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Rural Leases - Not a DIY Job

12 September 2016

Some farmers like to make agreements by relying on a ‘handshake’ and good faith between them and the other party.  Unfortunately, when circumstances change or the relationship deteriorates, the lack of a legally prepared contract can come back to haunt them.

Background

Sally owned a property that was surplus to her farming requirements so she decided to lease it to Ken.  Sally and Ken agreed that the lease should be recorded in writing but both of them wanted to avoid the expense of lawyers so they prepared the lease themselves.  The lease recorded that Ken would make monthly rent payments for a year in exchange for the use of the land with a right to extend the lease for a further year.

For just over a year, the lease arrangement worked without any issues until Ken was suddenly unable to make payments.  This led to a breakdown in Sally and Ken’s relationship and Ken stopped looking after the property.  When Sally visited her lawyer, the rent was three months’ in arrears and the property lacked feed and general upkeep.  Sally wanted Ken off the property and the rent paid up to date.

Variations to the Lease

Under a legally prepared deed of lease, there are specific requirements as to the process for renewal, usually including a review of the rent.  Unfortunately, Sally’s lease did not set out any formal methods and given she had let Ken stay beyond the initial one year term, it was likely she had inadvertently agreed to a renewal for a further year.  To make matters worse, when Ken fell behind in rent payments, Sally agreed to accept rent in lambs in the belief that Ken would only be behind in rent for a month or two.  Unfortunately, Sally did not appreciate that she was agreeing to vary the lease terms and had failed to set any limits in this regard.  Ken was now entitled to pay the remaining year’s worth of rent in lambs (more than Sally wanted to receive) and it was unclear when he had to provide the lambs.

Cancelling the Lease and taking back possession of the property

Sally sought legal advice.  Sally wanted to cancel the lease and get Ken off the property as soon as possible.

The lease document stated that defaults needed to be referred to a farm consultant first.  If that didn’t resolve the matter, the default must be referred to a mediator.  Sally could not rely on the Residential Tenancies Act 1986 which allows a landlord to cancel a lease with three months’ notice, because the land was rural rather than residential.  Because the lease document set out a process to resolve defaults, nor could Sally rely on the Property Law Act 2007 which allows a landlord to cancel by giving 10 working days’ notice (if default is not remedied within that time period).  The default process under Sally and Ken’s lease would be costly and still may not resolve the dispute.  If that happened, Sally would then need to consider applying to the court for an order for possession of the land.  This would increase Sally’s costs again and add significant delay to getting Ken off the property.  Alternatively, Sally would need to wait for the lease to expire.

Conclusion

By not seeking legal advice when first deciding to lease the property, Sally entered into a Deed of Lease with provisions which inadequately dealt with a number of significant issues.  While the lease worked when Sally and Ken were on good terms, once Ken stopped paying the rent and looking after the property, Sally had very little power to get herself out of the bad situation.

If you are considering leasing a property, it is important that you seek proper legal advice at the outset.

 

Shelly Harrison is a Solicitor in the Business, Rural & Property Team at Norris Ward McKinnon, specialising in business and rural property law. You can contact Shelly at shelly.harrison@nwm.co.nz

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