A-Z GUIDE TO LEASING OF AGRICULTURAL LAND
Agricultural land leasing has recently become a very topical discussion recently for both farmers and other interest groups involved in the sector. Some extraordinary figures have been quoted in recent months and of course these prices have gathered much attention. The question of renting out your land /farm has never been more to the forefront of people’s minds, particularly those who see it as a way to postpone the often-difficult decision of selling. The tax benefits of leasing agricultural land for a minimum of 5 years have been well documented and the incentive of being able to receive a tax-free income up to the allocated sum is very attractive. This year we will lease out in excess of 2,000 acres and we have identified some points for landown
DECIDING THE TERM OF LEASE
It is important to firstly determine the length of lease you are prepared to enter. There are tax
benefits for anything over 5 years so that can be an important starting point but similarly you
might not be willing to go any longer than yearly or up to 5 years if for example a son / daughter is coming home to farm, you are considering a sale or you have plans to return to farm yourself.
The tax-free income on leases has tended to steer people to a 5-year minimum but it is importantto make sure that whatever you are doing fits in with your overall plans.
In terms of the income tax exemptions on qualifying sums remember that if the land is held in joint names, then both parties are entitled to the exemption so you might decide to divide the farm into two leases. It is important to review the qualifying criteria in advance with your accountant or farm advisor.
Where a farmer leases both his land and the basic farm payment, the entire amount received will qualify for relief under this section subject to the overall limits. It is not necessary to apportion the rent received between the land and the basic payment entitlement.
TENANT PROFILE
Of course, for many this is the key, but we warn people not to focus entirely on it. We have had many instances of top rents being agreed and only the first few cheques being received!
Complete your own research into what sustainable rent can be collected from the tenant. Don’t focus on headline prices. Some factors that will influence the rent payable are:
Length of the lease – generally the longer you enter into an agreement the better the rent.
Quality of the land – it goes without saying that the better the quality the more you can charge. Try to get some locally agreed rents that you can use for comparisons.
Terms of the lease – if you are imposing restrictions, it may impact the price so evaluate all this in advance.
Basic Farm Payments – how are these being handled; do you want to give them to the tenant and get 50:50 (split) back or are you collecting the entire from the tenant or perhaps none. All this can impact the overall rent.
NEGOTIATIONS
We have tended to complete private negotiations with parties rather than run the process through a public forum. This has largely been due to the fact that owners generally want a tenant who is a good reliable farmer, will pay on time, mind the farm and honour any agreement made. There is the option of course to go to the open market and that has the potential to top out the price but again we recommend that owners don’t focus entirely on price and keep their eye on the quality of the tenant. Once negotiations conclude it is wise to agree a Heads of Terms for exchange between the parties. This can iron out many other points that could arise and it puts a solid framework around the deal. Points to cover off are as follows:
Length of lease
Handling of basic farm payment
Rent payment structure i.e., monthly, quarterly or half yearly
Use of the farm, any restrictions
Break options
Rent Reviews
BASIC FARM PAYMENTS (BFP)
This can often be one of the most complicated areas to handle in a lease. There are several ways to negotiate it and owners in our experience have taken different approaches:
The tenant claims the BFP and gives the owner back 100% of the value (generally results in a lower rent).
The tenant claims the BFP and agrees a split with the owner i.e., 50:50 – 60:40. Some people feel this is the preferred choice as the tenant is paying possibly a higher rent to reflect the split and will therefore make sure they comply with good farming practice, so the BFP is received without delay.
Other points to consider around the treatment of this area are what if the tenant doesn’t claim or qualify for all the BFP? Are they then responsible to make up the difference if the problem is of their own doing? If the BFP amount reduces as issued from Brussels, are you happy to accept the reduction or are you looking for a certain amount to be guaranteed? If there is an appeal on some grounds that is outside the owner’s control, is it up to the tenant to pay the amount due and wait as needed? You can see from the above that this area, to the surprise of probably nobody is the one of the most difficult to structure correctly.
LEASE
Once a Head of Terms is agreed between both sides the owner can forward same to his Solicitor and have a lease drawn up which accounts for the agreement already made. It can take one or two drafts to get this completed. A part of the lease may include a Deed of Renunciation which is the tenant opting out of any landlord and tenant rights to the property having been in continuous occupation for more than 5 years. Some people use generic leases and try to avoid the costs of a Solicitor, but we think it is important that an owner has the legal input into such an important decision. If there is a problem with a tenant at a future date a Solicitor could be important and the fact that they were involved in the agreement from the outset will strengthen any case.
STAMP DUTY
The lease must be stamped by Revenue. 1% of the annual rental fee is the rate of stamp duty charged. This is charged within 30 days of the commencement of the lease. The stamping process is completed through the ROS Revenue website. The stamped document is attached to the lease. It is the tenant’s obligation to ensure the lease is registered with the Property Services Regulatory Authority within 30 days of receipt of the stamped certificate.
HOUSE KEEPING
Once the lease is signed and it commences with the tenant taking occupation it is important to ensure the first payment comes through as agreed into the bank account specified and that any passing over of ESB or utilities is completed. If the lease includes a farmyard, same should be cleaned out and ready for the tenant. Agree with the tenant that any other gates, troughs or machinery are to be left in a designated place and that any keys or access arrangements are agreed.
SUMMARY
The above is by no means exhaustive but covers off some of the main points. Make sure at the outset to treat this transaction with the care and attention it deserves regardless of whether you know the tenant. A proper lease, just like a fence makes for a better relationship. Don’t leave certain matters to chance, if you want something done a certain way, specify it, agree it with the other side and put it into the lease. Regarding values be realistic and try to choose a tenant with a good track record.
Clive Kavanagh, MSCSI, MRICS is a Director of Jordan Auctioneers & Chartered Surveyors and has been involved in the sale of agricultural land and country properties for the last 20 years.
Clive can be contacted in the office on 045 – 433550 or clive@jordancs.ie