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Equitable Leases and Business Agreements. Mary Sobba Agriculture Business Specialist. Disclaimer. I am not an attorney. This presentation is for information only and is not a substitute for competent legal counsel. Definitions.

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mary sobba agriculture business specialist

Equitable Leases and Business Agreements

Mary SobbaAgriculture Business Specialist

disclaimer
Disclaimer

I am not an attorney.

This presentation is for information only and is not a substitute for competent legal counsel.

definitions
Definitions
  • Contract – an agreement between two or more parties (offer, acceptance, consideration)
  • Lease – a contract granting use of property during a certain amount of time, in exchange for something
types of contracts
Oral

Written

Cash

Crop Share

Flex Rental

Recreational

Livestock

Building & Equipment

Timber

Types of Contracts
reasons to lease
Reasons to Lease
  • Land is an expensive resource
  • Return on investment
oral leases
Oral Leases
  • Tenancy at will (<1 year)
  • Periodic tenancy (year-to-year)
    • Continuous unless termination notice
  • A verbal lease for longer than one year is invalid under the statute of frauds.
  • Farmland is in a year-to-year tenancy
oral lease termination
Oral Lease Termination

Under Missouri law:

  • Written notice to terminate
  • Month-to-month tenancy
    • One month’s notice required
  • Year-to-year tenancy
    • At least 60 days notice before the end of the lease
oral lease problems
Oral Lease Problems
  • Establishing the starting date
    • NO “standard” date
  • Invalid lease
  • Sale or Death
  • What did you say?
oral vs written lease
Oral vs. Written Lease
  • Leases are legal contracts
    • State specific
    • Average tenancy is 12 years
    • 35% of leases are written
  • Agriculture is changing
  • Good business practices
  • “Trust” issues
written leases
Written Leases
  • Increase in absentee landowners
  • Be proactive, not reactive
  • FSA requirements
    • Crop-share vs. cash rent
    • Risk in growing crop
  • Tax issues
    • Material participation
five essential parts of a lease
Five Essential Parts of a Lease
  • Names and description
  • Terms of lease
  • Rental rates and arrangements
  • Right of entry
  • Signatures and Dates
the complete lease
Names and description

Terms of lease

Rental rates and arrangements

Operating Expenses

Conservation practices

Improvements and repairs

Records2002 Farm Bill

No partnership

Right of entry

Arbitration

Additional agreements

Signatures and Dates

The “Complete” Lease
goals
Goals

Examples:

  • Highest potential return in both short and long run
  • A fair return to each party
  • Continuity of income from year to year
  • Meeting Conservation Compliance requirements
goals1
Goals

Examples:

  • Tenant who will take care of property
  • Freedom from management and marketing
  • Peace of mind
next step
Next Step

Developing a lease which will combine the goals and resources of landlord and tenant into an economically acceptable package for both parties.

choosing a lease type
Choosing a Lease Type

Communication is the key to good leasing.

cash lease advantages
Cash Lease - advantages
  • Simple
  • Owner doesn’t have day to day decisions
  • Owner has very little financial risk
  • Tenant has freedom in choosing what to plant and rotation
  • Tenant has fewer records to keep
cash lease disadvantages
Cash Lease - disadvantages
  • May need to be renegotiated each yr
  • Cash rents may be too low in times of rising prices and increasing yields and too high in times of low prices and low yields
  • Tenants are required to supply more operating capital
  • Tenants bear all price and yield risk
cash rent
Cash Rent
  • What’s a “fair” rate?
    • Share of gross income (35-40%)
    • Production capability
    • Crop-share equivalent
    • Percent of land value
    • Other expectations or responsibilities
crop share advantages
Crop Share - Advantages
  • Price and yield risks are shared equally
  • Owner is more involved in operating decisions
  • Both parties benefit from new technology
  • Farm payments are shared
crop share disadvantages
Crop Share - Disadvantages
  • Must decide how expenses will be shared
  • Drying, custom operations, hauling must be determined
  • Cropping plan must be agreed upon
  • Landowner may be considered material participant and subject to self employment tax
crop share
Crop-share
  • Rates
    • 1/2 - 1/2
    • 2/3 – 1/3
  • Dividing Inputs
    • Depends upon split
    • Lime and application
flexible lease
Flexible Lease
  • Flex on Price
    • Base rent x current price / base price
  • Flex on Price and Yield
    • Base rent x current yield / base yield x current price / base price
  • Flex on Revenue
    • Base rent plus percentage of increased value over set dollar amount.
recreational lease
Recreational Lease
  • Types
    • Year-round
    • Limited Duration
    • Day Hunting
    • Guided Hunts
    • General Recreational Lease
livestock lease
Livestock Lease
  • Livestock Ownership Cost
  • Livestock Owner Net Share Rent
  • Operator’s Net Return To Livestock
building and equipment
Building and Equipment
  • Depreciation
  • Interest
  • Repairs
  • Taxes
  • Insurance

“The Dirti 5”

timber contracts
Timber Contracts

Types

Lump Sum

Shares

Scale

Doyle

International

discussion items
Discussion Items
  • Use of buildings
  • Use of grain storage
  • Who pays for lime?
  • Who pays for fences?
  • Who will mow the weeds?
resources
Resources
  • University of Missouri Extension
  • Guidesheets available electronically

www.outreach.missouri.edu

  • Reports on AgEBB

www.agebb.missouri.edu

  • Ag Connection newsletter
questions
Questions?

Mary Sobba(573) 581-3231sobbam@missouri.edu