This article was co-authored by Jim Fleissner, ALC
There are a variety of reasons why a person would opt to rent or lease land rather than purchase, as well as a variety of lease types. Perhaps the land is not for sale, or a purchase is financially impossible. Maybe the land is only open for hunting, but the owner uses the tillable acres for row crop production. Or, maybe the neighboring farmer is allowed to run cattle on the corn stubble after December 1. Regardless of the reasoning, there are options for individuals who want to rent and use land without owning it outright.
This article will explain the basics of leasing land, land lease agreements, and the things prospective renters or lessees should know before they sign!
What is a Land Lease?
A land lease is a legal agreement between a landowner, known as the “lessor,” and an individual, referred to as a lessee, that allows the lessee to use the property for a specified period of time. The landowner retains ownership of the land, while still granting the lessee the right to use the property for a designated purpose over the agreed-upon timeframe.
Leasing land is a great way for landowners to generate passive income with their property. It’s also an opportunity for landowners to make improvements or develop their property further since some lease agreements will require the lessee to perform general repairs and upkeep on the property in exchange for use.
How Does a Land Lease Work?
Before entering into a land lease, there are a few fundamental aspects to understand. This section will examine the basic parts of a land lease as well as some commonly used terminology.
Lease Agreement Terms
This is the meat of the agreement. In the lease terms, you’ll find the lease duration, cost, permitted uses, permitted users, and all the fine print. If the agreement is laid out well, there should be teeth for both sides regarding early termination and what happens to the money, as well as clear guidelines for who is allowed to do what, and who is required to do what.
Land leases have a predetermined duration which can vary widely from lease to lease depending on the agreement between the landowner and their lessee. Typical lease terms range from a year or a few years, up to decades in some situations. It’s important to ensure that your intended use of the land lines up with the landowner’s desired lease term before signing a lease. Keep in mind, too, that some states have limits for how long certain types of leases are able to be written, as well as recording requirements depending on the duration.
The lease fee refers to the regular payments made to the lessor by the lessee. These payments may be scheduled monthly, quarterly, annually, or any other number of ways depending on the other details of the lease. Typical lease payment models vary by lease type and can be a great avenue for negotiation.
Lease fees can vary widely depending on the location and size of the property, intended uses, and other factors. It’s important to do some research as to typical lease fees in your area, as well as to consult with a local Land Professional to determine a reasonable lease fee for your desired uses.
Permitted Uses and Permitted Users
The lease agreement will specify both the purpose that the land can be used for as well as the individuals allowed to access and use the property. For example, a lease agreement may specify that deer hunting is permitted but not turkey hunting.
Similarly, only individuals named in the Lease Agreement are permitted to access and use the property. Permitted individuals cannot be added to the lease agreement at a later date during the lease term. The best time to add or change the individuals named on the lease is prior to the initial signing or before extending the lease agreement.
For landowners desiring additional protections, additional parties/individuals can be named in their general liability insurance, despite the fact that they are not the policyholder. This is a way for the landowner to be more protected when allowing others to enjoy their property.
Understanding the permitted uses and permitted users of a land lease is imperative before signing to avoid potential conflicts or violations down the road.
Lease Renewal and Termination
Most lease agreements will include clear terms and provisions for renewing or terminating a lease. Should a lessee wish to extend their lease beyond the original lease term, the lease agreement should clearly define any changes in lease fees or permitted uses.
When it comes to terminating a lease before the lease term has expired, the lease agreement should specify the adequate conditions for termination to be valid. Common reasons include a failure to pay lease fees, violations of lease terms, or changes in the landowner’s financial or life circumstances. A good lease agreement should include protections for both the lessor and lessee to ensure that all parties are protected in the event of early termination.
It is also important to pay attention to local regulations regarding lease termination notification – for instance, in Iowa, an agricultural lease must be terminated via written notice to the tenant, even if the lease has a written end date, by September 1, otherwise the lease terms remain the same for the following year. Likewise, a verbal lease must be terminated in writing by September 1 in Nebraska, but a written lease with a hard end date does not require written notification.
Insurance requirements can vary depending on the nature of the lease and the intended use of the property. In most cases, both the lessor and lessee will need to purchase some kind of liability insurance policy, with the lessor often purchasing property coverage insurance as well to protect their land.
Some insurance providers also offer specialized liability policies tailored to the lease’s permitted uses, like hunting lease liability insurance. A Land Professional is a great resource to gain a better understanding of insurance requirements for a land lease, with some brokerages and lease facilitators even offering policies themselves in-house.
If you’ve got more questions regarding whether a land lease is the right decision for you, reach out to one of our Leasing Specialists today!