Farm auctions are commonplace when it’s time to sell farm land or assets. But auctioning off the right to lease the farmland? This relatively new option is getting headlines for capturing high rental rates in an already heated market. The premise is pretty simple: farmers who want farmland can bid on the right to lease it just as they might the right to purchase it. In theory, the arrangement allows the farmer to discover the true value of their farmland without the potentially uncomfortable negotiations of discussing money with their neighbors. Proponents also claim it can broaden access to leasing by expanding the conversation beyond the landowner and the prospective tenants most familiar to the owner. Like any new innovation, we have the proverbial fine print to sort through.
Does an auction format change the legal particulars of a farmland lease? From a legal perspective, there doesn’t have to be anything different. If the auction is merely the means by which the rental rate is established, an auction can be as good (or bad) a method as anything else. But a rental rate doesn’t exist in a vacuum. There are many factors that go into a strong farmland lease arrangement, and an online auction doesn’t always support the strong relationship that is vital to success over the long term.
At Farm Commons we advise discussing many important factors with a prospective landowner or tenant such as available infrastructure, irrigation details, storage availability, and allowed practices. A conventional grower with a classic corn and soy rotation may not have much need for details beyond the usual soil productivity measures and a legal description of the plot. For a diversified produce grower, the issues are much more numerous and many online leasing auction platforms don’t offer complete visibility. Details like cover crop practices, on-site distribution or sales, and hosting farm events don’t make it into the standard details for many auctions, and contacting the owner for more information can be very difficult. Diversified and direct to consumer growers have a hard enough time competing for high-quality farmland, and online platforms that sideline the nuances and for make it even more difficult.
Many online leasing platforms also obligate the successful bidder/tenant to sign a lease agreement without any further negotiation. This can create pressure for tenants to agree to terms they aren’t comfortable with, simply because they didn’t know the terms in advance. Full lease terms are usually offered, but can be hard to find. The take-it-or-leave-it environment, can hinder the authenticity of the agreement, and make it more likely that tenant and landowner aren’t truly on the same page.
To be sure, lease auctions can create transparency in a market where most negotiations happen behind closed doors. Price transparency can certainly build trust and broaden access to those without personal connections to the owner. But, price is merely one aspect of renting farmland. The need to create a streamlined user experience and effective software platform can drive out other values that influence the rental rate and create a strong relationship in the end.
Many folks say auction-based transparency and efficiency of software solutions are the future of farmland and the future of contract negotiations like leases. Perhaps it is. But there will always be a need for both sides to bring their unique needs, resources, and opportunities to the table. No matter the means by which folks arrive at a rental rate, farmers and landowners are the most legally resilient when they create an authentic agreement that is clearly communicated.