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Leasing a dairy property

Leasing of farms has occurred for many years in the dairy industry. With the ability to buy and sell farms becoming increasingly difficult, leasing may offer both Lessor and Lessee the opportunity to achieve their long term goals.

When people lease a dairy property they operate a dairy business by renting the land while owning the cows and mobile plant and equipment.

When landowners lease their property they are providing their land and fixed plant (capital assets) to another person (Lessee) to operate a dairy business in return for an agreed amount per year. This then means that the landowner (Lessor) has minimal (if any) control of the dairy business or its activities but may set some terms and conditions about how the asset can be used. The precise details of the agreement will vary to suit both parties but this is the overall concept of leasing.

Leasing may be an option for landowners who want to retire from active farming but are not ready to sell the property. In this situation, leasing frees up time and energy for other pursuits and generates an income without having to sell the property. It may also be an option for investors who are mainly interested in capital growth of the land and receiving a reasonable rental for the asset.

Leasing may be an option for farmers who seek full control over their dairy business without borrowing heavily to purchase land. They are likely to already own all or part of the herd and mobile plant. Dairy operators can grow wealth while leasing a property. They may use the profits to increase equity in their dairy asset, expand their business or to invest in non-farming assets.

A successful arrangement involves mutual respect and trust but is based on a written document which clearly states the expectations of each party. In successful leasing arrangements both parties have an appreciation of each other’s position and are very clear about what they can expect from each other over the period of the lease.

 

Template
Download our working checklist for arranging a dairy property lease agreement.

 

 
Seek help in developing a leasing arrangement
Tip

It can be helpful to draw upon the experience of a trusted farm adviser to discuss issues and come up with an arrangement that works for both parties. The discussions in preparing a lease agreement give both the landowner (Lessor) and the Lessee an understanding of each other’s perspective which provides a good foundation for building the relationship.

Click here to find an adviser in your area.

 

Property law and legal requirements of a lease differ between states, so it is essential that the final document is prepared by a solicitor

Dairy career paths and farm ownership

Like anyone involved in a business, the long term goal for dairy farmers is to grow assets and wealth during their time in the industry.

Traditionally, progress in the dairy industry has been focused on achieving the ultimate goal of farm ownership, as this has been seen as the best way to grow wealth. Entrants into the industry have generally spent time as an employee and/or experienced a period of share farming, during which there is growth in skills and assets, followed by a period of leasing, with a further increase in assets and skills and eventually dairy farm ownership.

Land and infrastructure contribute about 75% of the capital required to own a dairy business. For example the land infrastructure for a 260 cow farm is likely to be worth about $1.8 million. Cows and mobile plant contribute the remaining 25% ($0.6 million). For someone wanting to enter/progress in the industry the money required to buy a farm can be prohibitive, especially as land prices climb. They know they have the skills to operate a successful dairy business and generate a healthy business profit, but just can’t get into the game because of a lack of adequate funds.

However, this traditional approach is not the only way to achieve the desired result. Lack of farm ownership does not prevent successful wealth creation.

A more reachable financial target for someone moving along the dairy career path is to initially own all or part of the cows and mobile plant. Then the decision to own the remaining 75% of the capital required (the land) can be assessed in terms of such factors as the available funds to do so, the effect on the business bottom line in terms of debt repayment, or simply one’s personal feelings about land ownership and investing off farm to generate wealth.

For some, the next step will be to continue along the path towards farm ownership. Depending upon their equity position at farm purchase, when they borrow money at 8% to own the $16,000 per hectare land, they are renting money costing $1,280/ha per year ($518 per acre), but they will receive the gain in capital value of the land which could be 0 - 5% per year and are not at risk of losing the land on which they farm.

Other dairy farmers are not worried about not owning their 'place of business'. They are comfortable to rent it. For example, at 4% of capital value for a farm worth $16,000/ha, the rental calculates to $642/ha ($260 per acre). They believe that they can achieve a far greater return than 4% by renting the land owner’s asset and investing the profits made from operating their dairy business in assets not connected to their business. However, they do not receive the capital growth in the land over time, and are at risk long term of losing the land on which they farm.

Neither is wrong or right; it is possible to grow significant assets in either way but the absolute requirement in all situations is to have a profitable operational dairy business - making money out of converting grass and supplements into milk.

 
Renting to grow wealth
Farm Scenario

Compare leasing a dairy property to another type of business - a couple running a pizza business. They are doing it with skills they have developed, making simple and complex pizzas (like dairy production systems), but would rarely own the building they occupy. In their business structure, they provide the basic equipment to operate the business, they rent the capital in which the business is situated, and hopefully generate a good profit which enables them to invest elsewhere and grow assets.

These pizza business owners are very clear about the difference between the profit made/ asset growth/wealth creation achieved as a result of successfully operating a business, and the asset growth/wealth creation that can be achieved simply by owning an asset over time e.g. the increasing value of the building in which they operate their business.

There is no reason why the same principle used by these pizza business owners cannot apply in the dairy industry. Just like the pizza business owners some dairy farmers are not worried about not owning their ‘place of business’. They are comfortable to rent it to allow them to grow wealth. Others will rent or lease a property initially, and as they build their asset base, consider purchasing property when their circumstances suit.

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Risk, control and reward

The Lessee has total control over the business and also carries the risk. For the landowner (Lessor), leasing does not involve frequent contact with the tenant (farmer). This is a major difference between share farming and leasing a dairy property. A Lessee with the right skills reaps the rewards for their good management with a healthy profit but also incurs the risks of operating a dairy business in a volatile environment.

Landowners need to understand that the rental income reflects the landowner’s level of involvement in the business and risk. The rental income may be less than the interest that could be earned by selling the property and investing the money. In addition to providing a secure income, leasing allows the landowner to continue to build wealth through growth in the capital value of the land.

 
Progressing from share farming to leasing
Farm Scenario

After 10 years of share farming, and eventually owning a herd, Nathan and Deanne desired greater control of a dairy business. They transferred from a 50/50 share to a lease on their existing share farm. They were then approached by another owner to lease his farm. They had some stock, borrowed for the rest and employed labour. This landowner then purchased another two dairy farms and indicated that he would like Nathan and Deanne to lease all three. They moved from their original farm and now lease the three, all owned by the same owner, and milk a total of 900 cows. They have no intention of owning a dairy farm and have invested in several coastal properties. This arrangement allowed gradual growth, consolidation, and skill development.

 

Alternative to farm family succession
Farm Scenario

Anne and Martin made several unsuccessful attempts with the family to progress a succession plan from a 40% share on the family farm. By the time they were in their 30s they owned some land (not a dairy), cows, plant and some young stock. They were offered the opportunity in the middle of the 2006/2007 drought to lease the adjoining dairy farm, with an old 40 unit dairy capable of milking 400 cows.

They are very good operators in all aspects, especially financial management. They took the opportunity and have increased their assets to $3.0 million net; their average return on asset per year has been 28%. There have been capital improvement issues and they recently funded the construction of a 50 unit rotary dairy on the lease farm, which they will leave behind if the lease ceases in 10 years but which gives them the capacity to milk more cows. It’s a profitable business and could justify this capital expenditure - even though it’s not ‘normal’. A good example of mutual respect, and thinking outside the square.

 

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Dairying under a leasing arrangement (being a Lessee)

Dairy operators may lease a property as a step in their career path towards farm ownership. Others may choose always to rent land to create wealth. Regardless of the long term goal, a major reason for individuals moving from share farming to leasing is to gain complete control and reward for their efforts. If they are good operators they will also increase net returns and build wealth.

In general, a Lessee will be a reasonably experienced dairy farmer. They are operating a dairy business on their own, so will need all the skills required. A landowner (Lessor) may be reluctant to lease a farm to an inexperienced Lessee as it could be regarded as a high risk proposition.

The Lessee receives all the rewards from their skills, but also incurs all the risk. If, as in 2008/2009, the milk price suddenly decreases it is not reasonable for the Lessee to seek a reduction in rent.

If you are considering leasing a property and operating a dairy business some important questions to ask yourself are:

  • Am I sure I have the skills required to operate my own dairy business?
  • What is my motivation in leasing?
  • Is the budget I have completed realistic when all the expenses, debt, and lease payments have been included?
  • Have I allowed an adequate physical and financial risk margin?
  • Having met the landowners (Lessors) and discussed the details am I very clear of my responsibilities and what I am permitted to do with their asset?
  • Have we completed the working checklist for arranging the lease agreement?  
Issues that can impact adversely on a Lessee’s business success 
Trap

•  excessive debt

•  not being prepared to spend money on the farm

•  poor invesment decisions

. .

Equity

The Lessee will need reasonable equity (above 40%) in the cows and mobile plant. The lease is essentially similar to debt servicing; when the lease is added to any loan repayments on cows, and plant and equipment it must be sustainable, even at moderate milk prices and less than ideal seasonal conditions.

In tough times Lessees may not have as much flexibility to obtain additional credit as a farm owner at a reasonable equity level. The ability to service debt varies enormously with management skill and cost control, but as a guide, total debt servicing and leasing per cow of $400 would be considered comfortable and in excess of $700 per cow would be concerning (management would have to be in the top 10%).

Budget

Completion of a realistic individual budget is essential for the Lessee; they are in a higher risk position and must ensure the risk is covered. In regard to future budgets, the farm’s historical production will be a guide, but the future production will depend upon the production system that the Lessee implements and the costs associated, which may be very different from previous years.

Contingency plans

Analysis of whether someone can actually afford to lease a farm must include contingency plans for covering the repairs and maintenance expectations of the landowner (Lessor). There is no gain for lessors to spend large amounts on the farm. A Lessee must be comfortable with the ability to pay the required rental and the level of future capital commitment (if any) and maintenance expectations agreed in the arrangement with the Lessor.

Attitude

Lessees need to beware of operating with a ‘narrow attitude’, that is, becoming pre-occupied with the notion that it’s not the Lessee’s farm so ‘don’t spend money on it’. In most cases where a Lessee has grown assets in a lease situation, they have left the farm in a far better state than when they leased it - but they spent money in areas that made money for both parties.

A good example would be pasture renovation. Say the total cost of renovation is $800/ha. This expenditure means that the pasture is now producing 5 tonne dry matter extra each year from the base of 4 tonne. Over a 4-year lease period then this extra 5 tonne per year is still only costing $40 per tonne capital and $70 per tonne variable cost, a total of $110 per tonne. This is a third the cost of purchased feed and allows more cows to be milked and young stock reared - all of which indicates asset growth. To accept the base level of 4 tonne/ha because ‘it’s not the Lessee’s farm’ simply reduces progress and growth.

Profitable investment

The Lessee must constantly ask the question, “Is the additional expenditure on this activity or item justifiable (profitable) given the period we will be on this farm?” This also applies to capital infrastructure.

Poor investment decisions will limit growth. If the dairy business is profitable and debt is serviced and eventually reduced, or even eliminated, it must mean that there is now a significant cash surplus. If this is wisely invested in additional assets that appreciate, then growth will result. If it is invested in lifestyle or depreciating assets then growth ceases. The benefit of leasing has been lost for the Lessee.

Young rapid expansion
Farm Scenario

A young (mid 20’s) dairy employee appeared to have all the skills required to run a dairy business. He and others around him felt he’d get the full benefit of his skills if he leased a dairy farm. When a 250 cow farm came up in the district, he took it on with low equity and pushed numbers to 300 cows. Then he decided to do some contracting as a side business and borrowed heavily for the equipment.

He leased two additional dairy farms, increasing total cow numbers to 800, mainly on finance. The new situation involved a very high level of gearing (debt), significant paid wages, and difficulty in keeping attention to detail. Cash flow became extremely tight, there was no time to do and monitor budgets, creditors began to accumulate. Eventually creditors called in their debts and the business was placed in voluntary administration. After a reasonable business case at the start, subsequent finance was too easy, and there was not enough focus on financial issues.

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Landowners leasing their dairy property (being a Lessor)

Landowners (Lessors) may be ex-dairy farmers who do not want to sell their farm but for various reasons don’t want to operate their dairy business any longer, or investors who are mainly interested in the capital growth of the land and receiving a reasonable rental for the asset.

The Lessor receives rental income in return for handing over control of the land to the Lessee. Under a lease agreement, the landowner or Lessor has no control of the dairy business.

 If you are considering leasing your property some important questions to ask yourself are:

  • What is my motivation in becoming a Lessor? 
  • Do I understand that I am renting my asset to another party so they can conduct a dairy business? This will involve me having limited access and control of my asset.
  • Have I completed my budget and am comfortable with the rent being received for the asset?
  • Am I aware of any agreed capital expenses during the period of the lease or any likely items requiring capital replacement?
  • Have any restrictions on the Lessee that I require been agreed to between both parties? If I have too many restrictions, am I really ready to lease the farm to someone?
  • Have we completed the working checklist for arranging the lease agreement?
Moving on without losing their land
Farm Scenario

Jack and Belinda had been dairying for 25 years and were ready for a new challenge. They established a new business while continuing to dairy farm. With the new business growing faster than expected, the couple found themselves stretched by the demands of both the dairy farm and the new business. Although their children had left home and did not appear interested in dairy farming the couple didn’t want to sell the property. Leasing most of the property (they live on the home block) provided them with an income and freed up time and energy to concentrate on the new business, while retaining the family farm and their home.

The couple accepts the lease returns reflect the level of risk and involvement they have with the dairying land. While leasing the property provides the couple with important income, their decision wasn’t driven by maximising the return on investment. They place a value on being able to retain their connection with the land, live in a place they love and continue their new business.

 

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Risk and income

Irrespective of their background, a Lessor has made a definite decision not to share in the peaks and troughs of the dairy industry. This reduction in risk means that they must accept a lower but secure income. Will this income be enough to meet the needs of the Lessor? These needs include living expenses as well as tax and any capital or operational farm expenses that have been agreed to in the lease.

Control

The landowner (Lessor) generally has no control of the dairy business. They may have the right to regular inspections of the farm to ensure the conditions of the lease are being implemented by the Lessee but have no right to interfere with the running of the business. This can be particularly difficult to deal with when theLessor has an emotional connection to the land. If this is the case, then it is wise to determine to some degree that the landowner (Lessor) and Lessee share a similar philosophy of farming.

Farm condition

Sometime a potential Lessor has made minimal capital investment into the farm in the immediate past. Before attracting a suitable Lessee and a reasonable rental, there may need to be a period of catch up, to bring the farm up to a standard that allows the Lessee to operate a sufficiently profitable business to make it an attractive arrangement.

Maintenance

Maintenance of the asset over the period of the lease can be a thorny issue. Before the commencement of any lease the landowner (Lessor) must be very clear about:

  • The expectations on the Lessee in regard to maintaining the asset. Are they reasonable?
  • The obligations of each party in relation to capital provision and replacement. Often the landowner (Lessor) has minimal interest in investing in capital infrastructure such as a new dairy because there may be no gain to them; if this is the case it needs to be communicated to the Lessee from the start.

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Ingredients of a successful leasing arrangement

There are many very successful, long-term leasing arrangements that enable both parties to achieve their long term goals.

A successful arrangement involves mutual respect and trust but is based on a written document which clearly states the expectations of each party. In successful leasing arrangements both parties have an appreciation of each other’s position and are very clear about what they can expect from each other over the period of the lease. 

 

 

Leasing works both ways

Leasing a property enabled Ian and Alice Holloway to run a bigger dairy operation than they otherwise could have afforded. For land holders Stephen and Sarah Crooke, leasing allowed them to retain the family farm and home, whilst freeing up time and energy to concentrate on their gourmet icecream business. Click here to read the experiences of a successful leasing arrangement.

 

 

Features of leasing

Lessee's perspective (dairy business operator)

Lessor’s perspective
(property owner)

Income Opportunity to progress dairying career with less debt than if purchasing property.
Can diversify investments by investing profits in off-farm assets
Income from land while retaining ownership and capital gain but without day-to-day input.
 Decisions and control Controls all the dairy business decisions Has no right to control any decisions about the dairy business operations (is essentially a landlord).
 Maintenance Arrangements vary: must be agreed and clearly understood by both parties. Arrangements vary: must be agreed and clearly understood by both parties
 Risk Regarded as a higher risk by lenders – equity is herd, plant and equipment which is more likely to die, wear out etc than land. Low risk income – rent is fixed and doesn’t vary with the season or industry cycles.
 Personal traits Needs to be experienced dairy manager. Needs to be able to let go and not interfere with farm operations (can be difficult if close connection to the land).
 Potential traps Excessive debt (aim for >40% equity in plant and equipment)
“Narrow attitude” (aversion to investing in land owned by another).
 

 

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Lease arrangements and rental rates

A ‘true’ lease involves an annual rental, which is a fixed amount per annum, generally paid monthly or quarterly in advance. The rental rate will normally not be adjusted in relation to variations in milk price or conditions being experienced in the dairy industry during a given period.

The rental will either be fixed for a period and then be re-negotiated or have a method of allowing for annual increments. A commonly-used method for annual increments is a 5-year rolling average CPI figure. This has no relationship to the dairy industry and can be increasing at a time when conditions in the industry might be more difficult. The rolling CPI figure provides security for the landowner (Lessor) and is a lower risk position.

The lease will have clauses describing the assets being rented, and the terms and conditions related to the assets being rented. It will also describe the capital expectations on the Lessor during the period of the lease and rights of access for inspection by the landowner (Lessor). It is essentially very similar to any other commercial lease arrangement.


 

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Different perspectives on setting the rental rate

From the landowner’s (Lessor) perspective, the rental rate requested will be determined by the cash expectations of the Lessor and the returns offered in other investment options, while allowing for the different risk profiles in other investments.

A commonly quoted range is 3 - 5% of the capital value of the asset, although percentages outside this range may be appropriate, depending on the state of infrastructure and pastures on the farm.

In high rainfall areas of Victoria, with land values of $15,000 per hectare for a dairy farm, you could possibly generate $600 per hectare ($243/acre) annual rental, plus the annual capital growth figure of 3 - 5%, making a total return of 6 -10%.

In irrigation districts, this would include capital water, but the Lessee would generally be required to pay the costs associated with water, particularly water delivery costs.

It can be challenging to ascertain a lease value for a run-down farm. In some cases, the effort put in by the Lessee in re-establishing pastures and soil fertility, and the expenditure they make on capital, may improve the value of the farm. In this case it could be reasonable to have set a lower rental rate at the commencement of the lease and minimise any increase in rent over time.

Conversely if the landowner (Lessor) chooses to reinvest capital into the farm, e.g. up-grade the dairy, then it is reasonable that this is reflected in the rental.

The expected rental for a dry-stock block needs to reflect that there is minimal capital infrastructure being supplied, despite the potential for the market value of the land to be close to that of the dairy farm itself. Often the cost of a dairy dry-stock block will reflect an equivalent cost of purchased feed or agistment. On the other hand, if the property being leased includes a functional dairy, a home and shedding that have a level of depreciation this needs to be factored into the rent. A high level of infrastructure such as a modern dairy feed pad, excellent tracks, quality pastures, appropriate subdivision and reliable water will attract a greater rent.

From the Lessee’s perspective, the lease rate agreed will depend upon all the variables of the dairy industry, including the management skills of the Lessee, and an allowance for the higher level of risk. This determines the market rate that Lessees are prepared to pay.

A highly skilled Lessee, after paying a reasonable rental, can return in excess of 20% on investment in cows and mobile plant. Cows and mobile plant are regarded by lenders as high risk assets - they die, depreciate or have volatile asset values. Therefore, a return of 10 - 20% is required to justify the risk.

 

 

The Murray Dairy cluster farm project has developed  an equitable framework document and spreadsheet, which outlines a process for determining an equitable return for potential business partners.  View here>> 

Young gun returning home
Farm Scenario

A young (mid 20’s) son was keen to return to the home farm, which milked about 200 cows. He did enough number crunching that indicated that it may be difficult on 200 cows. He then approached a neighbour and secured a reasonably long term lease on an adjacent area that he could milk off, given some work and pasture renovation. Cow numbers could then go to 300 which was possible with the existing facilities. He and his wife then worked out a share arrangement with mum and dad. The result so far has been a viable dairy farm, and dad has actually had holidays for the first time in many years. This arrangement demonstrates financial savvy, leasing the neighbour’s land, and mutual family respect.

 

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Setting up a leasing arrangement

Generally the lease will involve a formal commitment for a fixed non-negotiable period of time and at a specified cost. Therefore, it is critical that each party is aware of what is involved and, in particular, what is expected during the lease period. For an agreement to be successful, the conditions must allow both the Lessee and the landowner (Lessor) to achieve their goals.

There are many issues that need to be discussed and clarified. It is important for both parties to talk about their concerns and how they may go about working them out. Some people draw upon the experience of a trusted farm adviser to facilitate the discussion and come up with an arrangement that works both ways.

The agreement can initially take the form of a Memorandum of Understanding (MOU) drafted during a joint meeting between both parties. It is then preferable that the details are incorporated into a formal lease contract by a solicitor. It is strongly advised to have a third party at this meeting (adviser, accountant, field officer) who records the stated intentions. This allows the two parties to solely focus on the issues being discussed.

As with any other business arrangement between two parties, the ultimate success will depend upon the spirit and level of mutual respect between the two parties. Some leases have worked on a ‘handshake’ agreement, but most successful lease arrangements have involved detailed discussion and drafting of the outcomes of this discussion into an agreement, which can be referred to in future if the need arises.

A comprehensive checklist may seem daunting, and many successful Lessees and Lessors will not have discussed all the issues listed, but it does provide a very good basis for establishing the details of the arrangement.  Always remember it must suit both parties. Mutual respect and open discussion are absolutely critical. There have been some disasters - hence the importance of discussing the issues and having a clear understanding of each party’s expectations before signing.

The formal lease contract needs to be drafted, reviewed, and finally agreed upon and signed. Some solicitors will not be comfortable acting for both parties. In this case it would be suggested that the detailed checklist be provided to one solicitor who then drafts a lease and this is reviewed by the other party’s solicitor for modifications. This can start a costly process and needs to be closely monitored by those involved. There is no doubt that the more details provided to the solicitor in the checklist, the lower the total cost of drafting the lease will be.

 

Template
There are many things that you need to discuss before signing a lease. This lease agreement checklist can be used to make sure you have covered everything. It is a guide for checking your current agreement or the basis for creating a new agreement.

 

 

Leasing 'hot spots'
Trap

History has indicated that the major sources of conflict (and hence those that need to be clarified at commencement) are:

•  maintenance versus capital replacement

•  farm repairs and maintenance and weed control to an acceptable level. 

•  fertiliser applied versus that agreed.

•  pasture re-sowing and cropping.

•  effluent systems.

•  access by the Lessor.

Leasing does not involve frequent contact with the Lessor, as might be the case in a share farming arrangement. This highlights why details need to be agreed upon at the commencement of the lease period.

The issues to consider and discuss include:

  • Titled area being rented, preferably with title details, and actual grazing area being rented - these can be very different.
  • The parties entering into the lease agreement.
  • Annual rental charge, inclusive of GST if applicable, method of payment, annual increments if any during the period of the lease. Any adjustments in the event of drought or changes to milk price should also be discussed and included.
  • Term of the lease, including a designated date prior to the end of the lease when each party indicates their intentions in regard to the potential uptake of another lease period.
  • Time for the lessee to relocate. Set a time frame for removal of lessee’s stock, plant and equipment at expiration of the lease; and a reasonable time period for the lessee to relocate if the lease terminates before the completion date.
  • Production records: The milk production history may or may not be available, but should be requested by an intending Lessee, as an indication of the previous production levels the farm actually achieved.
  • Licence fees: The Dairy Licence and the associated fees payable to Dairy Food Safety are normally paid by the Lessee. The milk supply arrangement is in the name of the Lessee and, unless specified by the landowner (Lessor), the selection of factory to be supplied is decided by the Lessee.
  • Insurance: In general, both parties need to have public liability insurance to an agreed amount. In regard to property insurance, it is generally each their own. Most insurers have a requirement to be notified if a property is being rented to another party.
  • Rates: Shire rates are normally the responsibility of the landowner (Lessor), and water rates particularly those related to quantities of water used are payable by the Lessee.
  • Death or permanent disability: In the unfortunate case of death or permanent disability to either party, the impact on the lease should be discussed and noted.
  • Infrastructure: A landowner (Lessor) may be concerned about excessive cow numbers being milked and the subsequent demand for new capital infrastructure such as vats, yards, new dairies, and water supplies. In this case, the Lessor can indicate that the farm is set up to milk a certain number of cows and if the Lessee decides to milk more cows, then changes to the infrastructure will be at the Lessee’s cost. In some situations, the lease will simply state an agreed maximum number of cows. This discussion clarifies intentions. It is the Lessee’s responsibility to determine how many cows they will need to milk to fulfil all financial requirements and then assess whether the farm can actually milk that number.
  • Condition report: Conduct a joint inspection at commencement of the lease, recording (even with photos/video) the state of the farm, including tracks, dairy and non dairy infrastructure, fixed plant and equipment, weeds and general state of the pastures. Both parties can sign the joint inspection report. This is critical as memories are not reliable! It is important in particular to highlight any OHS issues on this joint inspection, and correct any problems. Both parties need to be clear about the legal responsibilities they both have in relation to workplace safety. If there is a house supplied with the farm lease, then the condition of the internal and external of the house needs to be noted and agreed upon.
  • Inspection access: The landowner’s (Lessor’s) inspection rights need to be discussed and formalised. Normally one inspection per year is adequate.
  • Agreed capital improvements prior to and during a lease period can be stipulated in the lease, including dates by which these improvements are to be completed. This then avoids the landowner (Lessor) feeling under constant demand from the Lessee for capital improvements during the lease period and the Lessee being disappointed with capital progress.
  • Repairs and maintenance are normally conducted by the Lessee and capital improvements and replacement by the landowner (Lessor) - but this depends on what both parties desire. There have been situations where capital improvements and replacements have been paid for by Lessees when the lease is very long term and a lower rental rate is charged.
  • Plant and equipment: List the age and condition of any fixed plant and equipment at the start to provide a future guide to the need for replacement versus repair. This is a major source of potential conflict and must be clear. At the start of the lease period, it is often worthwhile for a Lessor to have fixed plant and equipment serviced by a technician and a condition report provided, and general farm maintenance completed. This clarifies the ‘starting’ status of the assets being leased.
  • Disputes: There needs to be a clear method of arbitration in relation to capital replacement of an item versus repair. For example, a vat may repeatedly require repair (Lessee’s cost) and it should be replaced (Lessors cost). In this situation, the opinion of a qualified technician, indicating that the repairs are not due to negligence by the Lessee and that the item requires replacement can resolve this type of issue. Some leases have a ‘trigger’ amount for the replacement of any one item and above this amount it becomes a capital item and payable by the Lessor.
  • Water supplies need to be investigated carefully by the Lessee at commencement - sources, condition of pumps, and in particular position of water lines and the state of fill around troughs.
  • Effluent disposal systems can be a source of conflict, particularly if more cows are milked on the farm. The state, level of ponds and general level of adequacy of the effluent disposal system needs to be recorded at the start of the agreement plus the agreed cow capacity for the system.
  • Agreed fertiliser requirements - specified in units of PKS or kg/ha of traditional fertilisers (and hence tonnes/year). Maintenance calculations are available from agronomic sources. It is fair and reasonable for the landowner (Lessor) to receive documentation of tonnages applied to the rental area each year of the lease, to ensure adequate amounts have been applied. It is also prudent for a Lessee to receive any soil test results and fertiliser histories for the rental property beforehand. If there are capital amounts of fertiliser required this needs to be discussed and incorporated into the lease. Some lease arrangements require pre- and post-lease soil testing to ensure that nutrient levels are retained. This is fine in theory, but variability in sampling techniques, laboratories and seasonal conditions can lead to problems in practice. In some cases, parties will differ in their approach to fertilisers. For example, in the situation of a Lessee preferring biological sprays to the conventional fertilisers preferred by the landowner (Lessor), they may in fact not be able to agree, and hence should not proceed to enter into a lease arrangement. Some lease arrangements will limit the level of nitrogen per hectare per year.
  • Weeds: The current state must be noted and annual weed control is the responsibility of the Lessee.
  • Farm productivity: Pastures, cropping, and pasture renovation are important aspects of the future productivity of the lease farm. It is critical that the intending Lessee walk all paddocks of the farm, to assess the productivity of the pastures prior to entering into the lease, (and at the same time check the operation and state of the water supply, and condition of fencing). Some leases will specify maximum areas that can be cultivated and cropped, and the re-sowing requirements. It is important to discuss drilling programs, as extensive use of annuals can reduce the density of perennial plants in a pasture, and this needs to be safeguarded against at the termination of the lease period. A digital photographic record of the pastures can be very useful when comparing at a later date.
  • Fodder reserves can be a source of conflict when there are casual arrangements such as ‘leave the same amount of hay or silage as there was at the start’. It is preferable for the Lessee to purchase any fodder at an agreed price at commencement; at termination, any fodder remains the property of the Lessee and any sale can be negotiated. Some landowners (Lessors) will stipulate limitations on the amount of fodder that can be made and removed from the farm per year. This is sometimes made too restrictive; instead, offsetting the loss of nutrients as a result of exporting forage with adequate fertiliser applications can negate the issue.

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Leases legal requirements

The legal requirements for entering into and formalising leases vary from state to state. It is therefore recommended that legal advice be sought and the lease be prepared by a solicitor with expertise in this area of the law.

Registration

Registration of the lease means that the lease and the lessee’s interest are formally noted on the land title and therefore protected.

In most states, if the lease period is greater than 3 years the lease can be registered with the Land Titles Office. In some states this is a legal requirement.

However, it is recommended that, if state laws allow, all leases regardless of the term be registered to protect the lessee’s interest.

All states have standard form requirements for registration of the lease document. These vary from a simple requirement for a standard form front page to specific requirements for details such as the names of the parties, the term of the lease and the rent payable.

Registration fees differ from state to state.

Stamp Duty

Requirements for payment of stamp duty vary from state to state and depend upon the transaction.

In most states there is no stamp duty payable on the lease agreement itself but stamp duty may be payable on some transactions involving the lease. For instance, stamp duty may be payable if the lease is transferred or if the lessor makes a payment to the lessee if the lease is surrendered before the end of its term.

Stamp duty is administered by the state revenue office.

Residential tenancy

State residential tenancy laws may apply to the lease if accommodation on the farm is provided.

Other legislation

There may also be specific state laws about improvements to the leased land, termination of the lease, notice of termination and dispute resolution.

Renewal and renegotiation of the agreement

It is important not only to have a lease termination date but also a date before the end of the lease on which negotiation on future lease arrangements commences. For example if termination date is 30th June, then 31st March would be an appropriate date to commence negotiations about the future. If a lease is for an initial period with an option to renew then the conditions of this option, such as future rental or lease term need to be defined.

 

External corporate landowner (Lessor)
Farm Scenario

An overseas family company owns three dairy farms because the family wants to own land in Australia. They have no interest or knowledge in dairy farming.

They have been leasing the farms to two different Lessees who milk a total of 1200 cows for a period of 20 years, in a mutually beneficial leasing arrangement.

The Lessees have been expected to maintain a high standard of physical appearance and low weed level, which they have done. All repairs and maintenance are paid for by the Lessees. Capital improvements, even dairies and fixed plant to allow herd growth, have been a shared cost with appropriate rental adjustments. The arrangement has been in place for 20 years and three dairy businesses have grown significantly.

 

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