Many farm tenancy arrangements are based on family or neighbor relationships and are often not in writing. Because land changes hands through sale, gift, and inheritance, such verbal arrangements create uncertainty regarding the farmer’s tenure - and investment in - the land. Arguably, a verbal ‘permission to farm’ made by someone now deceased is not renewable under the state agricultural tenancy statute, which provides for no such succession of verbal permissions, only protection from ouster in the year such permission was verbally granted. (See The Verbal (Statutory) Farm Tenancy). That said, land changing hands between generations provides an opportunity to change the way farmers and landowners have been doing business together.
Heirs and legatees inheriting rights in land may want to hold on to title but are seeking a more formalized agreement with the farmer who has been tending the land. In this changing demographic environment—with more landowners living out of the area—it is to the farmer’s benefit to have a more secure tenure relationship than the traditional handshake. A written tenancy agreement (hereafter "lease") also helps secure continued enrollment of land in North Carolina's Present Use Value property tax system.
[Note: this narrative refers to the farmer working the land under written agreement as a Lessee, whose interest is a leasehold. A farmer without a written agreement is a tenant, whose interest is nonetheless protected by statute for the crop year, and should be referred to as a “tenancy.”]
In North Carolina, most rental arrangements for farmland are likely for a set price per acre for the production season; a year is considered traditional in the general statutes (See NCGS §42-23). The farmer pays the landowner the total of the rate per acre multiplied by the number of acres farmed. Under this arrangement, the tenant/lessee bears most of the costs — and thus most of the risks — of preparing the land for production and growing and harvesting the crop. Thus, the lessee still owes rent in the event of crop or market failure. Some cash leases provide for an amount paid tied to the price of the crop, actual yields, or a combination of both, and can offer a lower base rent to protect the farmer in bad years while rewarding the landowner in better years. 1
A crop share arrangement — more common in the Mid-Western United States — allocates risk between landowner and lessee, splits the costs and the proceeds of production according to agreement. Share leases can give the landowner a specified share of the crop (which the farmer can buy for a set price or the landowner can sell on the open market), so when the farmer does well, the landowner does well. Though crop shares have elements of a partnership venture, NC law is explicit that such leases are not to be considered partnerships. 2
There are several issues to consider before the landowner enters into a lease to create a multi-year working relationship with a farmer, either someone in their family, a neighbor, perhaps someone new to the area. For those landowners without experience renting or leasing land to a farmer, this narrative is meant to provide some ideas and elements for putting together an effective farmland lease agreement that provides clarity and tenure security.
A landowner should take stock of their land and take a look at what they have to offer, as well as consider their goals for the property. Determining the amount and quality of land available—even if under current verbal tenancy—is an obvious place to start. Keep in mind that not all land is created equal, and rent comparisons are difficult, particularly outside of the larger open areas of Eastern North Carolina.
Poor land, very small parcels, or land with poor access and/or obstructions may not even be worth considering, as these may be too difficult to farm and may be better suited to forest management. Parcels too small to accommodate ever larger planting and harvesting equipment, yet remote from direct market opportunities may not be marketable for farming use. If it has not been farmed within the past few years, the work (cost) to rehabilitate it may be considerable.
Landowners can turn to several sources to “discover” their land if, indeed, they do not already have a recent relationship with it. Many will have recreational relationships with their parents’ land (e.g., hunting, fishing, or horseback riding) but may be less familiar with how it is managed for income production through farming or forestry. Landowners can inquire for their records through the county Farm Service Agency (FSA) office, which may include crop production history, aerial photos, NRCS program participation. Google Earth is a great way to get a recent aerial view of your land in great detail. Landowners can also request assistance from their local N.C. Cooperative Extension center, which may have a working knowledge of how their particular parcel has been managed over the years, or the county Conservation District office, which might be available to walk the land and point out important soil and hydrological features, as well as certain restrictions pertaining to environmentally sensitive tracts of land.
Probably the best first person to help educate a new landowner about their land is the farmer who has farmed it. In many cases, this will help lay the foundation for a continuing, if more formalized, legal relationship.
For the landowner, a clear appreciation of values, goals, and needs—as well as their own desired role in decision-making—for the farm will form the foundation of work on the agreement with someone who will farm it, whether that person is related to the landowner by blood or not. Below are a few points to consider from the landowner side of the agreement:
Lease agreements for farmland or other real property assets are always in writing; verbal non-written arrangements are subject to statutory definition and enforcement (See Verbal Farm Tenancies in North Carolina). The limited advantage of an oral, annual agreement is that the agreement can be terminated at the end of the season at landowner discretion, provided sufficient statutory notice is given. While flexible for land owners, such arrangements create instability for farmers, particularly if they need to make medium-term investments in the ground to ensure best yields in the current season. If the landowner has inherited land subject to a written lease, they should request a copy from the lessee and review it to understand the term and limits of the tenancy.
The language used by the farmer in their profession presents a learning curve to many landowners, terms that have everyday meaning to him or her. Landowners should not fear appearing at a disadvantage in asking even a basic question, as the interplay of education should help strengthen the basis for agreement.
Most often, landowner involvement is passive. In some cases, though, personal values that the land be farmed and well-taken care of will drive a landowner’s desire to rent the land to a particular type of producer, perhaps one with a certified organic marketing plan. For those landowners particularly enthusiastic about emerging local food systems and environmental stewardship, they should be prepared that a farmer may have concerns with sharing daily operational decisions if the landowner has no farming experience to offer. For those folks, it may be best to consider the investment of land into the rental equation as the contribution and defer to the skills of the producer in managing that contribution (again, subject to the landowner’s goals, etc.). Even in share-lease situations, the landowner should understand that a lease is not a partnership and should not entitle them to weigh in on day-to-day decisions (unless both have so agreed); this is a breeding ground for frustration and disagreement.
This applies to both the market for land rents, as well as what is going on with either commodity prices or input market conditions. The landowner should be prepared to respond to the situation where the current rental rate agreement is jeopardizing the farmer’s operational abilities. Also, if the landowner feels rent is low in a period of rising commodity prices, they should consider that many of the farmer’s inputs may rise with crop prices, so a lessee’s margin for increased rent payment may still be limited.
The landowner should annually plan for a business meeting with the farm lessee to overview the season that has ended. Here is a place to raise issues that lessor and lessee want to bring up about the condition of the land and important changes that will have an impact on the next year. If there is something the landowner sees they have questions about or want addressed, this is the time to discuss it.
Smooth working relationships between farmers and landowners can span generations. A stable farm lessee, when a landowner considers their management options for the land, should be considered an asset. Landowners should, therefore, be reasonable when offered a higher rent and improvements by a new and untested lessee and allow the current lessee to address any issues where their work may appear deficient compared to what someone new is offering. In some areas, competition for land can be fierce. Though the landowner may strive for a higher monetary return from the land, a revolving door of lessees may have costs that exceed any marginal increases in rent.
The following points should be included in the farmer/tenant’s landholding strategy:
Below are the very basic elements of a lease agreement. As alluded to earlier in this narrative, there are many variations of the themes below.
The lease must be signed by the actual owner(s) of the property or those with proper authority to bind the property to the terms of the lease. Keep in mind that property that has been inherited may have more than one owner. If property is held in a trust, the trustee must sign. If land is held in a limited liability company, the person with management authority must sign. Failure to secure the signatures of the proper owners leaves the lease vulnerable to being voided by owners who did not consent to the agreement.
The property description in the agreement identifies the land both parties intend to be farmed. The lease should identify the land area, buildings, and equipment (if applicable). Land can be described by inserting appendices to the agreement (properly referenced in the document) that contain either the deed description or a portion thereof, and/or aerial photos of the property from FSA or county Geographic Information System (GIS) website or Google Earth, with fields and access marked on the photograph. Access should clearly be set out, especially where access crosses other land or to structures not in the leased premises.
The lease should specify when it begins and when it ends. In coming to an agreement, the farmer will readily be able to calculate the amount of time necessary to recoup their input investments in the land. Multi-year leases can offer a set term that binds the property for that period, with a renewal clause that should be clear on how renewal takes place or notice of termination is given (i.e. time period and manner). For example, it is probably reasonable to both parties to allow a minimum six-month period to announce an intent not to renew a three-plus-year lease.
For a cash rent lease, the amount of rent is normally paid in one payment by a particular date, which varies (traditionally, rent was paid at year’s end from crop proceeds). For more diversified operations with earlier market harvests, the parties can agree to an installment schedule for the preparation of the land, spring crop harvest, and fall crop harvest. Determining a fair rate is often a challenge, but there are several methods to consider. (See Determining a Fair Rent)
The lease normally limits use to agricultural production. Some landowners may want to specify prohibited uses, such as chemical application. Landowners should consider the practicalities of limiting certain activities that would otherwise reduce the productivity of the operation. Remember that all prohibited uses can be qualified by written consent if the lease so declares.
Below is a partial list of use issues to address:
Maintenance of property should be allocated between the parties, including responsibility for routine repairs and those caused by extreme weather events or fire. Be sure to list items such as fencing, gates, wells and drainage pumps, etc. In many farm situations, there are structures that the Lessee installs but intends to remove, such as hoop houses, moveable cattle fencing, etc. Be sure to identify in the lease that these are not fixtures and the Lessee will be removing them at the end or termination of the lease for clarity (though these items are removable as trade fixtures of the farmer/lessee). Likewise, if items such as grain bins are anchored to cement pads and such, be sure to agree on what happens to the bin and the padding at the end of the lease, whether it is left in place or the Lessee must dig it up and repair the ground.
Issues that can be addressed can include prohibitions on the right to sublease, payment of utilities, right of entry and inspection by landowner. A statement binding the heirs and assigns (i.e. subsequent purchasers) to the terms of the lease agreement should be included (see Recording a Lease Memorandum below). The lease should also contain a clear indemnity clause, requiring parties to pay for liability attributed to one party for the actions of another. It is common sense to require that both parties keep insurance policies at a designated level for just such a purpose.
Default means that one of the parties has not lived up to the obligations attributed to them in the lease. Numerous events can trigger default: failure to pay rent, failure to abide by any use prohibitions, maintain liability insurance, comply with laws and regulations, bankruptcy, etc. Default does not necessarily trigger termination, but should trigger a process for recognizing and curing the default if possible. If the default cannot be cured, a process should be spelled out for repossession of the property by the landowner, including reserved rights to crops and removal of personal property by the farmer. Disagreements should be subject to a clear dispute resolution process, such as a mediation requirement. (For absentee landowners, be cooperative and do not insert any litigation venue clause inconvenient to the land and farmer.)
Though many landowners might agree to a rental rate that covers their carrying costs (property taxes and insurance) on the land, be sure to spell out who has responsibility for these expenses (the landowner is responsible for taxes and insurance on the land).
A common type of farm lease—particularly where the lessee farmer is individually a co-tenant on the land or an entity owned by the landowner(s)—is a “triple net” lease. The three payment obligations under this lease are the rent, the annual property tax bill, and the cost of liability insurance on the land (which may be distinguished from a liability policy for the farm operation.)
Lastly, the lease should contain a clause requiring the lessee to provide information on income when requested, if not to the owner, to the property tax office. This is to ensure that the landowner can provide proof of farm income to keep land enrolled in the present use value property tax regime when audited for compliance by the county.
In a lease agreement, determining a fair price is often the most important factor for both parties, yet it can be difficult to establish in many farming situations. Location, soil quality, the forces of supply and demand, commodity and direct-market prices, as well as your personal goals for the land all play a part. For higher-grossing, larger acreage operations, establishing a rental rate can be more straightforward where there is a history (and reasonable forecast) of cost and price information.
Landowners have been known to charge just enough to cover the taxes on the land. Some likely do not charge, as in when the trade-off is keeping a pasture mowed (in exchange for the hay the farmer takes). Most agreements are set up on a per-acre basis, where a rate per acre times the total acreage used becomes the annual payment. Below are some considerations for setting the rental rate:
(General Source: MacKenzie, M.K., How to Determine Fair Farmland Rental Rates, Cornell Small Farms Program (2019).
A written lease of any term is an enforceable contract between the lessor and lessee, as well as successors of either (particularly if the lease so states). However, under NC statute, a lease for a term in excess of three (3) years is not enforceable against lien creditors or a purchaser for value of the leased property. 3 This means a lease for five years is enforceable by the farmer/lessee against the heirs of the original lessor until the end of its term; however, if the heirs were to sell or otherwise put up the property as collateral for a loan (and thereafter foreclosed), the lessee is without recourse to remain on the land. Additionally, unpaid property taxes pose a threat as well.
To signify the lease, a lease memorandum may be recorded in the county register of deeds that need not disclose the rent amount but must disclose the following:
The statute provides a form of memorandum for recording, and an example is provided on a page following the lease example following this article. The lease example provided following this narrative includes the basic terms of an option to purchase the property subject to the lease, which must be noted in the memorandum.
If the lease agreement includes a residential dwelling and includes an option to purchase the dwelling, such documents and memorandum have more specific requirements. 5
As a practical matter, a lease is only as good as the parties’ willingness to enforce it in court. The more thorough and open the agreement process, the less likely a disagreement will occur in the first place. Although it is likely impossible to build a lease agreement that will provide for all contingencies that might occur, both parties should try to anticipate foreseeable occurrences and identify the procedure for what the parties do should something unforeseen occur. Because both landowner and farmer benefit from a written lease agreement, both should take care in developing an agreement that supports each other’s goals.
Robert Andrew Branan Extension Agriculture & Resource Economics Specialist, Agricultural Law
Agricultural & Resource Economics
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Publication date: Feb. 5, 2019
Revised: May 8, 2024
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