Obviously, rental is one of the key considerations in the letting of any farm.
Farm rental levels are, in essence, driven by profitability considerations. Farm lease – (as opposed to sharefarm) – rental rates per hectare per year are tendered by farmers to landowners on the basis of anticipated profits to be generated. Often these rents are set for three years. Needless to say the anticipated profits may not eventuate. They may be exceeded or, alternatively, actual earnings may disappoint. Disappointment may be due to one or more of; rainfall deficit, costs escalation or price falls.
One of the most common problems in farm leasing is the drafting of leases with a long initial term of tenure – (known as the “term certain”) – where there is no provision for rent review or where there is a set formula for rent review. Such formulae include fixed percentage increases or adjustments to the Consumer Price Index (CPI). As can easily be imagined, in a farming context, such arrangements can quickly go wrong.
Share farm arrangements, on the other hand, are much less likely to backfire but they too must be carefully monitored. For example, if a 30% share of sales to the landlord is appropriate today, it does not follow that this will be the case in five years’ time. If variable/input costs escalate faster than prices received then the 30% figure might well need to be reviewed. Happily, sharefarm arrangements are usually struck on a year to year basis and are thus less likely to give rise to problems.
Going back to lease rents – ($ per Ha. per Year) – there is another key problem area to be avoided. This is the upwards-only rent review or “ratchet” clause. This is a common provision in office and warehouse rents where it is less likely to have a seriously negative impact on the tenant. As you will appreciate, this is not the case with farming. Farm rents represent a high percentage of gross margin and their assessment is a critical issue. If a longer term tenure is being contemplated the framing of rent review provisions including dispute resolution is an area which must be closely scrutinised. Parties to the lease should be prepared to contemplate rental reductions as well as increases.
