Definitions
Consideration is the exchange of value by both Parties to a contract.
Rent is the “consideration” that a Tenant pays to a Landlord for the occupancy and use of the Premises. Money is the most common consideration, although the Parties may agree to rent payments in the form of goods or services.
Purpose
The purpose of this section is to clearly state the consideration and how it may be adjusted during the term. Stating the exchange of value by both Parties is essential element for a legal contract, even if the exchange is nominal.
FAQs
Farm landlords who are not involved in the farm operation are subject to income tax on their rental income. Landowners who “materially participate” in the farming operation must include the rental income as earnings that are subject to self-employment tax. According to the IRS Farmer’s Tax Guide, the test of whether a landowner “materially participates" is if the arrangement with a tenant specifies the Landowner’s participation and s/he meets certain criteria demonstrating that participation.
Farm tenants can generally deduct rent paid on their Schedule F (the IRS form that itemizes farm income and expenses). However, if any part of that rent is considered payment toward a purchase of the farm (i.e., in a lease-to-own provision in the lease), that part might be considered a conditional sales contract, not rent, and is treated differently by the IRS.
A share lease (also referred to as crop-share or livestock-share) is an agreement in which the rent is a share of the crop or livestock produced on the leasehold, or more accurately, the value of the production. The landlord does not necessarily receive the actual product. A share lease may split production costs and profits 50/50 (or some other proportion). A share lease reduces risk to the tenant, while the landowner must be willing to take on a share of the expenses, risks and rewards of the operation.
Non-cash or in-kind consideration is an alternative to cash rent. Examples include a CSA share, cordwood, or property maintenance services (not otherwise required by the lease). Both parties should consult their respective advisors to understand the tax considerations associated with these kinds of arrangements. See In-Kind Rent Fact Sheet.
For a lease to be a legal contract, there must be some exchange of value. If there is “no rent” at all, the rights conferred are considered a gift, which renders the lease unenforceable, and subjects the relationship to different tax consequences. Therefore, an agreement in which the land user pays no rent is not a legal lease contract. Items, services, and even promises qualify as in-kind consideration. The value contributed by each party doesn’t need to be equal – it just needs to have some value. See the In-Kind Rent and the No “Free Rent" Fact Sheets.
There are several factors to consider when determining the rent: market rental rates; the Landowner’s costs; the amount the tenant can afford to pay; and other costs or benefits the farmer or landowner add to the arrangement.
For a more thorough explanation, including alternative methods of payment, see the Determining Rent Fact Sheet and resources in the Rent section of the Build a Lease Tool
Example Text
These text examples (in italics) illustrate what you might include in parts of this section. Example text is not intended as “sample” or “model” language, or as “best practice.” You may copy and paste example text into the template, then modify it for your working lease document. Or you can learn from the examples in order to develop your own text.
Text box “Amount or Description”
- The Tenant agrees to pay to Landowner rent in the amount of $200.00 per month.
- Rent shall be $______ or 2% of Tenant’s net profit per year, whichever is greater, based on Tenant’s net profit as declared on her federal tax return or Schedule F. Rent is payable in __ equal installments.
- The Tenant shall pay rent in the form of 2 full CSA shares per season, valued at $_____ per share.
- Lessee shall perform certain caretaking duties equal to $200/month, hereafter referred to as “Caretaker Labor”, and more particularly described in Attachment D as the consideration.
- Monthly rent for the residence will be Tenant’s services (see Exhibit C) plus 8% of average gross farm sales of the prior two years or $300 whichever is larger but not greater than $600/month.
Text box “Conditions of Rent”
- In consideration of the purposes of this Lease, the Landlord waives Tenant’s payment of Rent for the first term of this Lease.
- Tenant shall deliver the rent by the first day of each month at the address specified herein.
- A penalty of $25 per month will be assessed on all late payments.
Text box “Provisions for Renegotiating the Rent”
- If the Lease is renewed, the rent shall be adjusted at the beginning of each new term using the Consumer Price Index for New England. The rent shall not decrease during the Lease Term as a result of the CPI computation.
- The rent will increase by 5% annually unless otherwise agreed in writing.
- Not less than 6 months prior to renewal, the parties will renegotiate the rent which will not exceed 10% more than the current rent.