Handshake leases – She’ll be right?
It is not uncommon in the rural industry for decades long farming arrangements such as leases to be made on a ‘handshake’. A good faith arrangement between neighbours, friends and family will continue to work as good as gold for years until suddenly it doesn’t.
No one likes to think about the worst case scenario, but circumstances do change. Relationships deteriorate due to divorces, deaths and financial troubles which can all of a sudden haunt the ageold handshake, leaving those parties involved with insufficient legalities and procedures to fall back on. When a deal is struck between parties to lease a farm, no doubt the two people involved are on good terms. The “she’ll be right” attitude prevails – why bother with the fuss of lawyers and paperwork when everyone is on the same page, right? This is, in fact, the best time to jot those key points down into a formal lease rather than trying to negotiate terms years later during a dispute.
Sure, you may not look at it again, the lease may gather dust in the bottom drawer for another decade whilst farming operations continue without a hitch, but if something does go wrong and the landlord and tenant cannot agree on a resolution, you can dig out that old lease and rely on the terms you agreed upon all those years ago – when the grass was greener. It is also common (again to avoid the expense of lawyers) for parties to put together a home-made lease. Whilst this is a step up from the handshake, remember that the only time you are ever going to look at that piece of paper is if something has gone quite majorly wrong. Rent may be unpaid, fences and other improvements may have been damaged or pasture may have been over or understocked further deteriorating the condition of the farm land.
Whilst the minimum requirements for a lease include only a description of the area which is to be leased and the amount of rent to be paid, there are a variety of other issues to be considered where disputes may arise.
Permitted use – the landowner may want to be specific about what farming activities can take place on the land. Different activities can affect soil quality for future use. In addition to this, some class C bush land that may once have been relatively worthless, with the booming honey market has seen a massive value increase. Some old handshake leases never considered this, and we have seen some tenants earning two or three times the annual rental from hive income alone. The landlord may also wish to look at specifying fertiliser requirements, types of crop or grazing rotation options. Absent any specific permitted use, the tenant has free reign to do what it likes.
It is common for rural leases to run for a long period of time, and this can benefit both parties. The landlord has a guaranteed income stream while maintaining the capital gains on the property, whilst the tenant is able to build up the farming operations and asset base to save to eventually buy land. However, the lengthy nature of these leases can also lead to unforeseen issues arising that may ultimately lead to a dispute.
A formal lease will have procedures in place to deal with these issues and specific requirements to cancel the lease and recover unpaid rent or damages. A lease reflects what both parties require to mutually benefit from the arrangement. This will inevitably help to avoid further cost, time delays and stress on both parties.