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Is a Handshake Really Enough?

Finance First

Trusting landlord relationship + formal agreement = strong cash rent situation

Published on: August 12, 2013

Rental ground is an area in your operation where you might have a decent amount of risk on the table. Sometimes that's because of the quality of the ground itself, or the level of cash rent, or the relationship you have with your landlord.

Some of those factors may seem to be out of your hands. But others require just a simple step on your part to substantially reduce your risk.

I recently heard about a farmer who cash rents quite a bit of ground based on "handshake agreements" with his landlords. One of our advisors met with him and was very surprised about these arrangements. The advisor told the farmer that he was concerned about the risk in those situations to both him and his landlords.

Trusting landlord relationship + formal agreement = strong cash rent situation
Trusting landlord relationship + formal agreement = strong cash rent situation

The farmer was surprised about the advisor's concerns. He didn't see anything very risky about it or why he would want to have a more formal lease in place.

A formal agreement makes things clear if something were to happen – like death or a major disability – to a farmer or landlord. The executors of the estate would already have a written record of what's supposed to happen with that land. That protects you if something happens to your landlord – and vice versa.

It can be risky to just rely on memory for the details of your arrangement. A written contract sets out your commitments to each other. When you both agree about these commitments, you're protecting the trusting relationship that you've built.

Also, consider how formal leases relate to insurance, especially with above-ground assets. Who is liable or responsible for what? A formal agreement helps keep things clear so you can make sure you have the right coverage and proper expectations of each other.

You can create a record of your agreement on things like what the payback period will be for longer-term investments – like lime, tile or major dirt work. That keeps both of you protected and working under fair arrangements.

Have you signed formal lease agreements with your landlords? If not, have you thought about creating formal agreements with them? It's a good idea – increasing certainty while reducing risk and negative consequences from unexpected situations.

Talk with your landlords about getting a formal lease agreement in place. Help them understand that it will enhance the trusting relationship that the two of you already have. Show them that you're thinking of them – an agreement protects their interests, as well. When your landlord understands it's a win-win situation, he or she may be ready to sign on the dotted line.