By Gary Sliworsky
Ag rep, Emo
For various reasons, many producers and aspiring producers consider leasing, rather than owning, farm property.
Leasing land allows a producer the flexibility of controlling the farming decisions while avoiding some of the pitfalls of ownership.
But while it is a popular method of gaining access to necessary resources, there are some factors to consider when negotiating a short- or long-term lease.
The following is from an article by Jennifer Stevenson, Business Finance Program Lead, OMAFRA:
There are several types of leases used in agriculture, however they fit into two main categories.
The first is where the landlord shares no risk for the crop or livestock along with the tenant while the second type is where the landlord and tenant both share risk for the crop (it may or may not be equal risk).
Where the risk is not shared, the lease is a pure charge for the rental of land, buildings, or equipment. The Canada Revenue Agency does not view this type of lease income as farming income.
The second type of lease is where both parties jointly share the costs for input costs, such as labour, utilities, fuel, insurance, seed, etc. And both parties would share the income, according to their negotiated agreement.
The CRA may view this type of income by the landowner as farming income.
Before negotiating a lease, both the tenant and landlord should be aware of the type of agreement they are entering into as a lease is a legal contract.
Typical information included in a lease contract includes information which is required in order for the contract to be valid, as well as information to support the additional lease terms.
Required information includes a legal description of the land, buildings, and/or equipment in question. In the case of land or buildings, it also should specify areas to be excluded.
Another required item is the lease rate. When and how much is to be paid must be clearly spelled out. As there can be a wide variability in lease rates over Ontario, it is good practice for landowners and tenants to familiarize themselves with the current rates in their area.
As there are no published rates, the easiest way to find out is by word of mouth.
The lease length and renewal process also is a required item. This outlines how long the lease will be in effect for, and what the process will be to renew the contract.
In the event of a planned renewal, tenants and landlords will have to give some thought on how the lease rates for subsequent years will be negotiated.
Over recent years, higher commodity prices have driven up lease rates.
Producers and landlords may consider using an unbiased rate, such as the Consumer Price Index (CPI) published by Statistics Canada, to determine the annual lease increase rate.
Other non-mandatory information that might be included in a lease document is water use (i.e., can it be used, is the use restricted in any way, etc.)
Other items are the right of inspection by the landowner, what will happen if the landowner sells the property, how can the lease be broken, how may the tenant use the land (i.e., are there any restrictions in crops or livestock use).
Still others include environmental matters (what would happen if there is an environmental concern, and whose responsibility would it be to remedy the situation), insurance, utility fees, right to sublet, production methods and management decisions, compensation for damages, and option to purchase.
There are many components to a lease. As such, it is important each party in the lease agreement familiarize themselves with their potential rights and obligations prior to signing it.