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Guest Opinion: Grazing Lease Agreements

Drew Skjoldal

Skjoldal
JOHnny Sundby |

Although the premise of lease agreements is simple (a tenant paying a landowner for the right to run cattle on his land), grazing leases are a common source of conflict and litigation. I believe that such conflict can often be avoided by careful planning during the drafting process, and it is my intent to highlight some common pitfalls of incomplete or poorly drafted leases in this article.

Payment Timing

A lease should have clear direction on when lease payments are due. Many leases require prepayment, while some landowners allow the tenant to make payments in installments. The lease should have clear language regarding what penalties the tenant will face if a payment is late or missed entirely.



Calculating Rental Rates

Many leases’ rates are calculated on a simple per-head or per-acre basis. While this method provides simplicity, the parties may benefit from discussing other options.



Flexible rental rates are a particularly attractive option during our time of uncertain market conditions. For example, if rental rates are not flexible in a lease, parties who are entering into long-term leases will base the rental rate on current market prices. If the market rebounds significantly in the next few years, the landowner will not be capturing the added value that his land now holds. On the other hand, if the market dips even further, the tenant may not be profitable and may default on the lease.

One example of a flexible rental rate formula is to tie the rate to the cattle market. For example, the lease could provide that the annual rental rate will be adjusted upward or downward depending on the average price per-hundredweight of a 550 pound calf at an identified market. Again, such a provision should be customized to fit the particular circumstances of the parties.

Fencing, Maintenance, and Supplies

A grazing lease should clearly state which party bears the expense of labor and materials for all maintenance issues. For example, tenants usually assume that the landowner should have the fences in good condition when the lease begins, and then minor repairs throughout the grazing season are to be done at the expense of the tenant. However, if major repairs to fencing and corrals are needed due to their age or poor condition, many tenants like to require the landowner to bear part of the cost.

Stocking Rate

The stocking rate is one of the most important provisions that a pasture lease should contain. If pasture rent is simply set on a per-acre basis and stocking rates are not discussed, the tenant has an incentive to stock heavily, which may be harmful to the land.

To ensure that the tenant and landowner are on the same page, it is a good idea to be specific about both the number and type of livestock that will be grazing. For example, a lease could state that the tenant is allowed to graze up to 150 “animal units,” and then define that term in the lease as “a beef cow weighing approximately 1,000 pounds with a calf less than four months postpartum.” Language can be generated for leases involving all types of livestock.

Another important provision to include is how stocking rates may change if drought occurs. For example, a lease could include language that requires stocking rates to be reduced if the forage quality and quantity is reduced below a level identified and agreed to by both parties. Without this provision spelled out in the lease, tension may develop during a drought between a landowner who is concerned with protecting his grass, and a tenant who doesn’t want to be forced to remove his cattle and potentially sell them at an inopportune time.

Taxes and Insurance

It is important to include clear guidance on the parties’ responsibilities regarding real estate taxes and insurance coverage. For single-season grazing leases, it is common that the landowner will continue to be responsible for making property tax payments. However, for long-term leases, or leases in which an entire ranch is being leased, tenants may assume responsibility for payments. Regardless of which party is to be responsible, the lease should have clear direction on this issue, and not leave it up to the parties’ assumptions.

Landowners often require tenants to maintain liability insurance throughout the lease term, and should require that the tenant provide proof of insurance. Also, landowners should require the tenant to name the landowner as an “additional insured” on the policy. The parties should contact their insurance providers to discuss the details of such policies prior to executing the lease.

Conclusion

In legal practice, I commonly see how failing to spend time planning and negotiating a contract can result in conflict, expensive litigation, and damaged relationships. Grazing leases are a great example of this, and many sources of conflict can be nipped in the bud through proper drafting.

This article is intended as an overview of common issues encountered in grazing leases, and is not intended as legal advice and does not create an attorney-client relationship.

Contact Drew Skjoldal at 605-722-9000 or dskjoldal@lynnjackson.com.