A Brief Introduction About Crop Share Agreement
The tenant or the farmer who does not have sufficient operating capital, and the nature of cultivation is such that it does not provide a constant flow of income enters into a crop share lease agreement. The arrangement is such that the landowner receives the produce of the land as rent and also shares the cost of inputs with the tenant.
What is considered fair rent is a subjective question and depends upon the locality of the land and the cultivation. The parties to the agreement will have numerous options for creating a crop share agreement. The various cost-sharing or profit-sharing models shall be worked out, and the one who works in the best interest of both shall be considered as a workable crop-share arrangement. However, the agreement is subject to revision based on current market trends.
Who Takes a Crop Share Agreement?
Landlord – He holds the title and ownership of the land. He transfers the possession of the land on consideration either received as monthly rent or an agreed share in the output of the land, which is equivalent to the rent. He essentially has experience in farming and works together with the tenant for improving production. The arrangement for lease only differs; the ownership very well lies with the landlord only.
Tenant – He has the necessary equipment, labor, crop inputs, and fertilizers, etc. but does not have a working capital to fund the fixed monthly payment of rent. Hence the tenant shares the responsibility of optimum output with the landlord as well. The tenant is responsible for the proper and basic upkeep of the land leased.
Purpose of a Crop Share Agreement
A crop share lease facilitates a business model that ensures optimum revenue for both the parties to the agreement. The arrangement should be such that the total returns shall be shared in the same proportion in which the resources are shared. In a normal land lease agreement, the tenant is forced to spend for all the farming necessities and the monthly fixed rent. If the output is not as expected for various reasons, the tenant ends up with negative cash flows. Hence crop sharing shifts the burden of the tenant, and the landlord, in many cases, gets consideration more than the market rent.
Contents of a Crop Share Agreement
- The particulars of the land, such as dimensions, area, neighboring land for references. If only a part of the land is leased out, the details relating to such part shall be provided. The topographical map of the land shall also be included as an annexure.
- Details of cultivation – The expected schedule of cultivation for the period of the agreement.
- Term or duration of the agreement – Generally, these are long term leases entered to reap the benefits of the land.
- Rental – This clause details the manner of computation of crop share equivalent to the rentals. The detailed calculations shall be attached as an annexure to the agreement.
- Sharing of cost – This is a complementary clause to the rental, and the calculation of crop share surely follows out of this. But it is very much necessary to detail the items of cost-sharing to avoid disputes and ambiguity.
- Manner of usage of pesticides and disposal of crop residues
- Sale of crops – The landlord shall consider including himself for all the marketing measures undertaken as it will assure more profit.
- Crop insurance – The responsibility shall lie with the tenant, and if the landlord wishes, this may also be shared.
- And all those clauses which require an explanation of the division of responsibility between the landlord and the tenant.
How to Draft a Crop Share Agreement?
It is very important to have numerous discussions and screening of sharing models before entering into a contract. The landlord shall enumerate in a spreadsheet all the cash and non-cash costs in leasing out the land. The costs borne by the landlord and the tenant before and after the crop share shall also be worked out. The effect of new technology and resources throughout the agreement shall also be considered in this exercise.
The resultant model is a representation of the present value of future costs and benefits of cultivation. Any kind of model only provides variable income to the landlord. He takes higher risks to utilize the power of the land.
When you draft an agreement, you should identify which parts of the land are meant for what crop. Because the outputs from each crop are different, crop sharing agreement should discuss the sharing on the crops after deciding on what crop should be where
A consensus should be arrived at for the operation of the land. There should be responsibilities attributed to both tenants and the landlords with respect to the general maintenance and operation of the land. The tenant should return the land to the owner in as good a condition as was given to him. Normal wear and tear, and depreciation can be accounted for. There should be limits on plowing and sowing crops the year they are seeded. Actions that need mutual consent should be highlighted in the agreement. The landlord should replace any property that the tenant regularly uses if it got damaged.
Any dispute that hasn’t gotten resolved through mutual discussion should be submitted to the arbitration of at least three disinterested persons. The clauses in the agreement should highlight the rules for such arbitration.
A typical negotiation starts at the stage of calculating the crop sharing models. The landlord, with his expertise, can assess the optimum cost-sharing ratio. Negotiation shall also be done on non-commercial factors like including the landlord for taking important decisions to improve productivity (like applying lime to the cropland), employment of additional labor and marketing strategies, etc.
Benefits and Drawbacks of Crop Share Agreement
Quite a lot of benefits are derived out of a crop share lease. To list a few
- Farmers can expand and introduce novel farming methods without investment.
- All the risks and rewards are suitably shared.
- The tenant and the landlord have greater flexibility in decision making.
- The optimum output results in appreciation in the value of the land.
- Since the agreement is binding for the contractual period, even if the landlord or tenant dies, their heirs can receive the benefits of the contract. For this purpose, the contract must be reviewed carefully to ensure that the terms of the contract are still mutually desirable.
- A crop share agreement acts as proof for tax purposes. In case of any differences in the tax levy, the assessee can use this document as proof of his share of benefits from the agreement
- Having airtight clauses regarding the property being rented, the beginning and ending dates of the agreement along with the description of the property can help in identifying the benefits due from the contract.
On the other side,
- The income from this agreement will be variable. Because of the unpredictability of the yield and market prices, the revenue generated might not be sufficient
- With the changes in the operational costs of running the land, the profits might fall down. This adversely affects the tenants because the lease agreement specifies the amount to be paid. If a contract is altered according to the changing situations, it might be relevant.
What Happens in Case of Violation?
A crop share arrangement by itself is intricate for the commercials and the division of responsibility between the tenant and the landlord. Hence it calls for more chances of misinterpretation. The tenant may use the equipment of the landlord for things beyond the scope of the agreement, thinking that the agreement allowed it.
The landlord, on the other hand, would have failed to pay the insurance by over reading the contract. In any case of violation(1), it is very difficult for the parties to come out of the lease as the subject matter of land is farming crops. The parties shall mutually discuss and come up with an amicable solution. If things go out of hand, they may consider seeking legal advice.
The crop lease agreement involves reading in between the lines, various factors, and cost objects to arrive at a profitable model for the landlord and the tenant. Hence a farm management advisor and a lawyer can throw light on various things the parties missed sight. Once the contract is signed, it is very important to have a periodic discussion to ensure the parties are well informed.