What is a land lease agreement?
A land lease agreement is also known as a ground lease agreement and it allows the tenant to use the land owned by a landlord in exchange for a defined amount of rent. These agreements are similar to the manner standard property leases work where the tenants may enter into commercial and residential agreements.
Generally, most leases don’t have structures and the tenant can build a temporary structure that he pays for on his own. But under some arrangements agreed upon by both parties, the tenant can build permanent structures. In some land lease cases though, there could already be structures that the tenant can use.
When to use a land lease agreement?
Even if the landlord and the tenant are in the best of terms, a land lease agreement should proceed with the relationship. Word of mouth or handshakes are not enough. Having an agreement binds both parties to the terms of the agreement and either party could become liable if there is a breach in the terms of the agreement in the future.
With this in place, the landlord may now set his expectations for the tenant. The tenant would accept such expectations when he signs the agreement. The tenant may construct structures on the landlord’s property with the latter’s permission as stipulated in the agreement.
There should be no argument there and, as a matter of fact, the agreement provides several benefits for the parties involved. You can apply a simple land lease agreement if you own vacant land and an interested tenant.
Elements of a land lease agreement
A land lease agreement exists between two parties, one who will utilize the land (tenant) and the other who owns the land (landlord). The tenant can use the land as per the agreement for either agricultural, recreational or commercial purposes.
When making the agreement, make sure that the expectations and responsibilities of both parties are clearly defined so that there will be no confusion between the contractual parties about how the tenant will use and manage the land. Here are the elements of such an agreement:
- Details of the land
Be specific as you can about the description of the land in the agreement. Here, include the total amount of acreage that the landlord owns and if the lessee will use less than that amount, it should specify the portions that the lessee plans to occupy.
It’s important to clearly delineate the property’s boundaries to eliminate future confusion. This also ensures that the lessee won’t infringe on the acreage he isn’t allowed to utilize or on adjacent properties owned by other entities who aren’t part of the agreement. It is best to have a topographical map as an addendum to show the layout of the land
- Use of property
The contract should also stipulate clearly and in detail how the lessee plans to utilize the property. Simple land lease agreements are usually created for specific purposes. For instance, allowing hunters to use the land when it’s hunting season. Any other activities that weren’t agreed upon are a violation of the agreement.
Aside from detailing the use of the land, a farm land lease agreement should also define who maintain and make improvements on it. You should specify what the expected improvements will be including utility lines, entry roads or the buildings that would support the lessee’s activities.
After the agreement ends and the landowner wants to keep the changes, there should be an established method where the lessee receives a return of the cost of his investment. On the other hand, if the landowner wants the lessee to return the property to its original state, include this in the agreement too.
- Duration of the agreement
Any land lease agreement must contain specific start and end dates although a provision written into the agreement can extend the duration for specific periods of time. You should also specify the terms that can terminate the lease if the property isn’t used as stated in the agreement.
- Financial Terms
The lessee must give proof of liability insurance. This supports the activities in case of injuries to the people or damage to the belongings or property. As an added precaution, you might also want to add liability policy where the lessee will pay for any potential damage should he fail to provide enough coverage for damage to property and people.
- Legal Review
It would be prudent for both parties to have their own legal representatives go through the contents of the agreement to ensure it complies with contract laws. You can hire a contract lawyer to confirm that the conditions and language used in the document are fully enforceable should there be any legal action that arises from the use of the land.
Types of farm land lease agreements
Farm land lease agreements can have several variations. Most of these come in the form of written contracts. However, because the parties concerned often know each other personally and have been in business for a long time, some of the agreements aren’t done in writing. In such cases, enforceable leases may get implied through the actions of each party or communicated verbally.
The problem with this is that verbal leases are often difficult to prove, thus, they may easily get terminated. The farmer can gain control and possession of the owner’s land through the payment of rents that can also come in varying forms. Most, though, need fixed cash payments while others may ask for a portion of the profits of sales of livestock or crops produced by the property. Farm land lease agreement may come in the form of:
- Cash Lease
Under this type of agreement, the lessor receives a regular stream of payments. Here, the farmer takes the risk, especially when the prices of commodities fall. However, if the prices improve or shoot up, the farmer could benefit under the cash lease agreement. You can include provisions within the contract to help address such issues and, therefore, reduce the risk.
- Crop-Share Lease
In this type of agreement, the landlord provides the land while the farmer provides the contracts for input costs, equipment, and labor. Instead of fixed rent, the landlord gets either a part of the crops to sell or a cash payment that depends on the net proceeds from crops’ the sales. In this agreement, the landlord bears more of the risk but can gain more depending upon the harvest output and commodity prices.
What happens when you don’t have a land lease agreement?
When there is a written land lease agreement, this can prevent outside entities from thinking of the arrangement as a joint partnership instead of what it truly is, a landlord-tenant relationship. Usually, a tenant incurs debts when taking out a loan for the purpose of making improvements on the property.
Land lease agreements may include an explicit “No Partnership” clause to protect the landlord from creditors who might come after the land should the tenant fail to settle his financial obligations with his creditors. As a landlord, you would always take precautionary measures to protect your interest.
Lease agreements you enter into should include language to protect you from financial issues that the tenant might encounter while the land is in use. The simple land lease agreement should specify that no partnership exists created between the tenant and the landlord. Depending on how you documented your agreement, it could either be one of the following:
- Subordinate lease
Here, the landlord agrees to assume a lower hierarchy in the claim of ownership and pledges interest on the land for collateral for a loan that the tenant will use to move forward with improvements. Should the tenant default on his loan, the landlord loses ownership of the property.
More often than not, banks don’t want to lend tenants large amounts of money required to construct improvements for the simple reason that they aren’t getting a security interest underlying the land itself. As for your risk as a landlord, you can agree to subordinate in exchange for higher amounts of rent.
- Unsubordinate lease
Here, the landlord won’t assume a lower hierarchy by prohibiting the tenant from pledging the title to the land as collateral for loans. For this lease, should the tenant default on his loans, the landlord keeps ownership of his land while the tenant loses his leasehold interest. Unsubordinate leases usually come with lower amounts of rent.
In summary, a land lease agreement prevents future conflicts between the involved parties who might file a lawsuit to quiet title in claims for adverse possession should there be any doubts as to the property’s ownership.
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