GrainsWest Winter 2020

Winter 2020 Grains West 42 family business. It provides the flexibility to expand the farm, increase production and increase profits. GET IT INWRITING Stuart Person, senior vice-president of agriculture with MNP, emphasizes the importance of having a proper rental agreement to protect both landlord and renter. “As farmers plan to expand their operations, and with increasing land costs, we are seeing a larger percentage of rented crop land,” said Person. “And we are also seeing significant tracts of land owned by investors who are just looking for someone to farm it. Unfortunately, we still see too many of these rental deals based on handshakes or verbal agreements.” Person recommends both sides create a rental agreement with a three- to five-year term. It can then be reviewed annually or at least a couple of times. Agricultural lenders and farm management advisors can provide advice in drafting these documents. Person strongly suggests rental agreements should be prepared or reviewed by a lawyer. Farmers can face a variety of difficult and potentially expensive situations when no written agreement exists. For example, a farmer fills a grain bag in the fall and leaves it on rented land. If the land is subsequently rented to another farmer, when must the bagged grain be removed? Similarly, if a farmer applies anhydrous ammonia to rented land in the fall and in spring is informed the land has been rented to someone else, how will he be compensated? Needless to say, if a farmer has built an equipment line around a certain number of acres, losing a portion can really mess with efficiency and economics. “With a three- to five-year agreement, both parties can have stability,” said person. Alberta Barley region two director Jeff Nielsen is familiar with the consequences of not having a written agreement. A verbal agreement made between a landlord and his grandfather more than half a century ago had been passed on to Nielsen. Ownership of the land had passed from the original landlord to his own granddaughter. While the arrangement worked well, one day it simply evaporated. “I had bought one quarter section from them previously when they just decided they weren’t going to rent to me anymore,” said Nielsen. “I offered to buy the last quarter, but the granddaughter decided they were just going in a different direction. So, that was it. “It is very tough when you don’t have an agreement in writing,” he said. “I never liked it over the years because there was always this feeling of insecurity.” MAKING IT WORK Merle Good is a farm tax expert and farm succession planning consultant. He uses a four-point plan for developing rental agreements that are secure, flexible and fair. “About 85 per cent of my clients are developing wills where they leave some land to non-farming children,” said Good. In response, he created a mechanism that works for rental agreements between farmers and their off-farm siblings, but that he also suggests can work for most rental agreements. 1. To determine a fair cash rent value, generally 20 to 30 per cent of gross revenue per acre, Good uses a formula based on crop insurance coverage rates that would be assigned to a beginning farmer. This fairly representative figure is referred to as the proxy. The beginning farmer crop insurance coverage is calculated by using average land prices and yields in a certain area. In the Didsbury area, for example, that beginning farmer crop insurance coverage might be determined to be $275 per acre. If the cash rent is to be about 30 per cent of gross revenue per acre, then 30 per cent of $275 is $82.50 per acre, which is the average cash rent in the area. If the coverage rate drops, the cash rental amount drops, and vice versa if the coverage rate increases. 2. For a rental agreement term, Good recommends what he described as a rolling lease, a three-year term reviewed annually. The landlord and renter square up on rental fees for the current growing season. If everything is good, the rental agreement rolls ahead to be reviewed again the next year. It allows the renter to plan at least a three-year rotation, and also forces renter and landlord to talk at least once a year. “Rather than just send a cheque in the mail, it forces them to communicate, which is important,” said Good. 3. In the event of a landlord’s death, Good encourages the inclusion “…we still see too many of these rental deals based on handshakes or verbal agreements.” —Stuart Person FEATURE