Farmland leases: What you need to know

A handshake seals the deal. That’s been true for farmland leases for generations. But the market’s changing. So is the need to get that deal down in writing.

Growing competition and high costs make it important to sign a written lease that spells out the responsibilities of both farmland owner and lessee. Doing so does more than just document the dollars and cents of a farmland lease agreement. It cements a strong relationship between both parties. And that has long-term benefits for the land’s productivity.

A lease defined

A written farm lease is a contract that transfers to a lessee the right to use a property for a specified purpose in a defined time frame. It includes key details to both farmland owner and lessee. Farmland leases are renewed at the same time each year. In the Midwest, it typically happens in the fall and runs through the following year’s crop growing season.

Why a lease is important for the lessee

A written, signed lease is like an insurance policy for farmland for a specified time frame. It enables annual crop rotation planning but also facilitates long-term thinking that can positively influence a farm’s productivity. With a long-term lease in hand, a lessee has the assurance that he or she can reap the rewards of a shared investment to make improvements. Things like installing drainage tile and adding new technology help improve long-term soil health and potential crop productivity.

Without a written lease in hand, it’s much more difficult for a lessee to incur those costs. But with a multi-year lease, the lessee has assurance he or she will be working on that land well into the future. That makes it easier to justify improvements over time, especially when the landowner shares those costs.

How a written lease benefits the landowner

The farmland owner reaps similar benefits from a long-term written farm lease. Such an agreement enables the owner to work with his or her lessee to make improvements over time. This ultimately sustains or improves the land’s productivity, making it more valuable in the long run.

A written lease also helps manage risk for the landowner. The document normally spells out specific liabilities and responsibilities, like with land maintenance and any exposures from normal ag operations like accidents or injuries. Contractual risk transfer is a critical function of a written farm lease. The lessee typically becomes responsible for operating liabilities during the time frame spelled out in the lease. Identifying and accounting for these variables in writing is key to managing risk for both parties and should be reviewed by your legal representation.

What to include in a farmland lease

The duration and price paid by the lessee are foundational to every lease. Also include:

• Lease structure. Cash rent has historically been the most common agreement, especially with absentee landowners. Crop share is another type that is popular among landowners — like retired farmers — who want to remain more engaged in decision-making on things like crops planted, agronomic management and long-term improvements like drainage tile installation. Each lease type has pros and cons that should be considered in determining the right structure for you.
• Full terms. It’s important to not just spell out the specific lease termination date, but also how that termination will happen whether because of the contract reaching maturity or one party failing to meet his or her obligations. Many leases include clauses that specifically address when and how a lease can be terminated, and the circumstances that cause it.
• Land use. Most farmland leases are signed for crop production. But there are other uses of the land that should be spelled out whenever relevant. Consider accounting for things like livestock grazing, hunting and energy generation — wind, solar or oil/natural gas — in writing a land lease if they are potential future land use options.

Farmland lease rates

Farmland rental rates vary from region to region, and even county to county, based on the supply and demand for farmland. Rates can also vary depending on the type of farming being proposed on the land. Typically, land that is used for high-value crops can demand a higher rental rate than land for commodity crops or pasture. But there are other considerations when it comes to rental rates, including:

• Soil quality. Moisture and soil drainage characteristics, slope, nutrient and water holding capacity will influence the productivity of the land.
• Field size and shape. A perfectly symmetrical field with easy access will be easier to farm compared to land that is irregularly shaped, near a stream bed or on a hillside. Likewise, larger fields are more desirable than smaller fields tucked away in several locations.
• Field conditions. Fields that have been well maintained and consistently farmed, have erosion control measures in place, or have good fertility will generate higher rental rates over poorly maintained fields with weed issues, brush or trees in fields.
• Location. Fields that are close to the tenant’s home farm, near grain elevators, on well-traveled routes are more desirable than land several miles away that require moving equipment long distances.
• Water and infrastructure. Land that has water access (for irrigation or livestock) or buildings, such as sheds or grain storage, are more desirable than land without such amenities.

Farmland lease resources and best practices

As you structure your next farm lease, remember no two farms are exactly alike. It’s a good practice to account for all specific variables that could influence each lease’s liabilities for both landowner and lessee before signing. Consult with your farm’s team of trusted advisers in drafting your next farm lease. That includes your lender, accountant, attorney and insurance provider.

Consult with your state’s university extension system to find information on lease provisions and best practices specific to your state. Many land-grant university extension systems also have specialists who can help draw up a comprehensive land lease for your farm, like the following:

• Iowa State University Extension and Outreach: Improving Your Farm Lease Contract
• University of Wisconsin-Madison Extension: Wisconsin Cash Farm Land Lease Example
• University of Minnesota Extension: Flexible land rental agreements

A well-designed and planned-out farmland lease can help ensure the productivity of farmland well into the future. And it’s a great way to forge strong relationships between landowners and lessees over time. Consult with your farm’s trusted advisers to make sure your next farm lease is rewarding — financially and otherwise — for all parties involved.