There can be little doubt but that landowners welcomed the improved tax incentives to promote land leasing over our more traditional conacre system. The option to secure longer-term continued access to land provides security of access for the farmer. Leasing enables the farmer to pursue real improvements in land quality to enhance national output capability.

Having continued access to land secures investment in fertility in terms of soil pH and basic nutrient content. In the traditional conacre system, any investment in soil fertility often acted to increase competition for that land in the following year, which often resulted in either increased cost or loss of the land.

Conacre rental has, in the main, acted to pull down soil fertility and productivity over time. It resulted in additional production costs for tillage farmers and prevented sustained expansion for livestock producers.

Longer-term access

So there are many good reasons why leasing is a better system for land access. But there are also other real issues that go with leasing. Technically, a lease can be anything more than one year but the Government-driven system which provides for tax-free rental income to the landowner begins with a minimum of five years on a tiered basis. Where two or more individuals enter into such a lease, a formal and legal agreement must be drawn up and signed by both parties and then stamped by the person leasing the land. The deal is subject to stamp duty which can be paid online to Revenue.

This arrangement is particularly attractive to the lessor or landowner. The person who pays the rent and takes all the production risks may still have to pay tax on any profit generated through access to that land. But the cost to the farmer is allowable against tax.

As well as having security of tenure, the lessee has the ability to expand without the huge capital costs associated with land purchase.

Tiered relief

Table 1 outlines the tax-free thresholds that apply to leases of different periods of minimum duration. These range from five to 15 years-plus and the size of the allowance varies with the duration of the lease. Where land is held in two names, the allowances are actually double so a piece of land in two names is entitled to up to €80,000 tax-free for greater than 15-year leases.

These allowances make leasing attractive but also places substantial cost on the farmers, whatever the enterprise. However, the cost of the lease can be written off in full against the tax whereas only the interest could be written off as a cost in the case of land purchase.

While the current tax-free allowances associated with leasing were introduced to enhance land access, the fact that the allowance can include the value of any entitlements included in the same deal reduces the amount of land that an individual deal can cover.

Example: if we take an average lease cost of €196/ac, a land-only lease for 15-plus years would secure access to the €40,000 tax-free income for the lessor from 204 acres. But if entitlements valued at €68.40/ac are also included for every acre, the tax-free allowance of €40,000 is limited to 151 acres. On a five-year lease the land amounts would be the 92 acres (land only) or 68 acres (land plus entitlements), respectively.

Leasing challenges

While there are many potential benefits to be gained from leasing, there are also a number of challenges. Both parties enter into an arrangement which must be honoured regardless of changing circumstances. Aisling Meehan looks at a number of common queries on leasing.

Q Leases, especially registered leases that confer tax-free allowances, are stamped legal documents. What if the economics of farming change dramatically and the lease cost is no longer affordable? What are the legal obligations of the parties involved?

A. It depends on the terms of the lease but the IFA master lease of land provides that the landowner (lessor) and farmer (lessee) have various legal responsibilities known as covenants.

The lessee’s obligations include the agreement to pay the rent for the duration of the lease, to keep any buildings, fences, gates, roads, etc, in good and substantial repair and order, to maintain the hedges, to keep the land in good agricultural and environmental condition and to claim BPS entitlements leased with the land, to insure the land and keep the landowner indemnified from any claims in relation to the land leased.

The lessor is obliged, among other things, to allow the farmer who pays the rent and otherwise complies with the provisions of the lease, peaceably to hold and enjoy the land during the term of the lease without interruption from the landowner.

In a lease agreement, it is not open to either party to break the term of the lease during the currency of the lease unless there is provision for a break clause included in the terms of the lease. However, the parties to a lease should be wary of inserting provision for such a break clause as it could affect the availability of the income tax lease exemption, the terms of which provide that the lease must be for a definite term.

Q. What happens if the user, the lessee, walks away from the deal and does not pay?

A. He/she could be sued for the balance of rent due for the term of the lease. If the farmer fails to pay the rent 14 days after it becomes payable, the IFA master lease provides that the landowner can re-enter the land and the lease will finish but without prejudice to any rights or remedies which the landowner may have against the farmer. Legally, parties have a duty to mitigate their losses so the landowner should try to secure a replacement tenant for land.

Q. What happens if the lessee does not pay the agreed amount but continues to occupy the land or leave stock on it?

A. If the term of the lease has expired and the farmer will not vacate the land, the landowner can issue proceedings for ejectment for overholding pursuant to section 72 of Deasy’s Act 1860. The relevant procedure in the Circuit Court is by way of Ejectment Civil Bill – overholding pursuant to Order 51 of the circuit court rules. If there is a valid and subsisting lease, in that case ejectment proceedings can be brought for non-payment of rent, pursuant to section 52 of Deasy’s Act 1860.

If the landowner accepts that the lease is valid, it is still possible to make a demand for possession and institute proceedings for forfeiture, eg where the tenant has been in breach of condition or covenant of the lease such as non-payment of rent.

Q. If farming profits were to improve substantially from the circumstances that applied at the time the lease was drawn up and the lessor wanted to withdraw from or renegotiate the lease, how is the lessee protected?

A. Most leases generally provide for a rent review clause. The IFA Master lease does not specify how often the rent is to be reviewed, that is a matter to be agreed between the parties. However, most parties agree a period of five years. The IFA Master lease provides that the matter of rent review is to be agreed between the farmer and the landowner but in the absence of agreement, the matter is referred to an independent surveyor who will determine the rent due.

The IFA Master lease provides that the independent surveyor shall, in determining the reviewed rent, determine an annual rent which, in his opinion, will be based on the full open market rent of the farm let as a whole. No account will be taken of the fact that the farmer may have carried out improvements to the land or indeed let the land fall into bad condition or disrepair.

Q. Where a lease was drawn up with conditions that apply to, say, the non-use of the access to the lessor’s yard or residence, how can such issues be resolved in the event of such a breach?

If the lease provides for no access to the landowner’s yard or residence entrance, then the farmer has no right to do so. It would generally be agreed at the outset of the lease, how the farmer was to gain access to the land and this would be incorporated into the written lease.

Most leases provide dispute resolution mechanisms and it depends on the terms of the lease as to how disputes will be resolved. For example, the IFA Master lease provides that any dispute under the lease shall be conclusively determined by an independent surveyor. The surveyor must have 10 years’ post-qualification experience in the leasing of agricultural land.

The appointment of the surveyor to make a decision on the matter in dispute is a matter to be agreed between the landowner and the lessee. If they cannot agree, they can apply to the president of the Society of Chartered Surveyors of Ireland to appoint such a person. The IFA Master lease provides that the independent surveyor shall give notice in writing of their decision to both parties within 60 days of his appointment or such lesser period as agreed between the parties.