IntroductionLeasing additional land to increase production can be

a useful option for growers. Leasing land can allow:

• improvedcashflows

• increasedscaleandefficiency

• increasedprofit

• reduceddebtrisk

• growing the farming business without the need topurchaseland.

Typically in agriculture, the tenant uses the land for anagreed time and fee. There are numerous variations onleaseratesandtypes.Someincludeadjustmentsbasedonyieldsandmarket conditions. Normally the tenant carriesthemajorityoftherisk.

Landowners(Lessor)objectives

• financialreturnontheasset

• landandinfrastructuremaintainedingoodcondition.

LandownersresponsibilityThelandownerisgenerallyresponsibleforpayingratesand

rents,publicliabilityinsuranceandinfrastructureinsurance.

Tenant’s(Lessee)objectives

• Makingaprofit;generallybyallowingincreasedscaleandefficiencyofproduction.

• Growingthefarmingbusinesswithoutbuyingland.

Tenant’sresponsibility

Thetenantisresponsibleforoperatingcostsand maintainingthelandinastablecondition.

Thetenant’sobjectivesaregenerallyfocusedonshort-termprofitability,whereasthelandownergenerallyhas

objectives relatingtotheassetcondition.Thisdifferenceinobjectives can be a point of conflict and must berecognized. This is the reasonwhy longer-term leases aregenerallymoreusefultobothparties.

TheleaseagreementAwrittenagreementshouldbeconstructedandinclude the

following:

1. Land to be leased - Define the area and any partsexcluded.

2. Identifyother items included in the lease forusebythetenant.

3. Durationofthelease–leaseterm,optionsforrenewal,penaltiesforearlytermination.

4. Premature discontinuation by the landowner ortenant (penalty arrangements so that both partiesknow the costs of late departure, early terminationandcanmakeplansaccordingly).

5. Leasecommencement–haveanagreedstartingdateforthelease.

6. Leasepayment–establishtheamountandwhenitisto be paid.

7. Repairsandmaintenanceofpastures,equipmentandstructures - generally, all facilities are to be“maintained in present condition”. It isrecommendedthatthe tenantandlandownermakeajoint inspection of all facilities,make notes and takephotographicrecords.

Land Leasing

Leasingcanbeausefulwaytoprofitablyexpandafarming and vegetable business without therequirementforcapitalortheriskofdebt.

This information sheet provides an overview oflandowner and tenant responsibilities, highlightsthe importance of establishing a written leaseagreement andprovides guidance ondeterminingleaserates.

KeyMessages

Some leases also include soil tests for nutrients toensurethat ‘nutrientmining’bythetenantdoesnotoccurovertime.

8. Cropping paddocks (cash or fodder crops) - the agreement should specify the intensity of cropping; for example, the percentage of the property or area (hectares) that can be cropped in any year, ifapplicable.

9. Access to water - for irrigated crops is just asimportant astheland.Thereforeaccessandreliabilityof water resources (the water and any irrigationfacilities)must be agreed.

10. Capitalimprovements-generallytenantsdonotmakecapitalimprovements.

11. Conflict resolution - have a conflict resolutionprocedure defined in the lease document. Eithernominate a single arbiter that both tenant andlandowner accept, or nominate one each and anumpire.

Howmuchistheleaseworth?There are several methods to determine what a lease

isworth.

• Percentageofcapitalvalue.

• Percentageofthegrossmargin.

• Percentageofexpectedgrossincome.

• Marketvalues.Itisappropriatetoseekamarketvalueassessmentfromaruralrealestateagentasacheck.

Eachbusinesscanaffordadifferentleaserate,thisdependson the production systems andprofitability of crop types.Simplybecausethemarketrateisacertainamountperacreorhectaredoesnotmeanthatallbusinessescanaffordthatamount.

It is critical that growers conduct their own marginalanalysis on crop types and profitability of production todetermine what rate can be paid for as a lease payment.There is no point leasing additional land if it is notprofitable!

Inmany regions of Australia, lease land typically achieves4-5% of the capital value of land. If a grower had topurchase this land from thebank the interestwouldbe inthevicinityof9-10%,plusrates.Thedifferencebetweenthetwo percentages is then available to the grower asincreasedprofit.

Useful resourcesSuccessful Land Leasing inAustralia –Aguide for farmersand their advisers- Second Edition by Rod Ashby andDuncan Ashby. RIRDC Publication No. 11/052. Thispublication can be downloaded from RIRDC – https://rirdc.infoservices.com.au/downloads/11-052

SummaryLeasingcanbeausefulwaytoprofitablyexpandafarmingandvegetablebusinesswithouttherequirementforcapitalortheriskofdebt.

Disputesbetweentenantsandlandownersoccurregularly.Itiscriticalforpartiestothoroughlydiscussanyagreementandtodocumenttheleasearrangement.

Documenttheconditionofstructuresandlandatthestartof the lease;makenotes, takephotosoravideo record toprovideevidence.Awrittenagreementisessential.

Ensurethattheleasepriceforthelandwillbeprofitableforyourproductionsystem,whichmaynotnecessarilybethemarketrate.

ToolsandfurtherresourcesFurtherresourcesavailablethatmaybeusefultoconsiderbusinessstructuresinclude:

• IncreasingProductivity-Achievingeconomiesofscaleinvegetableproduction

• ScaleofVegetableProduction-Profitcalculator

• CollectiveMarketing-Sellingvegetablesprofitably!

• ANewBusinessStructure-Theoptionsandbenefits

• CollaborativeBusinessModels

• LegalBusinessStructures

Disclaimer

ThisbusinesscasewasproducedandeditedbyTasmanianInstituteofAgriculture(TIA).TIAproducesthesedocumentswiththe expectation that users exercise their own skill and care with respect to their use. Before relying on or altering anybusiness practices, users should carefully evaluate the accuracy and relevance of the information for their purpose andshouldobtainappropriateprofessionaladvicerelevanttotheirparticularcircumstances.

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