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  Wednesday, September 03, 2014

Disclaimer and Important Notice

This publication outlines some of the information and considerations of leasing privately owned land. 

This publication serves only as a guide and is not to be relied on as an interpretation or complete coverage of all the laws affecting land rental arrangements.  The Government of Saskatchewan assumes no responsibility towards persons using it as such. 

It is important to discuss your specific situation and all land rental arrangements with your lawyer, accountant and tax consultant before signing a lease agreement. 

For more information about this publication, contact:

Ministry of Agriculture Regional Office
or the Agriculture Knowledge Centre
Phone (toll free): 1-866-457-2377
Fax: 1-306-694-3938
E-mail: mailto:aginfo@agr.gov.sk.ca

This publication and other Saskatchewan Agriculture publications are available from the Agriculture Knowledge Centre.


Introduction

A land lease agreement is a legal document that sets out the terms of an agreement between a landlord and tenant. 

There are many items and conditions that need to be included as terms of an agreement. 

The landlord and tenant must carefully examine the various terms and conditions to ensure that they are acceptable to both parties. 

This publication provides sample clauses for a cash lease agreement.  Also included are samples of various forms which may be needed as part of a lease agreement. 

Landlords and tenants must remember that agriculture is cyclical.  With this uncertainty, agreements in excess of three years should provide for a periodic review of the essential terms.

In a cash lease, the tenant pays a fixed payment to the landlord for renting the land and improvements.  This fixed payment is agreed to in advance of the growing season and is payable regardless of a crop failure or low prices. Typically the tenant supplies labour and machinery and pays all the expenses except for property taxes, building insurance and major building repairs.  For this, the tenant receives all the income.

A cash lease may have distinct advantages over a crop share lease for absentee landlords who do not have a good understanding of agriculture in Saskatchewan. 

The assurance of a stable income may be important for some landlords.  The landlord does not have to worry about the effects of low grain prices or disasters.  The tenant accepts all the price and production risk, and this may mean less stress for the landlord.  The landlord does not have to be concerned about the honesty of the tenant, as would be the case in a crop share arrangement.

A cash lease also has advantages for the tenant. The tenant has more flexibility in making all the management decisions of what, where and when to plant, harvest and market the production.  The tenant with superior management skills may be better off with a cash lease because of the potential to produce higher yields and higher net incomes.


Completing a Lease Agreement 

The following steps should be taken in completing a lease agreement.

1.   Read this publication and the Saskatchewan Agriculture publication entitled Land Rental Arrangements.  Study the sample clauses carefully to determine the impacts of each clause.  Consult with your lawyer and your accountant.

2.   Calculate what you think is an equitable rent arrangement.  Working through the worksheets in the appendices will help to ensure that an equitable rent arrangement is established.

3.   The landlord and tenant should meet, if possible, to discuss the terms of a prospective lease, deciding which clauses are needed and deleting the clauses that are not needed.  Make changes where desired and have one party draft the prospective agreement.

4.   Each party should then consult its own lawyer to determine final wording to meet the needs of both parties.  Both parties sign the final copy in duplicate.

5.   The landlord and lawyer should ensure that the requirements of The Homesteads Act, 1989 are fulfilled.  This Act requires that the landlord's non-owning spouse give written consent to lease out the land.  A sample form entitled  Consent of Non-Owning Spouse is provided in this publication.  A homestead is any land(s) upon which the spouses have lived since their marriage and in which the owning spouse has an equity interest.  A person may have several homesteads.

The Act also requires that the non-owning spouse appear before a solicitor, notary public, Justice of the Peace, local registrar of the Court of Queen's Bench or district court judge to complete the Certificate of Acknowledgement.  This is to ensure that the non-owning spouse understands his/her rights in the homestead, and that he/she signs the lease agreement and form entitled Consent of Non-Owning Spouse of his/her own free will and consent, without any compulsion on the part of the owning spouse.

If the landlord has no spouse, or if the land in the agreement has never been part of a homestead, or if the homestead rights of the landlord's spouse were relinquished by an interspousal agreement or Court Order pursuant to The Family Property Act, then complete the form entitled Affidavit of Landlord.

6.   It is a good practice to complete an Affidavit of Execution.  This is confirmation by the witness that the specified individuals completed the agreement.

7.   The tenant and the landlord should complete the form entitled Consent to Make Major Improvements prior to making major improvements on the rented land.  It should be clearly outlined what buildings or improvements are to be made, who will pay the cost of materials and how the tenant will be compensated for his labour or any costs which he may incur.  Attach one copy of the form to each copy of the lease agreement.

8.   The tenant may wish to ensure the agreement remains in effect if the land is sold to another party.  To do this, the tenant can file a caveat with Information Services Corporation of Saskatchewan (ISC), formerly the Land Titles office.  Any of the ISC Customer Service Centres can assist with this process.  The Customer Service Centres are located in North Battleford, Humboldt, Moose Jaw, Prince Albert, Regina, Saskatoon, Swift Current and Yorkton.

9.   If the lease contains a renewal clause, the landlord and tenant can use the following forms to renew the lease agreement: Lease Renewal; Consent of Non-Owning SpouseAffidavit of Landlord, and Affidavit of Execution.  All clauses in the lease agreement should be reviewed and adjusted as required.  A caveat would have to be re-filed for the new lease.

10.  The form entitled Withdrawal and Discharge of Caveat is used to remove a caveat from the certificate of title.


Establishing a Cash Rental Rate

There are three common methods to help establish a cash rental rate:

a)   cost approach,
b)   crop share equivalent approach, and
c)   market approach.

Both parties need to look at the potential for profit calculation, or income approach (see Appendix III), to see if the cash rental rate will work.  This calculation determines the amount of income or profit that can be expected from a given rental situation. 

Both parties must recognize that there is little advantage to entering a rental arrangement that has no expectation of profit for the tenant or a very low return to the landlord's investment.

a)    The cost approach

The cost approach is a method where the landlord decides what minimum rent is needed to cover the costs associated with owning the land.  These costs include the investment cost of the value of the land in question (opportunity cost of the money). 

The landlord should also consider the cost of property taxes and the leased buildings' investment cost, repairs, depreciation and insurance.

Key advantages/disadvantages of the cost approach:

-     the rent is simple to calculate;
-     rental rates do not fluctuate wildly from year to year;
-     rental rates do not fluctuate with crop or crop input prices;
-     rate of return for landlord is equal to selling the land and investing the money; and
-     does not look at any interests of the tenant.

Appendix I provides a worksheet that can be used to calculate the landlord's costs.

b)    The crop share equivalent approach The crop share equivalent approach is a method where the cash rental is calculated to be equal to a projected crop share rent, but rather than pay the landlord in crop, the tenant pays an equal amount in cash. 

The landlord and tenant have to decide which crops are to be included in the calculations as well as which production levels (area average or individual yields) are to be used.  It would be a good practice to go through the calculation to determine what crop share should be used. 

This calculation is described in the publications entitled Land Rental Arrangements and Crop Share Lease Agreement published by Saskatchewan Agriculture and available by phoning the Agriculture Knowledge Centre or checking the Saskatchewan Agriculture website at http://www.agriculture.gov.sk.ca/.

This method equates the cash rental to what it would have been under a crop share.  However, there is a significant difference.  The calculations are based on projected production and revenues and do not take into consideration the price and production risk.  A rental discount needs to be applied to the calculated amount to offset the extra risk that the tenant assumes.

If you have a rental arrangement that you expect will continue for several years, there are some options that can be incorporated to ease the cyclical nature of farming. 

For example, both parties can agree to re-calculate the rent each year based on the previous year's prices and yields.  Now, it doesn't really help in the bad year, but it is comforting to know that after a bad year, the upcoming year will have lower rent.  Remember, the reverse happens too.  The landlord, strictly speaking, still does not accept any price or production risk, but the landlord accepts some of the risk of the cyclical nature of farming.

The key advantages/disadvantages are:

-     the rent is somewhat more complicated to calculate;
-     rental rate could fluctuate much from year-to-year, or as often as the lease is re-negotiated; and
-     no production or price risk is assumed by the landlord. However, calculations of rental rates are affected by the tenant's production figures.

Appendix II provides a worksheet that can be used to calculate a rent amount using the crop share equivalent approach.

c)    The market approach

The market approach is based on other cash rental agreements in the community. Talking to neighbours and others who rent land can provide valuable information to determine what is happening locally. Both parties need to work through the calculations to determine if the community standards are acceptable.

Another way to find out about the local market is to advertise and call for tenders where the interested people, in writing, tell what they would offer. 

The call for tenders is more common among  landlords who know little about farming, those who no longer live in the area, those who do not wish to assume any of the risk, or those who need a constant, guaranteed cash flow.

The key advantages/disadvantages are:

      -  the rent is easy to determine;
      -  the rent does not fluctuate with crop or crop input prices; and
      -  the landlord assumes no production or price risk.

For more information and examples on the above approaches to cash rental calculations, review the publication entitled Land Rental Arrangements, published by Saskatchewan Agriculture.


Risk and Rent Discounts

In a fixed cash rental agreement, the landlord assumes no risk.  The rent is agreed to prior to seeding and thus the tenant accepts all the price and production risk.  This is the main reason why crop share rental needs to be discounted in cash lease agreements.

The second reason for discounts is to account for the fact that, in most cases, some or all of the rent is received prior to when it would have come from a crop share.  It is common that part of the rent is paid prior to seeding. 

Cash lease agreements often discount the crop share amount by five to 20 per cent, depending on the terms of the lease. 

Some common examples of discounts are:

-     up to five per cent reduction because the landlord accepts only some of either price or production risk, or
-     up to 10 per cent reduction because the landlord accepts no price and production risk (cash leases).

Additional discounts - considering time value of money:

-     up to five per cent reduction if one half of the rent is paid in advance of seeding, and the balance in advance of marketing, or
-     up to 10 per cent reduction if full rent is paid in advance of seeding.

In the majority of cases, the property taxes are paid by the landlord. If the tenant is paying some or all the taxes, the cash lease will need to be discounted.


Other Issues

From time to time, there are payments made by various governments to farmers or landowners.  Clause 15 of the sample Cash Lease Agreement provides an example of how these payments may be shared. This clause should be carefully reviewed and amended to meet the requirements of both the landlord and tenant.

Liability protection for both the landlord and tenant is becoming an important issue.  Failure by a tenant to adhere to environmental laws could impact both parties.  Included in this is the issue of manure management. 

A landlord should address this issue in the lease agreement especially if there are intensive livestock operations in the area.  In an agreement, the clause should refer to soil test recommendations as the measuring tool as well as protecting against nutrient loading.  In all cases, the amount of manure, fertilizer or soil amendments should be restricted so that overloading does not occur.

Another issue is smoke from burning of crop residues.  If this smoke causes an accident on a roadway, that fire may have legal implications.  The issue is to try to take steps to protect against legal actions caused by one of the parties.  As stated many times in this publication, consultation with a lawyer is recommended.

The incorrect handling and application of pesticides can create many problems.  Herbicide carryover or herbicide resistant weeds, or chemical drift and spills are all concerns landlords should seek protection from in the lease agreement.

A landlord does not want to bear any responsibility for spills and chemical drift.  Landlords need to ensure protection against damage on adjacent lands as well as on the landlord's own shelter belts and yardsite.

First, the landlord will have to decide on the level of involvement, both in terms of time and knowledge, in the determination of which pesticides can be used, rates and what is not allowed on the land.  Creating a list of pesticides that could not be used is one method.

Second, a landlord could require the tenant to supply the landlord with detailed pesticide records each year of the lease.  This information is very important to a new incoming tenant who wishes to plant a sensitive specialty crop.

Third, a landlord may want to take the initiative to require a full-fledged cropping plan to be developed and approved jointly between the landlord and tenant.

Such an agreement could include which crops to grow, fertilizer rates, pest control options, harvesting standards and summerfallow requirements.

If such a plan were developed, the resulting lease agreement would no longer require many of the clauses which speak directly to seeding, summerfallow, pesticides, and so on.  It is important to remember that, for each option, it may take considerable time for both parties to come to an agreement.

Carbon sequestration is a relatively new issue for landlords and tenants.  Carbon credit payments can be received for land that is farmed with specific production practices.  Crops can include grain or forage.  Both landlords and tenants should understand their rights and obligations within these contracts.  You may want to seek legal advice.  Landlords and tenants should negotiate who receives what portion of the carbon credit payments.  These terms should be documented within the lease agreement.

Written and verbal lease agreements should have an agreed-upon end date that fulfills both the landlord's and tenant's needs.  New leases should be re-negotiated or terminated at a reasonable time prior to the end date for the original term.

The early renegotiation of leases allows the lessee time to arrange for seed, fertilizer, herbicides and equipment.

If the lessee is terminating a lease arrangement, then early notification gives the landlord time to arrange for someone else to farm the land.

Mutual consideration and early negotiations will assist both parties. 


Sample forms:

PDF (210 KB)

PDF (115 KB)

PDF (176 KB)

PDF (166 KB)

PDF (179 KB)

PDF (115 KB)

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PDF (117 KB)

PDF (147 KB)

PDF (150 KB)

PDF (266 KB)

PDF (148 KB)

 

For more information about this publication, contact:

Agriculture Knowledge Centre
Saskatchewan Ministry of Agriculture
Phone (toll free): 1-866-457-2377
Fax: 1-306-694-3938
E-mail: aginfo@agr.gov.sk.ca

Out-of-province inquiries can phone 1-306-694-3727.

This publication and other Saskatchewan Agriculture publications are available from the Agriculture Knowledge Centre.

Related Links

 

Provincial legislation

  • The Family Property Act 
  • The Arbitration Act, 1992
  • The Agricultural Leaseholds Act
  • The Land Titles Act, 2000
  • The Homesteads Act, 1989

Federal legislation

  • Income Tax Act

Copies of the provincial legislation can be found on the Queen's Printer pages of the Government of Saskatchewan.  Federal legislation can be accessed through the same website.



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