have information on leases on their sites, including sample agreements.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
