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Farm leasing - the emerging land tenure

As land becomes more expensive and less available, there is an increasing amount of land leasing.

Farm owners who may be looking for a change and less work, are considering the option of leasing their farms. Emerging young farmers see leasing as an opportunity to build assets and stock by natural increments as well as repay debt.

Leasing gives a fixed term opportunity to get stuck in and make some progress. Leasing also sets very clear boundaries for both the farmer and the tenant. Clear boundaries prevent unhappy people, litigation and expensive battles.

If you compare leasing to 50/50 sharemilking, the differences are obvious. With leasing you have a fixed term contract with a specific right of renewal and there can really be no interference by the land owner. With 50/50 sharemilking the term is relatively short and can be shortened further by claims from the owner.

The owner often thinks he has the right to tell the sharemilker what to do. The owner also has more effective power or control than the sharemilker and will often use that if he is unhappy. With leasing all this changes, the farm owner is not dependent on the ability of the sharemilker to produce a certain amount of product. Instead, he receives a fixed lease fee, paid monthly, regardless of production.

Lease agreements

If you are entering into a lease agreement, the lease agreement document is critical. You need to have the correct agreement in place and consider the issues carefully. Don't rely on your Solicitor to put in the farming bits, because often he or she will not understand them, rather get a good consultant to assist here. Start by making a list of the issues to be included in the agreement, so you don't miss them out on the day.

Rentals

Rentals are normally negotiated, but there are some "industry levels" emerging, eg. for dairying they can be 25% of the dairy cheque. Fonterra will often manage this process, retaining 25% of the cheque to give to the farm owner.

Land can be leased for around $700 - $1,000 per hectare and is based on location, soils, fertility, pasture etc. Who owns the shares will also have quite a big bearing on the rental.

A rough rule of thumb could be $1 per kilogram as rent,
e.g.: 70,000 kg/ms = $70,000 120,000 kg/ms = $120,000

Sheep and beef can vary from $12 - $20 per stock unit. Rents can be calculated in a stock unit basis or a per hectare basis.

Additionally, rentals need to be set at levels where not only does the owner receive adequate return, but also the tenant is able to apply his labour and capital and make it all work. The tenant must be making money so that he is happy.

Relationships

We need to realise that the relationship between the owner and tenant is important. It is a relationship that must be respected and looked after. As a commercial landlord, I see my tenants as my clients. I treat them with a huge amount of respect and encourage them to make as much money as they can and feel good about me the landlord, because then they are happy and happy to pay the rent. If it is a financial battle all the time and they feel bad about the landlord, then the results are obvious.

Independence

I have set up a part of my business looking at rentals, doing the rental assessments and assisting with rental agreements. As someone said "it is the small print that can often catch you".

Summary

Leasing of farm land is becoming increasingly big business. To me it is the preferred option to sharemilking, but there are a range of issues that need to be considered. It is important to take adequate professional advice from suitably qualified people. Most importantly, respect each other and respect the relationship you have, because this is crucial to your farm leasing business.


 

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