In this news article, in the first of a two-part written series, Clive Kavanagh of Jordan Auctioneers, provides readers with a guide to the leasing of agricultural land in Ireland.
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 landowners to consider. We have focused on leases over five years for lands, excluding any residences.
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Decide on the Term of the Lease:
It is important to first determine the length of lease you are prepared to enter.
There are tax benefits for anything over five 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 important to 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/her 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.
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Tenant Profile:
For most people, the farm is more than just an asset and its careful minding into the future is of utmost importance to an owner.
It is, therefore, essential that you decide on the profile of the tenant you are after, their track record leasing land, their willingness to operate the farm to a good standard and to have a working relationship with you regarding any changes they may wish to make.
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Rent:
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. Do not 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.
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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 on 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.
Summary:
The above is by no means exhaustive but covers 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. Do not 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.
About the author:
Clive Kavanagh, MSCSI, MRICS, is a director of Jordan Auctioneers & Chartered Surveyors who 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 [email protected]
