A topic that comes up fairly often in my real estate business is the topic of leases – and it actually comes up in more than one format. Sometimes we are looking at a piece of property to purchase that has an existing lease in place with the current owner and a tenant, other times we are considering purchasing property from an investment standpoint to lease it after purchase, and sometimes my landowners need to work out a lease to keep a current Agricultural Property Tax Exemption.
Whatever your particular circumstance may be, land leases are very common practice and you are likely to encounter one at some point. I have written this post to serve as a resource to help you start navigating the ins and outs of putting together a lease.
My disclaimer for the day is *the information I provide is merely observational, I am NOT an attorney, I am a real estate professional and I am not authorized to provide legal advice. It is not my intent to provide you with legal advice in this post, as it is anecdotal information from my personal experience and provides a list of resources to reference in your own free time. If you DO have specific legal questions, CONSULT YOUR ATTORNEY.*
The most common type of lease that I encounter is verbal. While a handshake lease is very common in agriculture, that doesn’t necessarily mean it’s a good idea. My family farms and ranches, and I will admit there’s been more verbal handshake lease agreements than we can count over the years – but as the legal precedent changes, it’s really better for all parties involved to have all the details clearly outlined on paper in a written lease format.
Types of Leases
No matter what you do, the lease should be in writing. To help get you started, there are three common rent types used in agriculture based leases.
- Cash Lease – The most common form of rent, and easiest to calculate. This is a flat per acre price or flat per head price. We use this for farm leases as a price per acre depending on the crop, ranching leases as a price per head or per acre at a pasture rate, and even on hunting leases with a price per hunter, per gun, or per animal harvested.
- Crop Share – With a share rent, the parties share in the inputs (costs) as well as the profits. This is a common form of rent seen in farming, the landowner often shares in the cost of inputs such as fertilizers, pesticides, seed, and the farmer does all of the labor of ground care, planting, harvesting and pays a portion of the inputs as well, and the profits are shared.
- Flex/Hybrid – This one is a little more complicated, but it is a great potential benefit to the tenant or landowner if there’s a big shift in the markets. This is typically calculated at a base rate per acre, but then for example if the price of cattle goes up, then the rent price goes up, so the landlord gets more money in a good cattle year. In the reverse, depending on how the agreement is written (and why it’s better to have everything in writing) if it is a bad year, then the tenant might in turn pay less money. This option requires very clear definitions and should clarify who is watching the market prices and when the changes to rent price will occur.
* As a side note on #2 with the Crop Share option – I actually see a form of this used as well when we have worked out agreements to help keep a property in ag production for agricultural property tax exemptions. A good example is hay production, the new owner shares in the costs of fertilizer and someone cuts and bales hay on their property which they either sell or keep for themselves. In this case, the landowner is not benefitting financially in the form of profits, but they are definitely benefitting in keeping their property in agricultural production and in turn keeping their property tax rate lower – so they do still benefit financially in the long run.
Other Details to Consider
While in my opinion the type of rent paid is the biggest topic to discuss and agree upon, there are other details that also need to be taken into consideration both as the landlord and the tenant on a property.
- How much will the lease cost?
- When will the rent be due?
- Will there be interest or penalties for late payments?
- What exactly is being leased?
- Are there only specific portions of property being used?
- What are the limitations of the lease?
- If it’s a pasture lease, are you going to specify how many head of livestock are allowed per acre so that it isn’t over grazed?
- If there is a drought or a fire that destroys the grass, will the lease terminate or the amount of head allowed on the property decrease accordingly to protect the property?
- What will happen to the tenant if the property is sold during the duration of the lease?
- Who is responsible in the event of an accident or a lawsuit?
- If any improvements are built on the property during the duration of the lease, (fencing, barns, etc) who will pay for them?
- Is there an existing lease for mineral rights or groundwater rights, or is anything being actively negotiated?
Also make sure to check with your local Farm Service Agency Office both as a landlord or a tenant to make sure that there are not any potential conflicts with enrolled programs or payments. Might not hurt to chat with your accountant as well before signing a lease.
How Much to Charge or How Much to Pay?
It’s important as a landowner/landlord to make sure you’re getting a fair price for your property in a lease and it’s just as important as a tenant to make sure you are paying a fair price. Texas is a massively diverse state, so prices will vary drastically from one area to another because ground quality and capability will vary greatly as well.
The best thing you can do is reach out to your local County Extension Agents for resources on what the common current price point is for a particular type of lease. You can find your Agent’s info here. It’s also helpful to survey the locals in the area to see what everyone is paying – just make sure you get a wide variety of responses if you’re able because you’ll see some outliers on the high and low in with that, and some people may not be comfortable discussing details on finances at all.
Limitations on the Lease
The bullet point above specifically about limitations on the lease is particularly important. The lease terms should specify exactly what the property will be leased for so there isn’t any confusion. If you are only leasing for hay production, make sure the tenant understands the property isn’t available for their kids to come out with friends on the weekends to ride 4 wheelers. Or if they run cattle on the property, you might need to specify they can’t come dove hunting in the fall – or maybe you are ok with that, in which case, carry on! My point is simply to clarify exactly what you are ok with as a landlord in writing so that you don’t have any unexpected surprises.
Rights to Enter the Property
This is a big one to consider if you are a landowner that intends to lease your land. Unless you specifically reserve the right to enter your property during the duration of the lease agreement, then you actually give up your rights to enter or inspect the land. Keep this in mind as you write your lease – and this is a great topic to discuss with your attorney as well if you need help with specific wording.
Should the Lease be Recorded?
A lease does not have to be recorded in order to be considered valid. However, if the lease is recorded in the local county courthouse and the property sells during the duration of the current lease, it puts the public on notice that there is a valid current lease on that piece of property. Not required, but definitely a detail to consider.
What if There is an Accident or Lawsuit?
Another excellent and important topic to discuss with your attorney if you need help writing a lease are liability and/or indemnification clauses. Basically you want to be protected and not held liable for the actions of or damaged caused the other party, and if there’s a lawsuit against you because of their actions that they will be responsible to pay for the legal fees to protect you or pay for any judgments against you. Definitely an important one to consult an attorney about.
Building Improvements on the Property
If property is being leased for agricultural production purposes, there’s a chance some improvements might be needed in order to get the job done correctly – example: grazing land needs fencing, and some crop land needs irrigation. If you anticipate as a landowner that you tenant will need to build improvements, you should probably address things like who is paying for what percentage of those improvements, what materials can be used, and where they can be placed – especially if they are considered permanent.
Mineral or Groundwater Leases
This may seem like a “it isn’t the tenant’s business” type of topic – and I do agree, but in Texas, the mineral estate is the dominant estate. In other words, whoever owns the majority of the mineral rights has the right to use as much surface estate “as reasonably necessary” that they need in order to produce the mineral. And this includes their ability to use groundwater rights as well. So if you are aware of an active mineral lease, whether or not you are the primary owner of the mineral rights on the property, it might be a good idea to address with your tenant that someone may be entering the property for mineral production purposes under that active lease. Perhaps consider a clause that allows that tenant to get out of the lease if active production starts up on the property. A tenant might not be happy with you if all of a sudden an oil pad pops up right in the middle of his crops.
There are some exceptional resources available to help you through this process. Here are a couple of my personal favorites.
The Ranchers’ Agricultural Leasing Handbook
Find Your County Extension Agent
Find Your Local USDA Farm Service Agency Office
Buying Land to Lease
If you were looking for helpful resources on leasing land you already own, I hope I was able to help you today. Our company also works in Land Improvement Services, so please let us know if we can help you out with your property.
If you’re in the market to buy some land – I’d be honored to have a consultation with you about your needs to see if I’d be the right fit to work for you to find the perfect place. Feel free to reach out to me directly with any questions you might have about purchasing land or any info in this article at TexasLandAndHome@gmail.com or 979-541-7810. You can also Contact Us Here.