Mary Sobba Agriculture Business Specialist Equitable Leases and Business Agreements

Disclaimer I am not an attorney. This presentation is for information only and is not a substitute for competent legal counsel.

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

Reasons to Lease Land is an expensive resource Return on investment

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

The tenancy begins on the day of the verbal agreement, NOT on the day possession is given.

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 Establishing the starting date –NO “standard” date Invalid lease Sale or Death What did you say?

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 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 1)Names and description 2)Terms of lease 3)Rental rates and arrangements 4)Right of entry 5)Signatures and Dates

The “Complete” Lease 1)Names and description 2)Terms of lease 3)Rental rates and arrangements 4)Operating Expenses 5)Conservation practices 6)Improvements and repairs 7)Records 2002 Farm Bill 8)No partnership 9)Right of entry 10)Arbitration 11)Additional agreements 12)Signatures and Dates

Goals 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 Examples:

Goals Tenant who will take care of property Freedom from management and marketing Peace of mind Examples:

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 Communication is the key to good leasing.

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 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 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 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 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 Rates –1/2 - 1/2 –2/3 – 1/3 Dividing Inputs –Depends upon split –Lime and application

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 Types –Year-round –Limited Duration –Day Hunting –Guided Hunts –General Recreational Lease

Livestock Lease Livestock Ownership Cost Livestock Owner Net Share Rent Operator’s Net Return To Livestock

Building and Equipment Depreciation Interest Repairs Taxes Insurance “The Dirti 5”

Timber Contracts Types Lump Sum Shares Scale Doyle International

Discussion Items Use of buildings Use of grain storage Who pays for lime? Who pays for fences? Who will mow the weeds?

Resources University of Missouri Extension Guidesheets available electronically Reports on AgEBB Ag Connection newsletter

Questions? Mary Sobba (573)