Learning About Lease Agreements
By Bobby Jones
After our first season as apprentices on a vegetable farm in West Virginia, Chelsea and I moved back home to live with our respective families and plan our next step. We had caught the farming bug. We knew we wanted to farm as a career. But we faced a common hurdle: How do young farmers, who have little or no capital and no access to land, start their own farms?
During our apprenticeship we learned to transplant a million trays an hour, to harvest quickly, to wash and pack produce efficiently, to sell at farmers markets, to manage soil fertility and weeds and to handle those long mid-summer 16-hour days of hard physical labor. But we didn’t learn how to start a business or secure land tenure. Books, magazines and online publications offer volumes of advice for crop production and managing the land. Butwe beginning farmers are faced with relatively little information on securing land tenure and the legal aspects of farming.
Chelsea and I knew that we could either work off-farm for ten years and save money to buy a farm property or try to make due on leased land. For many different reasons, we chose not to defer our farm dreams. We learned from other farmers (both successes and failures) that leased farmland did not have to mean a lack of long-term security. ATTRA and the Greenhorns have valuable online information about negotiating long-term lease agreements, but the information we gained from a presentation made by Scott Marlow at RAFI-USA, as well as horror stories about lease agreements from other farmers, put the issue in perspective better than anything in print.
Get it in writing
The most important piece of a solid farming lease agreement is often overlooked: write it down. If you don’t have anything in writing, you should be prepared to walk away with whatever you can fit in the bed of your pick-up truck. In fact, we know of several young farmers who didn’t even end up with that at the end of the day. When I say put it in writing, I mean put it ALL in writing. Consider all possible scenarios. Don’t want to be bombarded by visits from your landlord while you’re trying to weed carrots? Put it in the lease.
Does the landowner’s brother want to have access to his power tools that are stored in the barn? Put it in the lease. Are you going to be using tools or equipment owned by the landowner? Are you going to want to build outbuildings or other permanent structures on the property? How are damages to the property from natural disaster paid for? Are you going to want to have public farm tours? Does the landowner need to be included in your liability insurance policy? All of these things should be in a written lease.
Figuring out the right term
Once you begin writing your lease agreement, the period of the lease comes into consideration. In organic and sustainable agriculture, soil health is the source of the farm’s fertility and economic productivity. So, for organic and sustainable farming operations, long-term land security is even more paramount. At Babe + Sage we have an initial one-year trial period. Afterward, both parties can leave, renegotiate the terms, or let the lease automatically renew for five years in perpetuity.
We did not want to sign a contract for five years before farming on the property, but we also wanted the security of the long-term lease in place from the outset. We feel that five years is long enough to justify substantial investment in the property and the soil but not too long a commitment should the situation chance. Another important component in the term of the lease is an escape plan. If something goes wrong or we decide to leave, we don’t have to pack up at the end of the month and be gone. In our lease agreement, we have 90 days after the term of the lease is up to continue relocating equipment and harvesting or removing crops from the field.
Another key piece of any solid farming lease agreement is infrastructure improvements and investment. This section can get tricky. On the one hand, we do not want to invest our business money into a new well, buried irrigation line, barn or any other infrastructure that we cannot take with us if we leave the property. On the other hand, many landowners do not want to invest in a new well, buried irrigation line or barn if the farmer may be leave in a year or two.
At Babe + Sage we are fortunate to have supportive landowners who see our business’ success inextricably linked to the long-term security of their property. We arrived on the property in October to an overgrown farm with crumbling infrastructure. From day one, our landlord’s self-appointed role has been to create an environment that allows our business to thrive. A successful Babe + Sage Farm means that the rent checks keep coming in, property taxes are paid, and the land stays with their family even though no one in the family can take care of it. Also, if one day we “hit the big time” as they like to joke, the permanent infrastructure investments the Oetters have made will make the property more marketable to future tenants.
Define landowner involvement
There are as many different models for landowner involvement as there are farms. The role of the landowner on a leased farm usually falls into one of the following categories: absentee landlord, peripheral or non-voting stakeholder in the business, business partner or employer. Although most farmers are stubborn and independent, I believe that involving the landowner in the business to some extent is the most effective strategy.
Babe + Sage is organized as an LLC, and our landlord is a non-voting member of the LLC. Even though legally Chelsea and I are the only ones who can make decisions or conduct business for the LLC, we feel it is important to bring in our landlord as a stakeholder in the business. It makes all those concerns about infrastructure run smoother. It also gives the landlord a more tangible stake in the success of your business, which is, after all, dependent on the land they own.
In deciding the role of the landlord and/or business partner, it is important to have an open and honest conversation about the big three catastrophes: What happens if our market tent blows over on a windy day and kills somebody? What happens if a worker gets run over by the tractor? What happens if someone gets salmonella from our spinach? Who is in charge? These three scenarios are unlikely, but planning for them tells you a lot about how your business relationship should function in good times, too. In our case, we decided that in any of those catastrophic situations, we are the ones responsible.
Form an LLC
Chelsea and I are in charge of Babe + Sage, through the good and the bad. We have several things in place to legally enforce this liability. First, we formed an LLC (limited liability company). And you should, too, if you are going to lease land (or have someone lease your land). The limited liability that comes with the LLC structure legally separates the business activities and assets of the business from the property of members. That means that if a worker gets run over by the tractor and sues our business, the land remains safe as an asset of our landlord separate from the business.
Second, we formed a manager-managed LLC, which means Chelsea and I are the only people legally allowed to carry out business transactions for the business. The LLC structure is useful because it is so adaptable. An LLC’s Operating Agreement (basically the organization’s bylaws) can be adapted and tweaked to fit nearly any business relationship. I strongly recommend working with a good lawyer to develop an Operating Agreement that puts into legally-binding words the way you want your business to function. Finally, we also have liability insurance for our business which protects the landlord from any catastrophic business situations to some extent.
The keys to a successful leased land agreement are simple: be honest and write it all down. Most failed land agreements are missing one or both of these elements. Open and honest communication between tenant and landlord from the beginning will prove invaluable. It is important to openly and honestly discuss expectations, perceptions, roles, responsibilities, money and liability. Once your roles are defined, find the best way to write everything down in legally-binding language.
Plan for worst case scenarios and best case scenarios, then write it down.
LAND LEASING RESOURCES
Cash Rents Paid for Georgia Farmland in 2010 (pdf). UGA Extension resource on cash-rent data across the state. More specifically for commodity farmers but a good reference, broken down by region and farming activity.