At one point or the other, you would have come across the term “Land Leasing”, more importantly, because of its relevance in real estate today. Therefore, it is essential to understand the intricacies of a land lease agreement.
A Land Lease is permission given by a landowner to a lessee to improve the vacant land. This agreement allows the lessee to build a property depending on the purpose intended.
There are different reasons why a lessee would rent land from a landowner. The tenant or lessee would want the land for residential purposes, to build a house where they can reside. Another purpose for a land lease will be for commercial purposes, while some tenants will rent land for agricultural purposes.
Consequently, for both the landowner and the lessee to have a clear understanding of their roles, obligations, and other binding regulations concerning the land, a land lease agreement is necessary.
Furthermore, the land lease agreement differs from commercial and residential contracts because the focus is on the land and the lessee’s rights. However, for the land lease agreement to suffice for both parties, there must be a land lease valuation. Although this valuation process is the same across different contractual agreements, it entails professional evaluators inspecting the land and property to deduce the lease rate.
Before the discount rate is applied, the escalation schedule and terminal value are both determined. Interestingly, the rate is influenced by the risk profile of cash flow.
Therefore, the risk profile depends on the lessee’s credit score, the quality of improvements made, and the location’s potential.
Land Lease Agreement
A land lease agreement is a document that contains the details of the rights to occupy a land and develop it based on the divergent reasons of the tenant. It has been established that a land lease agreement is a formal document that explains the obligations of a lessee and landowner towards renting out land. The lessee has the right to build or improve the land any way they want, provided the conditions have been agreed upon by both the landowner and the tenant.
However, in understanding a land lease agreement, it is necessary to pinpoint that it goes by different names. To remove any form of confusion now and in the future, we must see alternative names people refer to as land lease agreements.
Here are some of the synonyms of a land lease agreement:
- Ground lease agreement
- Land agreement
- Farmland lease agreement
- Cash farm lease agreement
- Land contract
- Pasture lease form
- Pasture rental agreement
- Hunting lease contract
For people looking for sharecropping options, it would be best to consult Form FSA-1940-53 (Cash Farm Lease), which is made available by the U.S Farm Agency.
Why is a Land Lease Agreement Necessary?
The apparent importance of a land lease agreement is to ensure clarity in terms of communication, rights, and obligations for both parties. Furthermore, its presence of it ensures that both parties are secure in the case of a lawsuit. Plus, the agreement eschews any form of confusion as to the roles and obligations of both parties.
Some of the factors taken into consideration are:
- The person who pays the taxes
- The consequence of not paying rent on time, if there will be any.
- The party that obtains the land permits
- Landowners keep any building on the land after the land lease expires.
- The consequences of the livestock destroying the neighbor’s property
- The lessee subleasing the land to another person.
- The decision will be taken if minerals are discovered on rented land.
There are also issues with the lessee subleasing the land to other farmers to generate more income. This can be a bit of a problem if there is no agreement concerning the issue. Furthermore, the land lease agreement allows both parties to know who keeps the construction and improvements. These are some of the issues that a land lease agreement settles.
However, there are more intricate necessities that will be highlighted in this section. In rural and urban settings, the lessee can benefit from the landowner releasing the land for whatever purpose they need it for. Therefore, a tenant can generate passive income without having to invest capital or labor personally. Let us look at the ways this can be achieved.
In the rural setting, one of the most common forms of land lease is agriculture. Some will refer to this as tenant farming, but they all mean the same. Interestingly, this land agreement is ideal for both parties. The tenants may not have enough money to purchase land for themselves, but a land lease can help them save enough money and adequately utilize the tools and livestock to make more money.
On the other hand, landowners will also benefit from the lease agreement, especially during hunting season. By leasing the land to hunters during this season, the landowners get seasonal income. According to The National Agricultural Law Center, crop damage and frequent prevalence of disease in livestock can be prevented through the ground lease which can manage animals and wildlife in specific areas.
Substantial chain businesses in metropolitan areas frequently use a land lease to take advantage of a desirable location. This allows them to evade paying a large real estate fee. So, instead of acquiring property, corporate development plans may use land leases to strategically use equity or available capital to enhance the site and produce income. Landowners can also earn a consistent annual income and perhaps obtain any constructions or modifications erected on the property after the lease expires.
Usage of Land Lease Agreement
We now understand that land lease agreements can be in different forms based on the tenant’s purposes.
Here are three purposes of it:
Agricultural land lease
This covers the use of the leased land as an area for grazing animals; it can also be a designated area for hunting. More popularly, many people use rented land to grow crops for personal and commercial purposes.
Commercial land lease
The rented land is used for profit-making; it usually entails building fast-food restaurants, stores, and companies. Companies also build telecommunication towers and also erect billboards on rented land. Commercial land leases are usually used to increase the brand image and enhance profit-making opportunities.
Residential land lease
This entails building an area that tenants can call home. It could be a small house in the woods, as long as it is made for residential purposes.
Different Types of It
There are two types of land lease agreements; both parties either adopt the subordinated agreement or the unsubordinated agreement.
It is therefore vital to understand the peculiarities of both types:
Subordinated land lease agreement
For this type of land lease agreement, the landowner agrees to take a lower percentage in their claim to have access and ownership of the property that will be used for leasehold mortgage, which will be on the tenant’s loan on improving the property.
However, if the tenant defaults on a loan, the landowner may lose the land. Since banks do not agree to lend tenants large sums of money for their construction, landowners usually settle for subordination in exchange for higher rent payments.
Unsubordinated land lease agreement
This is the opposite of the first type of land lease agreement explained above; the landowner refuses to take a lower percentage and insists on not allowing a tenant to the land as collateral for any loans. If the tenant defaults in agreement, the landowner does not lose the land; however, there are lower rent payments since the risk is reduced.
Essentials to be Incorporated
A land lease agreement should include certain essentials to ensure that the obligation and roles of both parties are accurately spelled out.
Therefore, here are the critical parts that must be included in it:
The full name and details of the landowner or lessor, and the lessee (tenant) must be included in the land lease agreement.
Amount of the rent
The land lease agreement must contain the exact amount of the rent that a tenant will have to pay. Although, the amount is usually determined by the length of the land lease.
It is essential to make a proper description of where the land is located. You can use meters, photographs, diagrams, or a description in your words to ensure that both parties understand the location or the part of the land being leased.
The land lease must detail the date through which either of both parties can end the agreement. You can also ensure you explain the conditions on which the land lease agreement may be terminated.
Conditions for improvement or reimbursement
The land lease agreement should contain provisions on whether the tenant is allowed to improve the construction. Also, the agreement should detail whether the landowner keeps the improvement, or the tenant is reimbursed.
Use of permitted land
It would be best to detail the way the landowner should use the land. Ensure that you explain how the land should be used so that the tenant fully understands what they are not supposed to do.
How will the tenant pay the landowner? Again, this question needs to be answered through the land lease agreement, ensuring that you detail the method, and the time rent should come in.
There are additional requirements the land lease agreement needs to have in order. Below are the requirements:
The land lease agreement will determine whether the landowner still reserves the right to enter into the land or only on special occasions.
The land lease agreement should state if there were possible changes in the agreement in the future.
It would be best to determine which state law you would use to settle legal disputes between you and the other party.
Method of handling disputes
Consequently, it would help to decide what method of resolution will be best. For example, do you choose arbitration, mediation, or court litigation?
If there are any renewal options or extensions, it is best to specify them in the land lease agreement. In order to prevent fraud, ensure that a land lease of a year or two years is put into writing.
As an owner, you need to clearly explain the facilities that the tenant is allowed to use. For example, there may be a shed or a camping area that you want off-limits; therefore, the land lease agreement needs to include such a distinction.
Tenants who rent land for agricultural purposes will need to specify if the gates will be closed at all times to prevent the livestock from going out.
It would be best to decide whether the landowner is responsible for supplying basic amenities or not. Is the landowner meant to provide electricity, water, and other basic amenities?
The question of who will obtain the nearest permits will be answered in the land lease agreement. Also, it would be best to clarify whose role it is to ensure that the band does not impinge on government regulations.
You need to state whether the tenant is allowed to build additional structures on the land and if the landowner is expected to keep the improvements made after the lease ends.
You need to determine what type of insurance the tenant should have. It would be best to clarify how the insurance type will influence the agreement.
Ensure that you explain whether the land lease will require the tenant to buy liability insurance for the land or the landowner is free from any harm or damage that may occur during the tenant’s stay.
The land lease agreement must state whether the landowner or the tenant will be responsible for maintaining the land and ensuring its peak condition.
The agreement will also detail if the tenant has the right to access minerals, natural gas that may be located under the surface of the land.
Choose whether the tenant has the ability to mortgage their leasehold interest or the landlord’s interest in the land.
The land lease agreement will determine which party will be responsible for collecting permits and other approvals for the land.
You need to describe the conditions that the land has to be in when the tenant eventually leaves.
In a bid to protect the property and facilities, the land lease agreement should detail if the landowner will collect a security deposit for any future damage.
This part of the land lease agreement means that if there is an issue with one part of the document, the rest will remain credible.
This part states the party responsible for the payment of local, state, and federal taxes to use the land.
The details of how the land lease agreement may be ended by either of the parties should be clearly stated in the agreement.
Use of vehicles
The land lease agreement has a provision for explaining whether or not the tenant is allowed to use any vehicle that is on the rented land.
Land Lease Agreement Templates
Although we have highlighted the components of the land lease agreement, it is still necessary to see how the document is being worded. Hence, you can check a professional land lease agreement template to ensure the credibility of the one you want to issue.
We have provided free and easily downloadable land lease agreement templates here:
Advantages and Disadvantages of Having It
Here are some of the advantages
- The land lease agreement helps the tenant invest more into their business as renting a land ensures they can maximize their equipment to make money and investment.
- The landowner receives a steady income while keeping their land.
- The tenant can gain access to prime locations and eventually buy the land which will be great for them.
- The land lease agreement helps to settle any law dispute as there is a clear distinction between who owns the land, the tenants, and trespassers.
Here are some of the disadvantages of a land lease agreement:
- In a land deal, the title does not instantly pass to the purchaser.
- A pre-existing mortgage takes precedence over a land deal, which might cause issues for the buyer.
- The landowner may be held legally liable for inspection problems with municipal or state authorities.
- In the event of buyer forfeiture, it may take several months for the landowner to reclaim ownership of the land.
With the evidence presented in this article, it is important to get a land lease agreement that contains all the intricate elements to be free from future legal issues. But, more importantly, soliciting the help of experts to help you draft a land lease agreement will help you get the best out of the situation as well. Hence, the land lease agreement template has been attached. Finally, understanding the intricacies of this agreement will enable you to save yourself from fraudulent activities.