Every farm lease needs to include these critical elements

Every farm lease needs to include these critical elements

Leasing farmland is a common practice. In Iowa, more than half of farmland is rented to tenant farmers, per Iowa State University. That increases to as much as two-thirds of farmland in areas of central and northern Iowa.

Plus, landowners leasing farmland rather than operating it themselves is only becoming more and more common. It’s often the case that the land used to be operated by the owner, who is retiring, or the land has been passed on to an heir. These landowners wish to keep the land in the family, but do not want to operate the land.

In other instances, the farmer does not have the capital resources needed to operate a certain amount of farmland and so they lease it instead to a tenant operator. This is one way some farmers are able to increase the scale of their overall farm operation.

However, farm lease contracts, though increasingly common, must be carefully planned, developed and executed so that each party involved is agreeable to every component the agreement contains.

With that in mind, let’s go over a few of the elements that every farm lease needs to include.

Types of leases

The first decision a landowner needs to make – and often the first agreement the landowner has to reach with a tenant – is the type of lease that will be used.

There are four common farmland lease types here in Iowa. Those are fixed-cash lease, flexible cash lease, crop share lease and custom farming contract.

Fixed-cash lease

With a fixed-cash lease, a tenant must pay a cash rent per acre per year in order to use the farm’s resources. The landlord has the ability to put in place requirements, such as what types of crops can be grown and what practices can be used, including tillage, conservation and pest control.

Outside of those restrictions, though, the tenant is able to plan production and receives crop and USDA commodity program payments.

Flexible cash lease

Flexible cash leases are similar in some ways to fixed-cash leases. However, with flexible cash leases, the rent amount depends on yield and/or selling prices during the time the land is being leased. In some cases, government payments and crop insurance benefits are included in the gross revenue.

Flexible cash leases allow the landowner to potentially reap the benefits during good years, but also makes them assume some risk, too.

Crop share lease

Under crop share leases, the landowner gets a share of crop and USDA payments in return for the land being used. The amount or percentage a landowner receives will depend on region. Expenses are often shared under this lease type, too.

There could also be additional rent charged for use of buildings and storage facilities under a crop share lease.

Custom farming contract

With custom farming contracts, farm operators provide all labor and equipment needed for tillage, planting, pest control, harvesting and movement of crops into storage. The landowner pays all other expenses and gets the crop and government payments.

The farm operator is paid per acre by the owner, or receives a fixed payment.

Learn more about lease types

You can learn more about the different types of farm lease contracts, including the advantages and disadvantages of each of the most common types by visiting the Iowa State University Extension and Outreach website.

Once you have decided on a type of lease, it’s time to take a closer look at what that lease needs to include.

1. All the necessary details

As with any sort of business arrangement, getting the details right and in writing is critical. For farm leases, that means including the following:

  1. A detailed description of land location as possible, because there’s likely no address, or the legal description, if needed
  2. Start and end dates of the lease – plus renewal and termination terms
  3. Rent payment amount and when rent must be payed
  4. Where grain will be stored
  5. Operator duties
  6. A dispute resolution process to follow.

2. Decide who is responsible for paying what

There’s a lot that needs to be paid for while operating a farm. From things like fertilizer and nitrogen, to taxes and insurance – someone has to pay. Make sure any lease explicitly lists these items and who is expected to pay for them. Include whether the expenses are shared.

Other expenses that should be included in the agreement include utilities, maintenance, major improvements, etc.

3. Discuss permitted uses

Some landowners will have preferences for how the land is and is not to be used. That all needs to be included in a lease under a section descripting permitted and prohibited uses. Define as clearly as possible what types of activities can and cannot happen on the land. However, it’s important to allow some flexibility here, especially if farm needs could shift over time.

A map that shows where certain requirements or restrictions apply and where they do not is helpful in some cases.

4. Conservation practices

Landowners would be wise to discuss stewardship and conservation with their tenants. Encouraged or required practices should be found somewhere in the agreement. It’s advisable to allow for this section to be revisited annually as conservation practices may need to change year to year.

5. Insurance requirements and indemnification clauses

No farm lease agreement should be signed unless it makes clear what types of insurance both parties must carry – and who is responsible for carrying specific insurance.

The lease should be clear about how much insurance must be held, too.

There should be language regarding what is to happen if there is a natural disaster, as well as an indemnification clause that shares, in general, how a party will compensate the other if one party’s actions or negligence are responsible for any sort of loss.

Cover all your bases in farm lease

This post is not by any means an exhaustive list of everything a solid farm lease should include. It is a start on a few of the basics, though.

If you would like to discuss contracts and lease negotiations further, then we encourage you to contact our team at Midwest Land Management. We can help with any type of lease and make sure both parties are agreeable to beneficial terms.