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Following my first article on farm leasing ‘The New Land Tenure’ we have been inundated with enquires for help. This is of little surprise to me as there is now land being leased everywhere, although one farmer telephoned me to say he didn’t’ believe this was true as he couldn’t find a suitable dry stock farm to lease!!
When it comes to documentation it is really important to get all the issues out in the open and discuss them. The lease is a binding agreement and there is no way back once it is signed. I call the initial negotiating of a lease agreement ‘The Curve of Gratitude’. Make a list and discuss all the issues prior to formalising the document. If you fail to get agreement prior to signing, you sure aren’t going to get it afterwards.
Farm leasing is about relationships. My advice to the owner (Lessors) is lease the farm to somebody who is pleasant, honest and treats you with respect. It is very important to get this right. As a landowner, a grumpy self-centred lessee is only going to upset you. And I go back to the point, once a lease is signed, you have no way back. Get it right the first time.
A lease agreement may give the tenant almost exclusive right to the land. So what if it is a family farm and the family want to come out and go for a walk on their land or go fishing? A clause maybe necessary to state that the lessors family may have reasonable access for their use after gaining consent from the lessee (tenant).
If there is a compulsory purchase clause in the lease agreement, due consideration and discussion on the issues surrounding this is imperative. Issues all have to be documented, ie. How will the value be set for the purchase? What are the GST issues, etc?
I recently met some senior people who were happy to lease the farm to a good neighbour. The agreement was to have a compulsory purchase clause after 5 years. This might be a very good reason to be nice to all your neighbours. If you’re not it may well preclude you from leasing their farm as some have found out already.
Full disclosure is also essential in a lease agreement. If the flats flood from time to time put it in the lease. eg. ‘The lessee acknowledges that the flats flood from time to time’. ‘The lessee acknowledges that the drains were cleaned prior to the commencement of the lease and will be cleaned again in such and such year’. This type of documentation ensures there are no arguments later.
Another area that needs consideration is subdivision. Do you want or need to cut off a block of land during the term of the lease? If so, get it down on paper and signed off as part of the lease document. Maybe the lessee could have first right of refusal to purchase the subdivided block at a price to be agreed.
I believe property inspections are an important part of a lease agreement too. An annual report recording the condition of the property, documented fertilizer inputs, drain cleaning etc is a good tool to keep everybody happy. A few digital photos kept on file could help here too. It is also an opportunity to discuss any issues and keep it all out in the open. Annual inspections could be likened to changing the oil in your car. It keeps the lease agreement working and lubricated!
Legal Descriptions must be accurately detailed with a highlighted plan of the farm. A copy of a valuation slip or a rate demand is essential to accurately describe the property. Any right of ways and easements should be disclosed and discussed. No surprises please. The maintenance of consents becomes the lessee’s cost and liability. As I understand it, under the RMA an owner could be jointly liable with the lessee for breaches of consents for effluent disposal etc.
When it comes to documentation, you will often hear “It is all in the fine print”. There are a number of standard lease forms out there for farm leasing. Fill in the blanks and you’ve got yourself a lease! I think more care is required than that. You need a person experienced in the practical applications and preparation of the detail. It then needs to be checked by your lawyer for the legal aspects and checked by your accountant for accountancy issues.
We at Fraser Farm Finance know of one firm of rural lawyers who have prepared an excellent rural lease document and we will be recommending them or our clients. You are still able to stay with your existing lawyer, but have them complete the lease as an out source.
In summary, farm leasing is becoming a very large part of the rural economy. Lease agreements require attention to detail. It is essential there is discussion, disclosure, description, subdivision and thorough documentation.
A Lease agreement is a binding agreement and this requires preparation. Be prepared to pay for professional advice to get it right the first time, because once it is signed there is no way back.
These are the opinions of Don Fraser of Fraser Farm Finance. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought.
Don Fraser is the Principal of Fraser Farm Finance and a consultant to the Farming Industry. Contact him on 0800 777 675 or 021 777 675.
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