Agricultural Leases: An Overview

Background

The agriculture sector relies heavily on leases for land and equipment to meet the needs of farmers. With absentee ownership of farmland growing in the United States, farmers and ranchers lease many of the acres they farm and graze today.  Either private parties or governmental entities may enter into a leasing arrangement so the complexity and scope of these contracts can vary substantially.

Even though leases may vary in form, a lease is a contract that is implied through the parties’ actions, expressed through a written document or created through oral communications. The lease creates a situation, with the landlord being the lessor and the tenant the lessee. In most states, statutes dealing with landlord-tenant law will apply to these agricultural leases. Many states have adopted provisions in their landlord-tenant laws that apply specifically to agriculture, such as providing for a landlord’s lien on crops when the tenant fails to pay the rent.

In order to form a valid lease, the parties must typically include the following elements in their agreement: (1) the extent and boundary of the property to be leased; (2) a definite term that the lease will run; and (3) a definite rental rate. Stated more simply, a proper lease will generally describe the parties, the property, the rental rate, and the length of time it will run.

Leases are not merely instruments allowing farmers and ranchers to gain use of certain assets. Leases may be granted to take advantage of the land’s usefulness for certain activities. Landowners may grant a lease to an oil and gas company for the development of minerals under their property. Wind companies may seek leases for the development of wind energy on the land. In addition, a farmer or rancher may lease portions of their land for hunting or other recreational uses. For more discussion related to leased hunting and recreational uses of land, please visit the  and the Landowner Liability Reading Room.

Written Leases Versus Oral Leases

Oral leases are valid so long as certain requirements are met and many agricultural leases are oral. Some parties prefer oral leases, however the benefits afforded by a written lease cannot be overlooked.  A written lease is often preferable because it provides written evidence of the lease terms in case a dispute arises between the parties at a later date.

Each state has enacted a “statute of frauds” that requires that certain types of contracts must be in writing, subject to certain specific exceptions.  These laws can vary from state to state.  Examples of contracts commonly covered by states’ statutes of frauds are real estate contracts and contracts that cannot be fulfilled within one year.  Most states do allow oral agricultural leases of under one year because leases that can be performed within one year or less generally fall outside of the statute of frauds.  Leases lasting longer than one year will fall under the statute of frauds in most states and would need to be in writing in order to be enforceable.

There are common provisions that appear in many written agricultural leases.  These include the length of term for the lease, a rent clause, a termination process, limitations on subleasing and assignment, requirements to comply with federal and state conservation provisions and enroll in federal farm programs, types of crops to plant, duties to control noxious weeds and purchase insurance, types of farming practices that can be used, who is responsible for the upkeep of improvements and to make improvements on the property, an option to purchase, and attorney fees provisions.  These general provisions may be substituted or other terms added to meet the needs of the parties.

Termination of the Lease

Termination of a farm lease can come naturally at the end of the term or, if the lease is extended beyond the original term, the parties can terminate the lease upon meeting certain requirements of notification.  Termination of the lease will depend on the tenancy created by the lease and the particulars of the state’s law.

A tenancy for a period of years is one that has a specific start date and a fixed termination date.  The law views any fixed computable period of time as a tenancy for a period of years, even if the term of the lease is a fixed number of months.  The common law rule does not require notification for termination of a tenancy for a period of years because the parties already know the day upon which the lease would terminate.  This common law rule is not fixed and the parties could choose to require a notification time in the lease.  Finally, it should be noted that a particular state’s law could limit the length of time that this tenancy may last.

A periodic tenancy is one that runs from one-time period to another time period, such as month-to-month or year-to-year.  This tenancy has no definite end and is automatically renewed until proper notification is given.  In general, proper notification for a year-to-year lease under the common law is six months before the new lease term begins.  However, some states have shortened this period by statute.  A month-to-month periodic tenancy typically requires thirty days’ notice before the lease can be terminated.

Other methods exist which allow for the termination of a lease.  A lease can be ended at any time if all parties to the lease agree to terminate.  Another common method is to include a termination clause in the written lease that addresses circumstances where one party can end the lease if certain events, such as the breach of one of the lease clauses, occur.

State Statutes on Leasing

States can have a wide array of statutes dealing with agricultural leases, but there are some common provisions.  These common provisions typically deal with such matters as termination of the tenancy, assignment of leases, landlord’s lien for rent, and control of noxious weeds.  Where the common law is still in place, many states have different rules on the rights to remove fixtures, rights in permanent improvements, rights of entry by the landlord, tenancy termination, rights of tenant to harvest the crops after the expiration of the lease, and the liability of the tenant for rent in the case of natural disaster.

Farm Land Leases

The most common form of lease in agriculture is a land lease, with the cash rent lease and the crop-share lease being the two most frequently used leases in agriculture.  Both types of leases involve different forms of a definite rental rate.

In a typical cash rent lease, the tenant is obligated to pay a set price per acre or a set rate for the leased land.  With this form of lease, the tenant bears certain economic risks, and the landlord is guaranteed a predictable return, regardless of commodity prices.  The landlord does carry the risks of the tenant’s not paying the rent or using farming practices that reap short-term benefits from the land.  Parties can negotiate terms to help limit their exposure to these risks, the tenant can negotiate for flexible rent terms, and the landlord can include terms that specify the type of farming practices that should be used.

With a crop-share lease, the landlord receives a share of the crops produced in exchange for the use of the land by the tenant.  The amount of the share typically depends on local custom.  The landlord usually agrees to pay a portion of the input costs under a crop-share lease.  This type of lease exposes the landlord to more risk but does allow the landlord to benefit if commodity prices or production increase. The crop-share lease also allows the tenant to spread the risk of reduced yields and price risk and reduces the amount of capital needed for the operation.  A third type of lease that is becoming increasingly popular is the hybrid lease.  The hybrid lease is a combination of the cash and crop-share leases which provides greater flexibility in certain circumstances.

Grazing Permit

A grazing permit is similar to a crop lease, but is different in some aspects.  Where a lease creates an interest in land, called a leasehold, a grazing permit by statute does not create a right, title, interest, or estate in the public lands and is only a license to use the public lands.  The government may withdraw this license at any time without compensation, except in limited situations where compensation may be required.  A grazing permit holder may have a right to compensation when the permit is fully or partially canceled in order to use the public land for another purpose.

The Bureau of Land Management and the U.S. Forest Service administer grazing permits on federally owned public lands. If the state has public lands available for grazing, the permits are administered by the appropriate state agency.  The permits establish the requirements of the private party to use the public lands for grazing and operate under the traditional “first come, first serve” method.  In order to get a grazing permit, a private party must first own or lease base property or a private ranch.  Base property is private land near the area to be grazed and is not easy to acquire. The term of the permit is statutorily set at ten years.   The private party must pay a grazing fee that is based on a 1966 base value of 1.23 per animal unit month (AUM) and then adjusted based on current private grazing land lease rates, beef cattle prices, and the cost of livestock production.  The fee cannot drop below $1.35 per AUM according to a Presidential Executive Order issued in 1986 by President Reagan.

Besides the Taylor Grazing Act of 1934, public lands grazing is controlled by the National Environmental Policy Act of 1969, the Endangered Species Act of 1973, the Federal Land Policy and Management Act of 1976, and the Public Rangelands Improvement Act of 1978.  For many years, environmental groups have challenged the issuance and renewal of grazing permits, making renewal of many grazing permits more difficult.

For information pertaining to these statutes and the environmental issues, please visit the Environmental Law Reading Room.

Wind Leases

Wind leases are a fast-growing type of lease taking place on agricultural land across the country.  With a wind lease, a company will lease the right to enter the landowner’s property and erect wind energy infrastructure.  A typical wind lease may exceed thirty to fifty pages.  Prior to a lease being signed, the parties will typically sign an option agreement, usually between two to ten years depending on state law limits for option periods.  During the option period, the wind company will conduct tests to determine if the land is suitable for the project. If the wind company determines that the property is suitable for the project, then the company will exercise the option to lease the property.  But there is generally no obligation on the company to exercise the option to lease at the end of the option period if the property is unsuitable for the project.

A wind lease will include terms on the length of the time the lease will run, anywhere from twenty-five to fifty years, and many have an optional period that may last for up to another fifty years.  The lease can include terms about the nature of activities that the wind company will be able to undertake on the property and in some cases may limit the development rights of the landowner. A common lease provision is a confidentiality clause that will prevent the terms from being made public by both parties. The typical lease will also include a decommission provision that details the removal of the turbines, the removal of any materials or equipment, and the removal of concrete to a certain depth.

The compensation provisions can vary from lease to lease.  Some leases provide for a fixed payment over the life of the lease.  Other leases have compensation provisions that depend on the number of acres leased, number of turbines installed, amount of electricity produced, and percentage of revenue. A variety of other methods can be used to calculate compensation as well. The solar leasing processes will often be an agricultural landowner’s first contact with the wind energy industry. Considering this, it is critical that the landowner familiarize themselves with this sector of the energy industry before signing any contracts.

For more discussion on wind energy, please visit the Renewable Energy Reading Room.

Oil & Gas Leases

The large majority of oil and gas production occurs on farmland (estimated at 67% in 2014) and recent technological developments have allowed for more expansive extraction across the country. Oil and Gas leases differ from most agricultural leases in that they involve the leasing of below-ground mineral rights to a third party for extraction. Mineral rights are not always conveyed with purchase of a property, so landowners should verify their mineral rights before entering into an agreement.

The terms of an oil and gas lease are variable, but typically consist of a primary period (before production begins), and a secondary term (following the start of production). Once the secondary term begins following the location of a successful drilling site, the lease may continue indefinitely as long as the site remains productive. Prior to production, the landowner may be entitled to delay rental payments before they receive a share of the royalties following production. It may be beneficial to include provisions in the lease that allow options for termination in the event of late payments or non-payment.

Due to the complexity of oil and gas leases, it is important for a landowner to research their rights and responsibilities under the lease, and consult with a legal professional for assistance. The lessee will often erect infrastructure on the property, and the landowner should clarify the location and type of infrastructure to be permitted, including roads, pipelines, and storage tanks. Landowners can often continue agricultural production on the majority of their land under an oil and gas lease, including cropping or grazing. In some cases, especially those involving hydraulic fracturing, energy corporations will extract from neighboring properties without the use of above ground intrusion. However, a pooling agreement must be in place for neighboring landowners to receive a percentage of the royalties.

Compensation for oil and gas leases is variable. The rates offered for oil & gas leases are controlled by several factors, including the market for energy products at the time the lease is signed, type of oil and gas extracted, difficulty of extraction, and geographical location. Some leases provide a single payment based upon market rates, while others offer periodic payments that reflect a percentage of the proceeds generated from extraction. Other benefits may include signing bonuses, delay rental, and damage provisions. Often, costs for infrastructure and drilling may be subtracted before payments are received. Landowners may also want to consult with a legal professional regarding liability for pollution or other damages under state and federal law.

Solar Leases

Solar leases offer another alternative for those looking to lease agricultural land. In recent years, the price of solar energy equipment has dropped, allowing for further expansion of the industry and increased potential for profit. It is important for landowners to become familiar with the solar industry and consult with an attorney before signing a solar lease.

The terms of Solar leases may vary. However, just as with a wind energy lease they have a “development term” and “operations term”. The “development term” usually lasts 4-5 years and the “operations term” 30-35 years. Compensation for solar leases include a minimum payment threshold, which is tied to the market value of the land. For example, land outside of densely populated areas often has a higher value for solar developers than land in remote areas. Additionally, agricultural landowners may negotiate for royalties in addition to the minimum payment. Royalties normally vary from 3.5% – 4.5% of the gross revenue generated by the solar production. Both payment methods increase over time, keeping pace with the costs of solar energy, inflation and land value. Minimum payments are usually received yearly, whereas the royalties may be received quarterly.

Due to the lengthy terms of solar leases, there are a variety of factors that should be considered before signing a contract for utility scale solar development. While landowners may often continue to use the majority their property for agricultural purposes under other forms of energy leases, solar leases can be more limiting. Solar infrastructure takes up a large amount of ground area, called the “occupied area”. The landowner’s right to ingress and egress in the “occupied area” is usually waived and any infrastructure fenced off. However, the solar lessee will hold rights to ingress and egress over the land located outside of the “occupied area” for purposes such as maintenance. Land occupied for solar production cannot be utilized for any other form of production for the term of the lease. Accordingly, landowners should consult with an attorney regarding any third-party easements and the status of the mineral rights on their land. Solar leases can also have tax implications, including loss of agricultural exemptions and effects on federal and state income tax.

For more discussion on wind energy, please visit the Renewable Energy Reading Room.

Fee Hunting Leases

Agricultural landowners have a wide variety of options regarding hunting leases. The landowner may choose to lease to individuals for a limited number of seasonal hunts, or they may also lease to larger groups such as sporting clubs and outfitting businesses. Leases may assist an agricultural landowner in covering the cost of property taxes and operating costs, and may also provide added benefit in reducing wildlife pressure to mitigate damage to crops.

The most common forms of hunting leases are annual leases, seasonal leases for a particular game species, and short-term leases that vary in length from a day, to a week or longer. Various factors may determine leasing rates, including the number of hunters who hold leases, the quantity and quality of game on the property, species diversity, geographical location, amenities and accommodations, and the size of the property. The fees for most hunting leases are assessed on a per acre basis.

It is vital for landowners to familiarize themselves with any risks and liability involved with hunting leases. In some states, landowners have premises liability protection unless negligence can be proven. However, landowners may carry liability insurance for further protection or have lessees sign an agreement that releases them from liability in the event of any accident or personal injury. Other important items to consider when drafting a hunting lease include dates, boundaries of the property, permittable species that can be hunted, number of hunters allowed at once, rights and responsibilities of each party, and remedies in the event of a breach of the lease.

For more discussion related to leased hunting and recreational uses of land, please visit the Agritourism Reading Room.