THE leasing of farmland is important, but there are often problems with the administration of the lease itself.

There are no specific experts in the area, which can give rise to unnecessary and costly disputes.

The letting of farms in grazing districts is often seen as a side issue or a stop-gap measure, to be used as a holding operation as part of intergenerational farm succession.

From time to time, articles appear in the farming press on the subject.

Their general tone is supportive of leasing, often predicting a likely or possible increase in the amount of farmland to be treated this way.

However, this rarely materialises.

Thus, farm leasing continues but rarely receives the attention it deserves.

Within the farming community, opinions are mixed about its advantages and disadvantages. Let’s examine these.

Advantages of leasing

1.          Owning land and farming land are two separate activities, often not embodied in the same person. Leasing allows for the selection of the best tenants.

2.          Leasing can be an ideal ‘marriage’ between those with the skills and desire to farm and those who own land but may be reluctant or incompetent farmers.

3.          Many people who have the training and skills to farm lack the capital to purchase land.

4.          Owner-operators often lack the capital to fund farming operations and carry levels of debt which the farm struggles to service, let alone pay off.

5.          A leasing system should ensure the land is farmed well because a poor tenant can be given notice to quit for breaching the lease.

6.          If the rent is set at an appropriate level, leaving a profit for the tenant farmer, they will be happy to continue paying it.

Disadvantages of leasing

1.          Many owners are not skilled in land management or lease administration (which does not manage itself). Farms are not term deposits that generate regular interest.

2.          Some landowners lack the capital to fulfil all the landlord’s functions, particularly the renewal of infrastructure.

3.          An owner-occupier is better placed than a tenant to balance expenditure between land ownership and farming because they have ‘skin in the game’ on both fronts.

4.          An owner-occupier has greater security of tenure than a tenant, allowing for more long-term planning.

5.          An owner-occupier, compared to a tenant, has a fuller sense of ‘belonging,’ as well as a feeling of certainty and security, making them more likely to care for the land and the community.

When is farm leasing used?

WITH these comparisons in mind, we can ask: where can leasing be of value?

Firstly, it can free an incompetent farmer from the frustration of earning no money from a rundown and untidy farm with poor fencing, weeds, rusting machinery, and sagging low-clearance sheds.

There are young fledgling farmers and established operators looking to expand, who will happily lease such properties.

Often, these tenants will not need the farmhouse, so there is no domestic disruption, only stress reduction and improved cash flow from rent, and the sale of livestock and scrap machinery.

Secondly, leasing can provide an alternative to having a property run by a full-time manager. This is often a problem for larger landowners with business interests elsewhere who struggle to find high-quality career farm managers.

Thirdly, leasing can serve as an informal or formal superannuation strategy for retirement. However, recent issues with farmland in Self-Managed Superannuation Funds (SMSFs) mean that care and professional advice are critical.

Fourthly, leasing can offer solutions to thorny farm succession problems.

When siblings have competing expectations, leasing and syndication within a testamentary trust can provide equality of inheritance.

A typical arrangement may see one child inherit livestock and plant, and a portion of the farm, while the other siblings inherit other portions and receive rent accordingly.

Buyout provisions can be incorporated.

Such arrangements depend on sufficient scale, minimal debt, and, crucially, proper lease administration.

Intra-family leasing can be tricky if the farming sibling baulks at paying rent, using emotional blackmail to plead their case.

It happens.

The typical grazing lease

MOST grazing leases in the Western District are set on a three-year term with no rent reviews.

Sometimes, an option for a further three-year term, exercisable at the tenant’s discretion, is included, usually at the prevailing market rental.

In most cases, the major outgoings, such as rates and infrastructure insurance, are borne by the landowner, while the tenant is responsible for running repairs and the application of maintenance-level superphosphate every year except, in many cases, not in the final year.

The lease often stipulates that only sheep are permitted and may also prohibit the sale of hay grown on the property.

Similarly, tenants may use firewood but not sell or donate it off the property.

Leasing today

SO, what is the general state of play with leasing?

Broadly speaking, in grazing areas, the amount of leasing is steady.

Share farming in cropping and dairying districts is a more complex question, which we won’t address here.

In contrast to Australia, many developing countries have a strong history of leasing, and it is increasing in some countries, notably the USA.

The history of Australian grazing has focused heavily on owner-occupation, explaining the relative scarcity of leasing and the amount of poorly farmed land.

There are many ‘bad experience’ stories about leasing, such as overstocking, failure to comply with fertiliser clauses, ploughing up good pasture for raised bed cropping (contrary to the lease), and selling off hay or firewood when prohibited.

Another issue is longer-term leases with non-market rental adjustment provisions.

An example is a 10-year lease with annual Consumer Price Index (CPI) rental adjustments, which may work in commercial real estate but is destined to fail in agriculture.

The CPI does not respect the vicissitudes of farming profitability.

However, there are positive stories of long-term relationships where rent reviews are agreed upon, covenants honoured, and both parties prosper.

Where is the problem?

THE simple, three-year grazing lease does not present many problems on its own.

However, issues arise from poor tenant selection, sloppy lease drafting, and, in many cases, letting to friends (an absolute no-no).

These simple three-year leases often evolve into workable annual tenancies, with landowners and tenants understanding their responsibilities and agreeing on rental levels amicably each year.

Problems are more frequent with longer leases, such as those used in farm succession or superannuation scenarios.

These leases can be complicated by variables such as changing legislation, biodiversity issues, multiple dwellings, farm forestry operations, and evolving farming practices. Landowners and tenants may see the problem but not the solution.

In such cases, whom do they call?

In essence, there is no profession dedicated to the administration of rural land.

No one is doing it.

Rural real estate agents do an admirable job finding farm tenants, but rarely get involved in ongoing farm rent collection, and even less in lease administration, which would include property inspections, capital budgets, rent reviews, and the red tape associated with rural land ownership.

Lease administration also involves assessing compensation payable to or by tenants at lease termination, such as payment for tenant’s improvements and for unexhausted manurial values (UMVs).

These are the residual values of fertiliser applied by the tenant but not fully utilised.

Lease administration should also include the smoothing of tensions between landlords and tenants, especially within families.

It can be extremely difficult for a landlord to confront a tenant face-to-face in disputes, but using an agent can defuse such situations.

There is a lot more to managing leased rural land than rent collection.

Who could become involved?

SO, what about valuers and farm consultants as lease administrators?

Rural valuers can provide advice on rental levels and lease structures, but they do not administer rural leases.

If lease administration extends to rent collection, an estate agent’s licence is required by law.

Similarly, farm consultants can assess rental sustainability, but they are not typically valuers or estate agents.

In many developed countries, professional bodies provide these services.

In the United Kingdom, the profession is known as Land Agency and is administered by the Rural Practice Division of the Royal Institution of Chartered Surveyors (RICS).

In the USA, it is managed by the American Society of Farm Managers and Rural Appraisers (ASFMRA).

However, New Zealand and Canada, like Australia, do not have consolidated professional bodies.

It is probably time for the Australian Property Institute (API), which administers the valuation profession, to address this issue and move towards increasing agricultural training for its members, including forestry and biodiversity.

As this column often observes, the complexity of rural land is increasing daily, and landowners need advice.

With expertise from rural land managers, farm leasing could become more efficient, leading to more well-farmed land and fewer weeds and rusting machinery.

Perhaps the American model, where appraisers (valuers) join forces with farm managers and consultants, would best suit Australia.