Are you a farmer looking to improve your profitability? Well, what farmer wouldn’t! An obvious option is to increase the amount of land you farm. Statistics indicate that overhead costs per hectare generally reduce as the amount of farm land increases; so the more land, the higher the return on capital.
Purchasing land is one way to increase the area available to farm and therefore your potential for increased productivity and profitability. Other options you may not have considered are entering into a lease agreement, licence agreement or share-farming agreement, options which come without the high initial capital outlay, rigidity, risk, and long term commitment that extra land ownership demands.
1. Lease Agreements
When negotiating or entering into a Lease agreement for additional land it is worth keeping in mind that in order for a lease agreement to be legally valid, the agreement must:
• Name the lessor (land owner) and lessee (tenant).
• Identify the land to be leased.
• Grant exclusive possession to the tenant. (This means you will be granted sole use of the land for the period of the lease).
• And contain the date at which the lease commences and ceases.
Ensuring the conditions of the lease agreement match up with what you understand the agreement to be, is absolutely crucial, especially if you want to enforce the conditions later down the track. For this reason, whilst the following elements are not legally required to be in the lease agreement, we strongly recommend you include:
• The amount of rent charged and on what basis;
• the permitted use of the leased premises;
• timing of rent reviews and the mechanism for review;
• what is included in outgoings (if any) and an estimate of the lessee’s annual liability with respect to the payment of the outgoings;
• the right to renew or extend the term of the lease;
• the legal consequences of a breach of a term of the lease;
• other monetary obligations such as insurance requirements, and GST;
• special conditions as they relate to the particular land in question e.g. the maximum area to be cropped, the maximum number of stock to be run and minimum fertiliser rates; and
• the requirement for the preparation of a condition report at the start of the lease.
Section 116 of the Real Property Act 1886 (SA) provides protection for lessors and lessees. It requires that leases over one year in Torrens title land (the majority of land in SA) must be registered at the Land Titles Office. This may help to protect your lease agreement in the event of a sale of the land by the land owner.
Generally, a lease provides more options and legal protection than a licence and as such is often a more attractive option.
2. Licence Agreements
A licence may be used when the land owner is willing to grant access to the land for farming purposes but not exclusive possession of their land. There are various reasons a land owner may not want to grant exclusive possession of the land. One common example is where the land owner wants to graze their livestock on the stubble left behind after the licensed farmer’s crop has been harvested. However, there are some disadvantages to licenses.
Unlike leases, a licence:
• does not grant exclusive possession to the tenant;
• does not confer any legal interest in property;
• cannot be transferred (unless expressly allowed for in the agreement);
• cannot be registered; and
• generally cannot be protected by caveat;
Often licences are coupled with a lease where exclusive possession is to to be given over a portion of the land.
3. Share-Farming Agreements
One of share farming’s key benefits is allowing for the more efficient use of resources between two parties. It can be used as a valuable tool to reduce your risks associated with the unpredictability of the climate and grain market price.
It is important when structuring the share-farming agreement to make sure all necessary elements of the agreement are within the document. Share farming agreements can cover many different topics including;
• the percentage of the income and costs to be shared by both parties;
• the land;
• the duration of the agreement;
• how the land and water may be used;
• the division of labour;
• insurance responsibilities;
• taxation responsibilities;
• seed and chemical;
• fencing responsibilities; and
• how the agreement can be extended and terminated.
Before Beginning Negotiations
Before entering into negations a great deal of research should be done to ensure that the arrangement is right for you and that the arrangement is a fair one. Reviewing your capabilities to take on the extra land is important. Do you have the time and funds needed to farm the additional land? It is also a good idea to research the land as if you were purchasing it as it will help you to determine the potential benefit of the arrangement and at what point it is worth entering into.
Research may include:
• getting independent evaluations of the property done,
• working out a projected budget,
• checking the previous crop and stock rotations,
• identifying access to reliable water supplies,
• analysing risk factors for contamination of crop or livestock from adjacent properties
It is important that you are thorough in your research and the results and forecasts are taken into account when you are negotiating any agreement.
Dealing with Disputes
Disputes can arise irrespective of which form of agreement you have in place, so before you sign off on any arrangement make sure the agreement spells out how breaches of any terms of the agreement will be dealt with. This also allows both parties to know exactly where they stand in terms of their rights and responsibilities. Including a dispute resolution process within the agreement to cover unforseen issues and conflicts is also a good idea as it may avoid expensive legal costs in the future.
Help is at hand though if you haven’t covered the dispute resolution process in your existing agreement and a disagreement arises. The Farming Industry Dispute Resolution Code is a recent initiative of the South Australian Government which may assist in providing a low cost resolution process to a variety of farming disputes. The Code provides farmers with a mandatory alternative dispute resolution processes on a no (or low cost) basis overseen by the Small Business Commissioner. For more details: http://www.sasbc.sa.gov.au/industry_codes/farming_industry_dispute_resolution_code
Obtaining additional land through lease, licence and share-farming agreements can offer substantial benefits to farmers who want to increase their farm land without purchasing. Tri-meridian has years of experience in both drafting and negotiating agreements. We can provide the legal assistance necessary for whichever phase of the negotiation process you are in to ensure that your rights and interests are properly protected.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.