Guidelines for Leasing a Farm for Cattle.

Introduction

This Note provides a few useful tips for people who are thinking of leasing a cattle farm.

When a farm is to be leased, it is prudent to have a solicitor prepare a legally binding lease agreement between the parties and have the document registered with the Titles office. The cost of preparing it and the stamp duty are usually borne by the lessee.

The lessee is the tenant taking the lease. The lessor is the owner granting a lease.

Leasing arrangements

There are several types of leasing arrangements:

• fixed term lease a lease with renewable extensions which are predetermined
• a lease with the option to purchase
• a lease with a fixed purchase schedule.

This Note will only be concerned with the main points the parties to a lease should consider when leasing a farm, regardless of the term of the lease.

Livestock

It is advisable to purchase the livestock on hand separately, priced at valuation. If the stock is paid for by instalments and tied to the lease agreements, stamp duty will also be levied on the stock. The stock could also be leased with the farm. However, this may not be advisable as it would require an assessment of their condition so that when the lease expires, stock are returned to the owner in like condition and number.

Valuation

To determine the rentable value, an independent valuation of the buildings, fixtures, fittings and equipment is necessary. If the fixtures and fittings are old, their replacement needs to be considered during the term of the lease (who is responsible and what would need to be replaced should be determined). The lessee should not enter a lease agreement or pay rent on a farm that is run down and unserviceable.

The lease

The lease agreement should take into consideration:

• particulars of the parties concerned
• the duration of the lease, with provision of renewable extensions if required
• allowance for renegotiation in the light of dramatic changes in profitability, such as cattle and feed prices, disease, etc.
• four to six months notice of renewal to be given by the lessor to protect the lessee from having to sell pregnant cows and forego the profit from their progeny
• a survey map of the land, buildings and equipment, including effluent ponds, dams, bores, pumps, etc.
• the amount of rent and when it is due, for example, monthly or quarterly, and whether it is payable in advance
• where the rent is overdue, provision for charging interest (usually at the current overdraft rate) and/or cancelling the lease
• including a prespecified seizure schedule which prevents the lessor from seizing items vital to the farm's operation and which protects the lessor from specific recovery procedures.

Rental value

There are many ways of calculating a rental value. A simple one that is fair to both parties uses a percentage of the total capital valuation of the buildings, fixtures, fittings and equipment.

It is important that the lessee ensures that there is a reasonable profit margin left after paying for feed and all other costs, including the rent.

Where the farm is unstocked or only partially stocked, some time will elapse until full production and a regular cash flow is achieved. Provision needs to be made for this period when the lessee is without income from the farm.

Because of the tight profit margins in cattle production, prospective lessees should prepare a cash flow budget before agreeing to a rental figure. This ensures that a sound financial decision can be made. When preparing a cash flow budget, the current piggery performance figures should be used, with conservative milk prices and inflated feed prices, medication and all other costs. If the performance figures are estimated then these should also be on the conservative side.

Taxation benefits for depreciation would usually be claimed by the lessor, unless otherwise agreed to by both parties.

Other considerations

Repairs and maintenance

An inventory of all fixtures, fittings and equipment, together with a depreciation schedule is essential as equipment wears out and eventually needs replacing. Responsibility for repairs and maintenance needs to be sorted out.

Suggested responsibilities are:

• lessee - replace feed troughs, water bowls, wooden floor slats, pumps, heaters, lighting equipment, worn parts of machinery, fences, accidental damage and other equipment with a short life
• lessor - replace any damage occurring through an act of God (storm and tempest, etc) and maintain proper shed conditions, water lines, roofing, fans, augers, electrical lines and switches, insulation, silos and feed bins and any items of major capital value. No fixtures, fittings or equipment should be removed by the lessor.

Alterations

The nature and extent of alterations to the existing buildings and equipment should be agreed upon by both the lessor and lessee. The work should be completed professionally.

Insurance

All sheds should be insured by the lessor, with a copy of the policy provided to the lessee, who should take out and maintain public liability insurance cover. Where damage by fire has occurred, a written notice needs to be served on the lessor. If the damage is not repaired within a specified time, the lessee may hire a builder. Any disputes should be arbitrated by a registered valuer. Both lessee and lessor must agree on whether damaged buildings are fit for housing pigs.

Rates, land tax , council permits and licence

The lessor should agree to pay these so that the lease agreement is not invalidated by forced liquidation.

Telephone and electricity

These should be in the lessee's name. However, if this is not possible, a mutual agreement concerning the costs must be considered and included in the rent or bond paid to the lessor.

Sub-letting

A clause covering sub-letting must be included in the lease, stating that written permission must be obtained from the lessor or alternatively, that no sub-letting is permitted.

Inspection of premises

The lessee should ensure that there is no disturbance by the lessor but the right of inspection must be specified. In practice, seven days notice of intention to inspect the premises, given in writing, is usually required.

No nuisance

The lease should contain clauses which specify that:

• the premises may not be used for illegal purposes
• effluent ponds should not overflow
• effluent ponds should be kept clear of solids and generally maintained at the lessee's expenses
• the responsibility for structural repairs to ponds has been determined
• effluent management complies with local authority by-laws
• the lessee is responsible for keeping the premises tidy and controlling vermin.

Existing supply contracts

Where a farm is currently contracted to supply cattle to a nominated processor, the prospective lessee may wish to continue marketing a herd in this way. If so, the lessee should obtain an undertaking from the processor to continue the supply agreement/contract before signing the lease agreement.

Penalty and escape clause

The lease should have a specific penalty and escape clause to protect the long-term viability of the farm beyond the terms of the lease.

Registration of Farm and statutory authorities

The status of the farm in relation to these should be verified before signing a lease.