What to consider when leasing land

The leasing of land is defined as a financial agreement where the land is rented for an extended period of time.

This type of business model can allow a person to get into farming or expand their existing business without the high capital costs of land ownership.

Leasing land can provide a steady return to a landowner without them having to do the actual farming. This may be valuable when other commitments require you to be away from the property.

The length of a lease can vary from a couple of months to several years. Longer leases can pose additional risks for both the landowner and the lessee (the person leasing the land).

For instance, if the price of land increases during the period of the lease, the landowner can miss out on potential income, or if the lessee has a poor season, the rental price may be too high.

Cost of the lease

The rental price depends on many factors including the location of the property, carrying capacity of the land, soil type and available water. Before setting the rental price, it is a good idea to research past prices, seasons and yields and to draw up a budget to determine a fair price for both parties involved.

An economic valuation, which places a price on the pre-determined return and productivity of the land, can also be sought to help decide the lease price.

For the lessee, rent expenses are fully tax deductible. For the lessor, any rent received is not considered as primary production income for the reason of income averaging for tax purposes.

What to consider

When entering into a lease, there are a number of factors that both landowners and lessees will commonly provide. For the landowner, this comprises the land, buildings and fences, the payment of council rates and insurance on fixed assets.

Alternatively, tenants will usually provide the labour, machinery and livestock, the operating costs, repairs and maintenance on fixed assets and the insurance for their plant, as well as responsibility for any accidents associated with their farming operations.

When determining the terms of the lease and the responsibilities of each party, legal advice should be sought.

Lease defaults

A default on the lease can occur when either party fails to adhere to the terms of the lease. A default may include:

•Late rental payment or failure to pay utility bills.

•Use of chemicals or products that are deemed to be restricted on the property.

•Equipment not used or repaired as agreed.

•Overstocking in paddocks.

•Activities taking place that were not agreed to in the contract.

The lease contract should clearly define a plan of action for such an event and determine the consequence. This may include compensation to either party, agreed replacement of damaged equipment or property or termination of the agreement.

The lease agreement can also state each party’s intentions once the lease expires. At the conclusion of the lease, the lease can be renegotiated and a new agreement drawn up to specify the new terms and conditions. This must still occur even if all details remain the same.

A first option to buy the leased land after the term has concluded can also be written into the agreement. An already agreed price is generally stated in the contract along with a note that the lessee has the first right to buy, but no obligation.

The agreement should clearly state whether or not the rent paid during the term of the lease is to be deducted from the overall purchase price.

Leasing land can be a great way to get into agriculture or expand your existing business without the high capital cost of purchasing land. For landowners, it can also provide a steady income from land they are not farming.

However, before entering into any agreement, legal advice should be sought to determine each party’s responsibilities and in drawing up the lease agreement.

For more information, contact the Small Landholder Information Service on 9733 9777 or visit www.agric.wa.gov.au/small_landholder