It’s not uncommon for ranchers to do business on a handshake, especially when the business seems fairly straightforward, such as leasing pasture to or from a neighbor.
But verbal agreements don’t always work out, notes agri-cultural law expert Tiffany Dowell Lashmet. When you’re negotiating a pasture lease, the details of the agreement need to be in writing, and the document should be reviewed by an attorney and signed by both the lessor and lessee.
“When a problem arises, the lack of a written lease agreement can cause major problems for both parties involved,” says Dowell Lashmet, assistant professor and Extension specialist in agricultural law with the Texas A&M AgriLife Extension Service.
“My advice to all producers is to take the time and invest the money to ensure that all leases are in writing and are reviewed by an attorney. Obtaining a written lease incurs legal fees, but the cost spent to have an attorney review a lease will likely be much less than the costs spent to resolve a dispute down the road,” she says.
West Texas lawyer and ranch owner Kaye Edwards agrees. In the past six years, she has leased pastureland in Concho County to two different cattlemen who were both excellent tenants. Still, as an attorney who has practiced real estate law, Edwards didn’t risk not having a lease agreement. She developed a simple three-page document that clearly defines the rights and obligations of both the lessor and the lessee. “It’s simple because I want my lessees to be able to understand it, and to know that I’m not misleading them,” says Edwards, who practices law in San Angelo.
From a lender’s perspective, a simple written lease is superior to a verbal agreement, according to Edwards’ loan officer, Brian Meeks, San Angelo branch manager with Central Texas Farm Credit.
“A written lease can document and verify a loan applicant’s annual income or annual expense, along with the term of the lease and other conditions between the lessor and lessee. This can be important information in making loan decisions and qualifying loan applicants,” Meeks says. “A written lease can also be used to avoid conflicts in the future when conditions or ownerships change.”
A written lease may include a range of legal considerations, from dispute resolution clauses and attorney fee provisions to confidentiality clauses. Following are some of the key terms to consider when drafting a grazing or bull lease.
TERM OF THE LEASE
Specify the beginning and termination dates and under what conditions, if any, the lease may be extended after a certain period.
Edwards’ lease can be terminated after one year by either party with 90 days’ written notice. Her lessee has the option to renew the lease for one year under renegotiated terms. Also, the lease can be termi-nated by either party if water is not available.
PAYMENT OF RENT
Detail how the rent will be calculated. Rent for most grazing leases is calculated on a per-acre, per-head or per-animal unit basis. Most bull leases require the rent to be paid monthly. A lease should also specify payment details, including due date, form of payment and late payment penalties.
DESCRIPTION OF LEASE SUBJECT
Describe the subject of the lease and any limitations. For example, if a party leases 100 acres of land but does not intend to use a particular 10-acre field on the property, this limitation should be spelled out in the lease.
Spell out limitations on activities that the lessee may engage in, such as hunting, and by which roads or methods the property may be accessed. If limitations are not listed in a written lease, they do not exist. Edwards, for example, specified that her lessee cannot remove mesquite wood from the property.
STOCKING RATES AND DISASTER CONTINGENCIES
Specify the allowed stocking rates and include contingencies in case a drought or fire occurs during the lease. It should determine who will make the decision to reduce the stocking rate and spell out the period of notice required before the lessee has to remove livestock if this situation arises.
Similarly, it is important to determine the species and breed of animal that will be allowed on leased grazing land. Charolais cows, for example, might require more grass than a herd of smaller-framed Angus cows, Dowell Lashmet points out.
Edwards’ lease permits cattle, sheep or goats to be pastured on her land. She was concerned about overgrazing, and therefore stipulated that overgrazing would be determined by the standard recommendations of the local USDA office.
LIABILITY AND INDEMNIFICATION
Consider terms addressing both parties’ liability and indemnification obligations to each other should a problem arise.
For example, if a leased bull injures someone, will the bull owner or the lessee be liable? If the lessee digs a posthole and someone steps in it, will the landowner or the lessee be liable?
MAINTENANCE OF FIXED ASSETS
Determine which party is responsible for maintaining fixed assets, such as houses, barns, fences and wells. Usually, says Edwards, “some-body already in agriculture has the mind-set to take care of the land, more so than a hunter would.” Still, it should be stated in the lease agreement.
Another consideration involves permanent structures that remain with the property after a lease terminates. If a lessee intends to build a barn, for instance, he may want to ask the landowner to pay for materials, and the landowner may want to have input on how the barn is designed.
Address issues related to transferability. Is subleasing permitted? Is consent from the landowner required before a sublease may be entered? What are the lessee’s rights if the property is sold during the lease term? These questions are important to both parties.
CARE OF LIVESTOCK
If part of a lease requires one of the parties to care for another’s live-stock, spell out the expectations in detail in the written lease.
One producer’s idea of feeding sufficient hay may be very different from another’s. Unfortunately, this issue can arise when cattle are not adequately cared for, according to Dowell Lashmet. She notes that some leases offer an incentive to a caregiver for providing a high standard of care. For example, if the breeding rate on heifers is over a certain percentage or if calves exceed a certain weight gain per day, the caregiver will receive an additional amount in rent payment.