Lease-to-own allows farmers to transfer land with flexible options, a test period, and less debt for the incoming (tenant) farmer. Leasing for the purpose of permanently transferring ownership over the long term requires strong communication and a good working relationship between the parties bound by the lease.
In a typical lease-to-own setup, the incoming (tenant) farmer makes rental payments to the landowner to allow the tenant farmer to start working on the land and to start investing in eventual ownership of the property. The landowner continues to own the land until certain payments have been made and/or certain other prerequisites are met, and then the tenant becomes the landowner.
A lease-to-own essentially sets up an extended purchase and sale agreement. This means that the landowner agrees to sell the farm and the tenant agrees to purchase the farm at a date specified in the lease. A farm lease can be crafted with different provisions that may include an option to purchase or a right of first refusal (the ability to be first in line to purchase when the property comes up for sale). The heart of a typical lease-to-own agreement, however, is that it incorporates the sale into the lease rather than presenting an option that may or not be exercised.
A group of Hmong farming families in Minnesota formed the Hmong American Farmers Association (HAFA) in 2011 with a mission “to advance the prosperity of Hmong American farmers through cooperative endeavors, capacity building and advocacy." As part of its approach to community wealth creation, HAFA now manages an incubator farm from which member families sublease land.
The incubator farmland itself was purchased by a social investor with the intention of leasing the land back to HAFA. Because the purpose of the social investor buying the land was always to transfer it to HAFA at some point, the parties drafted the lease with a future transfer of ownership firmly in mind. Click here to read more about how a lease-to-own arrangement has facilitated this cooperative farming arrangement.
Beyond the basic lease terms that should be contained in every lease, the lease in a typical lease-to-own arrangement should call for the eventual sale of the property from the landowner to the tenant farmer. This should include the following components:
Lease-to-own agreements can be long term (roughly 10 to 99 years) or short term (roughly 1 to 10 years), depending on what the landowner and tenant farmer determine will best facilitate the transfer. A long-term lease may be the best option when a transition in ownership is the ultimate goal. Commercial lenders may be willing to make a loan to tenant farmers with a long-term lease in certain circumstances. Qualifying for a loan is even more likely when the long-term lease allows the tenant farmer to build and own improvements, such as barns, parlors, processing areas, and more. Additionally, a long-term lease can provide the landowner with a measure of security because the tenant has agreed to make rental payments for a number of years and will not need to renegotiate the lease every year. This means fewer costs and time requirements (unless the lease is terminated early for some reason).
On the other hand, a short-term lease can help facilitate a transfer more quickly if a tenant farmer has sufficient financial assets and the landowner does not need or want to retain control of the property for a long period of time.
The length of the lease is entirely up to the landowner and tenant and it will vary based on the unique financial, familial, and other considerations involved in each transfer.
A lease-to-own arrangement requires that the landowner and tenant farmer understand and agree upon several key issues, all of which should be written into the lease:
It’s not an attorney’s job to make decisions for farmers or to set farm transfer goals. Instead, attorneys can provide information about pros and cons of different options, advice about what is common versus unusual, fair versus unfair, etc. Attorneys can help farmers understand the universe of possible farm transfer goals and help narrow down individual options so that farmers can make final decisions.
The Center for Agriculture and Food Systems is an initiative of Vermont Law School, and this toolkit provides general legal information for educational purposes only. It is not meant to substitute, and should not be relied upon, for legal advice. Each farmer’s circumstances are unique, state laws vary, and the information contained herein is specific to the time of publication. Accordingly, for legal advice, please consult an attorney licensed in your state.