Debra Elias, Minnesota Institute for Sustainable Agriculture
The information presented in this fact sheet is not intended to take the place of professional legal advice. In developing any written lease agreement, it is highly recommended that all parties seek professional legal advice.
One way in which land coming out of the Conservation Reserve Program (CRP) differs from other farmland is that many CRP contract-holders don’t personally manage their CRP land. They may be retired, absent, no longer farming, or non-farmers who bought or inherited the land. Therefore, when CRP contracts expire, landowners must decide who will manage the land in the future.
At least three options exist for owners who won’t be managing or farming their land themselves. These include transferring land ownership to another owner, custom farming, and leasing the land to another operator. Each of these options has unique income, tax, and estate consequences. This information sheet will discuss the option of leasing.
(For more information on transferring the farm and custom farming, see Other Resources.)
Deciding what type of lease arrangement to use is an important decision for the owner and the tenant. Landowners should consider the physical characteristics of the land and any personal preferences. Options include:
For more information on these options, see Selecting a Lease Type, Recreational Leases, and Harvesting the Wind in this series.
A lease is a legal document. It describes the agreement between an owner and a tenant who combine their individual resources of land, labor, capital, and management for purposes of agricultural production. It also describes how they will share the income from the land.
In Minnesota, agricultural land leases have traditionally been oral agreements. However, a written agreement is recommended for many reasons. First, it encourages the owner and tenant to agree upon the details so that they have common expectations. It also serves as a record both parties can turn to if they disagree. A clear, written record helps resolve disagreements fairly and protects both parties. Finally, a written lease provides a valuable guide for heirs if either party dies.
The most basic items to be included in every lease are:
In addition to these basic items, an effective lease should clearly explain the duties and rights of the landowner and the tenant. It should anticipate potential problems and describe how they would be resolved.
Another difference between CRP land and other farmland is that CRP land usually has been only minimally managed during the ten years of the CRP contract. Yet another difference is that conservation benefits often have accrued to the land during this time. These differences give rise to the special issues of conservation goals, productivity, and improvements, which affect the equitability and outcome of any lease agreement. Landowners and tenants should consider these issues when deciding which type of lease to use. (See Table 1 for a comparison of lease types based on these issues.)
Soil fertility and structure, water availability and quality, and wildlife habitat may have improved on the land during its enrollment in CRP. These benefits are valuable both to the landowner and to society. They affect the long-term productivity and economic value of the land. The owner may have goals for maintaining these benefits.
How can the owner and tenant ensure conservation goals for the land will be met? There are at least three approaches for doing so. The owner can specify the land use, include land use provisions, or utilize lease types that create greater incentives for conservation. For more information, see Maintaining Conservation Benefits on Leased Land in this series.
For CRP lands returning to agricultural uses, there are many uncertainties concerning productivity. Experience in returning CRP lands to forage or crop production currently is limited. Little is known about how yields will compare with other farmland. This uncertainty means there is more yield-risk associated with farming post-CRP lands than there is with conventional farmland.
Landowners and tenants should consider who will bear the added yield-risk and how a lease could be used to create an equitable agreement. Lease arrangements where yield-risk is shared by both parties include flexible cash, crop share, percentage share, livestock share, and share of the gain leases.
Owners who return CRP land to agricultural production may need to make improvements. Immediate improvements such as seed bed establishment, perennial weed control, and soil building will likely be made and paid for by the tenant in order to farm the land. However, these changes also have long-term benefits for the landowner. Less immediate improvements, such as conservation structures, also may be desired by the owner over the long term. (For information on specific improvements, see Weeds and Pocket Gophers, Renovating for Forage Production, and Persistence of Planted Forages in this series.)
Questions regarding improvements on leased land include:
Landowners may hire a third party to make specific improvements at their expense (as in custom farming) or they may have the tenant make the improvements. If the tenant will be making the improvements, this information should be included in the lease or spelled out in a supplement. A lease supplement can be used to describe the improvements, the estimated costs, the party responsible for the costs, the method of reimbursement to the tenant, and the timeline for completion of improvements.
How will the costs and benefits of the improvements be shared equitably by the landowner and the tenant? In general, if the tenant bears any of the costs (input purchases and labor) of improvements that still have value after the lease term ends, the tenant should be reimbursed. He or she would receive compensation for the unused value of the improvements, according to the share of the costs contributed.
Production-Cost RiskTenants might incur higher production costs on CRP land than on other farmland. Costs may be higher due to the amount of tillage, nutrients, pesticides, labor, and management involved in farming the land the first few seasons. Both parties may want to discuss this situation and decide how to deal with it equitably. They should decide whether and how to share the higher production-cost risk and describe the arrangement in a lease. Crop share and livestock share (where each party agrees to pay some of the production costs for a corresponding percentage of the final product) can be used to mitigate higher production-cost risk.
TimingPlanning and preparation may be required in the fall before the landowner returns CRP land to agricultural use. The tenant who will operate the land during the first growing season may want to be involved in this phase. Timing becomes critical. If preparation must take place in the fall, when will the tenant be identified? If the tenant will carry out the work, when will the lease agreement start and end? Optionally, a landowner might hire a custom operator to complete the preparations at the landowner’s expense.
A lease agreement can help an owner anticipate and accommodate CRP land use issues. Ultimately, though, good communication between the land-owner and the tenant is the key to a smooth, mutually beneficial rental relationship.
Bob Patton, Supervisor of the Energy and Environment Section
email@example.com, 651-201-6226 or 1-800-967-2474
Ag Marketing & Development Division
Minnesota Department of Agriculture (MDA), 625 Robert Street N, St. Paul, MN 55155-2538, firstname.lastname@example.org