Giving farm rental a new Lease of life

This article discusses some potential issues that may arise in a farm lease between landlord and tenant, ranging from the obvious to the not so obvious.

Many farmers will remember the days when the lease of a farm was based on a gentlemen’s agreement. The inadequacies of this sort of agreement are

• Terms not clearly identified
• Parties understanding of their respective obligations possibly quite different.

As with any contract the conditions must be clearly identified and under the Contracts Enforcement Act a lease of land is required to be in writing. To that end the obligations of all parties need to be carefully thought out and documented.

Essential detail to be included in a lease of farm land (be aware that this is not an exhaustive list);

• Maintenance: To what extent is the tenant responsible for maintenance?;

a) In a short term lease – merely maintain the status quo?
b) In a long term lease – Keep in good repair?

Caution – a provision to keep in good repair will impose an obligation to upgrade any improvements that are in a state of disrepair.

Most leases exclude a tenant from obligation to repair damage arising from “fair wear and tear and an Act of God”. This provision is potentially dangerous as should this exclusion apply to farm improvements ie fences it would mean that they have no obligation to maintain fences.

• Management and good husbandry: Pasture Maintenance, cropping and re-grassing, fertiliser applications (type, quantity and timing), control of noxious plants and vermin, stocking levels etc and most importantly the condition of the farm at termination. What must be left in terms of autumn saved pasture supplementary feed, crops and re-grassed areas.
• Improvements: In some instances the tenant may wish to make improvements to the property. Provision should be made in the lease for the landlord to get an indemnity from the tenant for any liability arising from the works. The parties also need to discuss removal of the improvements at the end of the lease or whether the landlord is required to purchase at an agreed formula.
• Term of the Lease: The period initially fixed as the term of the lease is often followed by a right of renewal whereby the tenant may require the renewal of the lease for a further term. If the tenant wishes to renew the lease the landlord must grant the further term unless the tenant is in breach. From the landlords perspective rights of renewal are dangerous in that they will impede, if not bar, the landlord’s ability to sell the property until all renewal rights have been exhausted.

If the lease is allowed to run on beyond the expiry of the term the provision of the Property law Act will apply and the lease will continue on a monthly tenancy.

• Rent Review: the option to review the rent is another important thing to consider. Consideration should be given to the frequency of the rent review, the process in implementing the rent review and what happens if the tenant does not agree with the new rental. Disputes often arise between parties at this time and if the lease does not clearly outline the process it has been known for disputes to drag on and become very costly for both parties.
• Annual farm meetings: It is invaluable if the landlord and tenant have a good relationship. If the relationship is good, both parties are more likely to work together, which will inevitably benefit both. Annual farm visits or more regular meetings between landlord and tenant are a great way of dealing with outstanding issues and potential issues in the coming year.
• Sale or re-letting: The landlord should ensure provision is made in the lease to allow him/her to market the farm for re-letting or sale. In those circumstances, the landlord needs the ability to access the property for inspection by potential buyers and tenants and to attach signage if required.
• Right to purchase: Tenants may seek to have a first right of refusal to buy the property should the landlord wish to sell. The landlord should avoid such a commitment as it can greatly restrict the landlord’s ability to deal with the property. On the other hand, for tenants with a long lease, this can be an incentive to invest more into the property.

There are many legal and non-legal issues that need to be considered in the negotiation of a farm lease. We can not emphasis enough the importance of seeking legal advise when negotiating a lease and in particular the drafting of the lease document. We have seen time and time again lease documents that have a different meaning to what the intention was because of the way in which the document has been drafted.