Lease Agreements - Pasture Leases

Factsheet - ISSN 1198-712X   -   Copyright Queen's Printer for Ontario
Agdex#: AGDEX 812
Publication Date: April 2014
Order#: 13-053
Last Reviewed: April 2014
History: Replaces OMAFRA Factsheet 03-091, Pasture Lease Agreements
Written by: Business Management Unit staff, OMAFRA, Guelph

Table of Contents


Section 1. Lease Agreements

Section 2. Tax Implications of Land Leases

Section 3. Elements of a Lease Agreement

Section 4. Pasture Lease Arrangements: Estimating a Rental Price


Appendix 1

Other OMAFRA Business Publications


Leasing and renting land is a common practice in rural Ontario. The kind of rental arrangements for pasture varies widely throughout the province, as do the relationships between landlords and tenants. The purpose of this Factsheet is to help tenants and landlords develop fair pasture lease agreements and assist them in making sound decisions. The terms leasing and renting are used interchangeable in this Factsheet.

Section 1. Lease Agreements

Human Components of a Successful Lease

Any form of business agreement requires a good deal of mutual respect and trust. Leasing land is no different. To be successful, the lease arrangement must satisfy both the landlord and the tenant. Before entering into a lease, the landlord and the tenant should consider more than just price. The compatibility of the landlord and the tenant and the fairness of the lease are important aspects to consider.

Checklist of a Successful Lease

Compatibility - Can you get along and discuss differences? ___ yes ___ no

Honesty - Do you trust the person you are dealing with? Have you had business dealings together before? ___ yes ___ no

Clarity - Are the obligations of each party clearly defined in the written lease? ___ yes ___ no

Equitable Terms - Do both parties agree to the terms of the lease? ___ yes ___ no

Flexibility - Can you adjust the lease if changes occur? ___ yes ___ no

Suitability - Does the lease fit the crop and encourage good agricultural practices? ___ yes ___ no

Advantages and Disadvantages of Leasing Land for Agricultural Use

There are advantages and disadvantages to all leasing arrangements.


Lower Capital Investment

  • Capital investment is shared between landlord and tenant.
  • Landlord supplies land, buildings and perhaps some of the operating expenses.
  • Tenant supplies labour, machinery and usually the major portion of the operating expenses.
  • Operators can increase the size of their business with limited capital investment.
  • Since leasing is an alternative to ownership, it is really a means of "financing" a land base.

Increasing Financial Efficiency

  • When funds are limited, it is often more profitable to spend this money on seed, fertilizer, chemicals and machinery than on buying land.
  • Investing scarce funds in land may severely restrict the money available for operating capital, thus lowering the efficiency of the farm business.

Obtaining Farm Experience

  • Renting enables the beginning farmer to gain needed experience in the financial operation of a farm business before committing to a long-term investment in land.
  • Renting enables an operator to learn more about land in an area and allows the flexibility to change farms or leave farming.
  • Renting may enable an inexperienced farmer to obtain the managerial assistance or mentorship of a more experienced landlord.

Sharing Risk

  • By renting, both the landlord and the tenant can share in the risks and profits of farming. This is particularly important to a farmer with limited capital. The extent of the risk-sharing depends upon the nature of the lease agreement.

Family Arrangements

  • A family business arrangement might include a lease agreement whereby someone rents land from a parent or rents land from a third party and shares the machinery investment with the parent.

Providing Retirement Income

  • A retiring farmer might consider leasing all or a portion of his or her land base rather than selling.
  • Ownership of land provides a hedge against inflation.
  • The income from the rent provides a form of "pension" income to live on during retirement.
  • A farmer approaching retirement could gradually phase out of farming by renting a portion of his or her land and farming the rest of it.


Lack of Security of Tenure

  • Short-term leases create uncertainty for the tenant.
  • Since machinery investment is matched to the land base, the cancellation of a lease could result in having machinery over capacity and a higher cost per acre.
  • Short-term leases provide more flexibility for landlords since it is possible to change tenants quickly or to sell the land. However, short-term leases can work to the detriment of the landlord since they may not encourage sustainable farming practices by the tenant.

Lack of Efficiency, Conservation and Incentive to Make Improvements

  • Short-term leases may discourage production efficiency. For example, some tenants may not use the optimum amount of fertilizer under a crop share lease unless the landlord shares in the expense of fertilizer.
  • Most soil conservation practices are a long-term investment. Most tenants with a short-term lease are interested only in practices that will show results during the term of the lease.

People Problems

  • As with any business venture involving two or more persons, disputes and disagreements can arise.

Availability of Credit

The tenant farmer usually has a more difficult time obtaining intermediate and long-term credit than does the owner-operator because:

  • the lender may require land as security for the loan
  • leased land does not build equity
  • the lease is short term

Lack of Bargaining Power and Managerial Control

  • There may be situations where the landlord has greater bargaining power even though the tenant is a capable manager.
  • The landlord may insist on making most of the management decisions even though his or her contributions to the lease may be substantially less than the tenant's. For example, the landlord may insist on certain crops being grown that the tenant feels are not the most profitable.

Lost Opportunity for Capital Gain

  • Land prices have generally increased over time, although they do decline occasionally.
  • Land appreciation is an added benefit to the landowner, even though the capital gain is not realized until the property is sold.

Potential Loss of Tax Deferral or Exemption

  • Leasing land can in some cases prevent the use of both the tax-deferred transfer to children and the $800,000 capital gains exemption (the exemption increased to $800,000 in 2014, and will be indexed for inflation starting in 2015).
  • Consult an accountant
  • See Section 2. Tax Implications of Land Leases

A Written Lease Agreement

The most important thing you can do as a tenant or landlord is to put your agreement in writing. This one action would eliminate the vast majority of disagreements that occur. Even though the handshake has been a long-standing method of doing business in the rural community and a verbal lease agreement is a valid contract, it has serious disadvantages. However, many farmers and landowners are reluctant to use a written lease for several reasons:

  • Tenants and landowners alike do not want to give the impression that they distrust their neighbours by requiring a written lease.
  • The added time and cost to prepare a written lease may not seem justified when dealing with other farmers or community members.

The disadvantage of a verbal lease becomes apparent when a disagreement about the terms of the lease occurs, because it is exceedingly difficult to prove what the original understanding between the parties was.

Without a written agreement:

  • settling a misunderstanding between the parties once the land is in use (through mediation by a third party, arbitration or litigation) can be extremely costly
  • it is more difficult to protect the interests of both parties against any claims of a third or outside party to a right to the land or the crop - it is much easier to protect your interests from third-party claims by documenting the details of the agreement at the time you enter into it
  • the risk of losing significant time and business goodwill is high for both landowner and the lessee

A written agreement is not a sign of distrust - it shows that both parties want to protect and clearly document the agreement they are making.

Advantages of a Written Lease Agreement

Under the Ontario Statute of Frauds, all documents that create an interest in land must be in writing. A written lease is advantageous to both the landlord and the tenant since it provides both with a record of what they have agreed to. In the case of crop share leases, where the landlord and tenant are sharing costs, this is especially important. A written lease:

  • clarifies the expectations, obligations and responsibilities of both parties. If a dispute occurs, a written lease can prevent costly legal action by providing for alternatives to a court proceeding
  • gives the landlord some protection in the event of an environmental liability
  • provides a valuable guide to heirs if the landlord or tenant should die
  • provides documentation for tax purposes

What to Consider Before Entering Into a Lease Agreement

Insurance - Landowners may consider requesting proof of crop insurance, especially if the rent has not been prepaid. The tenant and landlord should also discuss insurance for protection from any potential environmental damage. If the tenant plans on storing any harvested crop on the landowner's property, there should also be insurance provisions for protection from theft or damage.

Securing the lease payment - Registering any unpaid portion of the lease payment with ServiceOntario under the Personal Property Security Registration will help protect a landowner's interest as a creditor in the event of non-payment by a tenant. Landowners may register online or by calling ServiceOntario.

A tenant may also want to have the lease registered against the title to be protected in the event that the land changes ownership. There may be very good reasons to consider the registration of the lease: for instance, any payments relating to the real estate can, in some instances, be considered "personal property" and fall within the registration provisions of the Personal Property Security Act; any interest in those payments would be subordinate to any other interest by way of a lease, so long as the lease is registered first.

Most properties in Ontario are registered under the Land Titles system, which dictates that leases for a period not exceeding 3 years do not require registration where the tenant is in actual possession of the property described in the lease. For properties under the less popular Land Registry system, the period is increased to 7 years. In the absence of registration, a subsequent purchaser of the land could take ownership without having to honour the terms of the lease.

Title search - Tenants may also perform a search on the title of the land to be leased to make sure they are entering into an agreement with the person who is the owner of the land. A title search may be done through the Ontario Land Registry Office.

A Lease Agreement as a Succession Planning Tool

A long-term lease agreement (not to be confused with a sale and leaseback arrangement) may be used as a succession planning tool. Landowners and potential farm successors thinking about alternatives to traditional financing options might want to consider a long-term leasing arrangement. Lease arrangements may include land, buildings and/or equipment. Owners and successors may choose to have multiple lease arrangements or a single inclusive lease. Leases in Ontario can be of any length of maturity, however, leases longer than 21 years must have the approval of the municipality to be valid.

Like any lease, the terms must be negotiated to the satisfaction of both parties. One of the biggest difficulties after setting the initial lease payment amount is determining what the annual increase should be. For longer-term leases, an impartial setting, such as the annualized core Consumer Price Index, which is published by Statistics Canada, may be used. It is advisable to talk to a succession planning professional to help set out some of these terms.

Section 2. Tax Implications of Land Leases

The following is for general illustrative and information purposes only and is not comprehensive, nor is it intended to be legal advice. It does not replace professional advice from a tax specialist. Remember, tax laws and qualifications for programs may be time limited or may change. It is strongly recommended that you consult with a tax specialist for up-to-date advice that is specific to your agreement.

The tax implications of entering into a lease agreement should be carefully considered.

Landlords can inadvertently disqualify themselves from being able to use two major tax provisions. The Canada Revenue Agency (CRA) does not consider many types of leasing to be farming. For example, a share crop lease, where a portion of the crop is given to the landowner as payment for the land, may not meet the CRA's definition of farming. As a result, some leasing arrangements can disqualify landowners from using the following tax provisions:

  • the ability to use a tax-deferred rollover on the transfer of land to children (called a rollover)
  • the $800,000 capital gains exemption on their land

Tax Deferred Rollover to Children

The Income Tax Act allows for the transfer of farmland to a child on a tax-deferred basis. This is accomplished by using what is called a "rollover." It allows the transfer price to be set at any value between zero (a gift) and the fair market value (FMV) of the land. In the case of a gift, the transfer value would be the adjusted cost base (ACB). Without the use of the rollover, the land would have to transfer at its FMV and all the gain would have to be reported.

To qualify for the rollover, the property must have been used principally in the business of farming prior to the transfer by the taxpayer, the taxpayer's spouse or their children who were actively and continuously involved. This means that the land's use was farming for greater than 50% of the time (as defined by the CRA). The property does not, however, have to be used in farming immediately before a transfer takes place in order to qualify for the rollover.

Landowners who want to use the rollover should monitor the percentage of time that they have leased their land and what type of leasing arrangement they are using. For example, a landowner who farmed a property for 20 years, then leased the land for 4 years could still qualify for the rollover. If, however, the leasing period was longer than the farming period, it could disqualify the use of the rollover. An exception to this is if the person leasing the property is the landowner's spouse or child actively engaged in farming.

The $800,000 Capital Gains Exemption

Selling Farmland

The $800,000 capital gains exemption is available to individuals on the sale of qualified farm property. Individuals who had used their entire $100,000 personal exemption, which was eliminated in 1994, have $700,000 remaining. The exemption is also available for partners in a partnership, since taxes are paid at the individual level. However, corporations do not have any capital gains exemption.

Qualified farm property includes:

  • farm land and buildings
  • shares in a family farm corporation
  • an interest in a family farm partnership
  • quota (referred to as eligible capital property)

Qualified farm property must meet the following definitions:

  • property purchased before June 18, 1987, must be used in farming at the time of sale, or have been used in farming for any 5 years during its ownership
  • property purchased after June 17, 1987, must be owned for 24 months prior to the sale, and in at least 2 years, the gross farm income must exceed net income from other sources or the property was used by a family farm partnership or corporation in a 2-year period during which time the individual, spouse, child or parent was actively involved in the farming business

In either of the above cases, property must be used in farming by:

  • the individual
  • the spouse, child or parent of the individual, or
  • a family farm partnership or corporation of the individual, spouse, child or parent

In all cases, the qualifying individuals, whether farming as a sole proprietorship, a partnership or as a shareholder in a farming corporation, must be actively engaged in management and/or the day-to-day activities of the business.

Leasing Farmland

Leasing farmland is most likely to affect the use of the exemption on land purchased before June 18, 1987.

Land purchased before June 18, 1987, must be farmed for any 5 years or farmed in the year of sale to be considered qualified farm property and therefore eligible for the capital gains exemption. If the 5-year rule has not been met, the property must be farmed immediately before the sale.

Since leasing is not considered to be farming, according to the Canada Revenue Agency (CRA), a lease in the year of sale could disqualify the landowner from using the capital gains exemption because it was not farmed immediately before the sale. Even a share crop lease, where a portion of the crop is given to the landowner as payment for the land, does not meet the definition.

Hiring custom operators to do the cropping work may solve this problem. Alternately, a share crop lease where the landowner is sharing the cost of inputs may also meet the CRA requirements of farming. Discuss such agreements with your accountant.

Canada Pension Plan and Registered Retirement Savings Plan

Rental income from a cash lease cannot be used as a basis for contributions to the Canada Pension Plan (CPP). Farmers who lease their land and have no other CPP-eligible income source will be unable to make contributions to the plan. This may have the effect of reducing the amount of CPP pension benefits. Although rental income is not eligible for contributions to the CPP, it is considered earned income for the purpose of contributions to a Registered Retirement Savings Plan (RRSP).

Rather than operating under a cash lease, a landowner could farm the property by hiring custom operators or lease the land on a crop share basis where the inputs are shared. Currently, the net income from these sources is eligible for contributions for both the CPP and RRSPs.

Non-Resident Withholding Tax

If the landlord is a non-resident of Canada, the tenant is required to withhold 25% of the rent (cash rental or crop share) and submit it to the Canada Revenue Agency (CRA). If the tenant does not remit the 25% withholding tax, the CRA will attempt to collect the tax from the landlord. If the landlord does not pay this tax, the tenant will be liable for the payment.

Capital Cost Allowance

When a landowner changes the use of the farm land, buildings or machinery, such as in renting, the Income Tax Act requires that the depreciable assets purchased before 1972 (Part XVII) be switched from the Straight Line Method of capital cost allowance to the Declining Balance Method, which is used for depreciable assets purchased after 1971 (Part XI).

In most cases, this is undesirable, since it would mean that all recaptured capital cost allowance that occurs when the class is closed out (e.g., sale of all machinery in that class) would be taxable income. The landlord could choose to not use the property and still maintain the Part XVII status, however, no deduction could be claimed in the years when it was not used. Any other use, either personal or rental, would require a change to Part XI. The landlord could choose to use his machinery or buildings as part of a custom farming arrangement and thereby maintain the farming status.

Harmonized Sales Tax (HST)

Generally speaking, a lease is taxable unless specifically exempted under Part I of Schedule V of the Excise Tax Act, which might apply in limited situations such as land destined as long-term residence. Rent that is paid by way of share of the crop is not subject to the HST. The treatment of cash rents for HST purposes may also depend on the landlord's total income. A business (including a landlord who rents property) does not have to register to collect and remit HST if its gross taxable and zero-rated sales are under $30,000. Landlords whose only source of business income is rent, where the rental income is less than $30,000, need not register, although they may choose to do so.

Farmland Property Class Tax Rate Program

The Farm Property Class Tax Rate program enables eligible farm properties to be taxed at 25% of the municipal residential/farm tax rate. The farm residence and 1 acre of land surrounding it are taxed as part of the residential class.

To be eligible for the reduced rate, an application to the program must be filed showing that the property is used by a farming business with gross farm income of $7,000 or more that has a valid Farm Business Registration number. Exceptions to this threshold can be made for new farming operations. For more information, contact the ministry toll free at 1-877-424-1300 or visit the website at

Section 3. Elements of a Lease Agreement

The Components of a Lease Agreement

A written lease can be as simple or detailed as the landlord and the tenant wish. The following summary presents the items that a lease can contain, categorized under three headings.

Items in Written Lease Agreements

Required Items

  • names and addresses of tenant and landlord
  • description of property to be rented
  • term and renewal of the lease
  • rent payable payment and use of utilities

Recommended Items

  • right of inspection and removal of crops
  • transfer of property
  • termination of the lease
  • use of the land
  • environmental matters
  • insurance
  • rights to assign or sublet the lease
  • resolution of differences
  • restrictions of land use

Optional Items

  • production practices and management decisions
  • income support payments, subsidies and reimbursements
  • repairs to buildings, fences and improvements
  • duty to notify AGRICORP
  • compensation for property damages
  • rights of first refusal
  • option to purchase
  • municipal zoning restrictions

Required items

All leases must contain this information:

Names and addresses of the tenant and landlord - Including spouses if required.

Description of property to be rented - Includes the legal description and specifies buildings or areas to be excluded.

Term of the lease - Indicates when it starts and how long it lasts. Although not a basic requirement of a lease, this section should also address the renewal of the lease if the parties wish to maintain the lease agreement for a period of years, including when and how such a renewal will take place.

Rent payable - The amount of rent, how it is calculated and when it is to be paid. In the case of a building lease or where the renter has access to facilities, the payment and use of utilities should also be stipulated.

Recommended items

Items that every landlord and tenant should consider including in the lease agreement:

Right of inspection and removal of crOPS - Includes the following:

  • The landlord should have the right at all times to inspect the rented property.
  • The tenant should be able to complete harvesting of the crop after a reasonable time period after the termination of the lease agreement or the sale of the property. If this is not possible, the landlord will compensate the tenant for the anticipated agreed value of the crop.
  • The incoming tenant, purchaser or landlord should have the right to enter on the land after harvest in the last year of the agreement to prepare the land for next year's crop.

Transfer of property - It is important that the landlord and tenant discuss their expectations in the event that the landlord sells the farm property to a new owner during the term of the lease. A fair agreement will attempt to strike a balance between the landlord's desire to not unduly restrict his or her ability to sell the farm and the tenant's desire to continue the lease arrangement.

Termination of the lease - The lease should clearly spell out how it can be terminated. This could be due to a breach of the terms of the lease or merely because the termination date of the lease has arrived.

Use of the land - The lease should state how the tenant is going to use the land. The lease should also describe any certification, regulatory or contractual constraints that the renter should be aware of, such as the land being certified as organic. The tenant should be required to adhere to normal farming practices in regard to disposal of manure. It should also be clearly stated how the land is to be left after termination of the lease. If buildings are included in the leased property, the lease should state how the buildings will be used and the rules for accessing the buildings.

If the farm will be used for selling products such as pick your own fruit, the lease should indicate this, and the tenant should be made aware of all the regulations governing the sale of food products, in addition to food safety requirements.

Environmental matters - This clause addresses the issue of environmental policies and responsibilities. In the event of an environmental problem, landlords, as owners of the lands, are ultimately responsible for activities occurring on their land. The tenant, as "user" of the land, should agree to adhere to appropriate and accepted farm practices and legislation relating to the environment (manure disposal, pesticide and herbicide applications, etc.). The tenant should also provide a "warranty" - a legal term meaning that this assurance can be legally relied upon - that they possess the necessary provincial licences for the application of pesticides or other chemicals to be used on the property.

Normally the tenant bears the cost, including the costs associated with an environmental clean-up, and reimburses the landlord for any costs that the landlord incurs as a result of the breach by the tenant of any environmental regulation.

Insurance - A clause regarding insurance would allow the landlord and tenant to identify who will be responsible for insurance coverage. The parties should ensure that adequate policies of insurance coverage, including occupier's liability insurance (insurance against personal injuries sustained by people coming onto the farm property) and fire insurance (especially if buildings are included), are in place.

Rights to assign or sublet the lease - The written agreement should contain a clause that prevents the tenant from subletting or assigning the lease to another individual without the written consent of the landlord. In a production lease, the consent of the landlord can be withheld at the landlord's sole discretion, without explanation or reasonable cause (i.e., unreasonably withholding consent). In the case of a residence, the landlord cannot unreasonably withhold consent.

Resolution of differences - An arbitration or mediation clause in the written agreement describes how to deal with disagreements the tenant and landlord cannot resolve. The most common practice is to appoint a mutually agreed upon third party to act as a mediator or arbitrator.

Restrictions of land use - The lease should clearly define any areas that may have restricted use (e.g., the area directly underneath a wind turbine).

Optional Items

These items add clarity to the lease agreement and provide discussion points for the landlord and tenant as they formulate the lease agreement:

Production practices and management decisions - This clause deals with production and management decisions the landlord wants carried out by the tenant. Some of those factors could include:

  • cropping decisions
  • proper use of fertilizer and chemicals
  • crop insurance and revenue insurance
  • delivery and sale of crop

Income support payments, subsidies, reimbursements - The written agreement should clearly specify how government or marketing agency payments will be divided. This is most relevant in a crop share lease.

Repairs to buildings, fences and improvements - A clause stating who is responsible for repairing buildings, fences and other improvements, and how the expenses will be shared. A common practice is to have the tenant responsible for all minor repairs and for the landlord to reimburse the tenant for improvement costs that have a lasting benefit longer than the rental term.

Examples of major improvements that extend beyond the length or termination of the lease are:

  • building and fence construction
  • erosion control
  • tile drainage
  • clearing land

It is usually required that tenants obtain written permission from the landlord before making major improvements. It is also important to outline how the value of improvements will be determined and when compensation will be made. An example of one form of compensation to the tenant for improvements is for the landlord to let the tenant farm the improved land rent-free for a specific period of time to be agreed upon between the parties (in writing) at the time the improvement is consented to by the landowner. An annual review and agreement of the repairs and improvements needed could also be included here.

Duty to notify AGRICORP - Both the landlord and tenant must notify AGRICORP of any crop-sharing arrangement.

Compensation for property damages - This clause is especially necessary for determining responsibility for third-party and environmental damages.

Rights of first refusal - In some cases, the tenant is interested in purchasing the leased land but is either unwilling or unable to do so at the time. In these cases, the landlord may be willing to include an option whereby the landowner will notify the tenant that there is an offer to purchase from another party, allowing the tenant to bid on the purchase of the land before the landowner accepts the offer to purchase the land from the other party.

Option to purchase - The parties may include an option similar to the right of first refusal that allows the tenant to purchase the leased lands. This could be for a limited or unlimited time and for either a fixed price or a price to be determined by some objective method such as a real estate appraisal by a certified agricultural appraiser.

Miscellaneous - The lease agreement may contain a clause that would terminate the lease if certain natural disasters occurred. For example, if the land were flooded and the tenant were unable to use the property, it would be unfair to insist the tenant continue to pay the cash rental unless the original rent charged had considered the risk of flooding. Other unforeseen circumstances include the installation of a highway, gas line, oil well sites, etc., on the rented land, creating inconvenience and additional operating costs for the tenant. In some instances, instead of terminating the lease, it may be considered desirable to renegotiate the terms of the lease or compensate the tenant for the added costs or reduced income they may incur.

Municipal zoning restrictions - The tenant enters into a farm lease with the express intention of conducting agricultural operations; it is important that the landlord provide an assurance to the tenant that the lands are properly zoned for such use. If the landlord is unwilling to provide such a warranty, the tenant should get advice from the local municipal authorities to ensure that the purpose to which the tenant wishes to put the property is permitted.

Section 4. Pasture Lease Arrangements: Estimating a Rental Price

Although beef cattle examples are used in this Factsheet, the principles and worksheets outlined apply equally to grazing dairy cattle, sheep, goats, horses and other roughage-consuming livestock. The values used in the various worksheets represent illustrations of the principles and should be adjusted for the individual situations of the landlord and tenant.

Stocking Rate

Determining an appropriate stocking rate of the pasture is very important to both the landlord and tenant. When pasture rent is based on a per hectare/acre basis, the livestock owner has an incentive to stock heavily. The landlord, in turn, may desire light stocking rates so as to preserve the pasture. Similarly, pasture leased on a share-of-gain basis could lead to overgrazing.

It is in the interest of both parties to discuss the stocking rate issue and develop a lease agreement that achieves maximum economic returns to resources while maintaining the pasture stand and quality.

Market Rates

While both the landlord and tenant may consider their own costs and returns in establishing a rental rate, the market demand will ultimately influence the final rate. The market rate is the going price resulting from negotiations between landlords and livestock owners. Previous year's rates, livestock inventories, price and weather conditions for the current year may all influence the market price.

Valuing Location, Water and Landlord Services

The value of water, location and landlord services are subjective. However, these items have some value to the livestock owner.

Location - The pasture location is important if the livestock owner is caring for the livestock. The total cost can be computed by estimating the number of trips per season, multiplying by the number of kilometres, then multiplying again by the cost per kilometre. The number of trips should include checking the cattle for count, health, minerals and water supply, as well as hauling or driving the cattle to and from the pasture.

Water - Good quality water in proper locations improves gain. If the water supplies go dry in mid-season, provisions must be made for hauling water or removing the animals. The lease agreement may establish the party responsible for these costs.

Landlord services - Landlord services vary from mere rent collection to taking complete care of the livestock during the pasture season. The value of such services may be included in the rental rate.

Other factors - Pasture rental rates per hectare/acre may reflect productivity. Past stocking rates, weed growth and moisture may affect productivity (stocking rates or carrying capacity).

Calculating A Rental Rate

The landlord's cost and livestock owner's return are two potential methods of estimating the cost and returns of the landlord and tenant. These may become a starting point for the negotiation of a fair rental rate. This may be calculated on a per hectare/acre or a per head basis.

Landlord's Cost Method

In this method, the major task is to establish fair values for the resources and annual use charges to determine the landlord's cost. The valuation process is outlined in the sample in Example 1. Sample numbers are used to show how the calculations are completed; they do not reflect real values.

Example 1. Calculation of landlord pasture ownership costs

Number of hectares = 100; Land value per hectare: $10,000

A. Value of land (bare land, excluding personal portion)
Average return on investment from land (@ 3.0% = $300/ha)
Property tax/year (use actual if available) (@ 1.0% = $100/ha)
Value of land improvements/ha (@0% = $0/ha)
Other investments (current value)
Handling facilities
Total Other Investments
Depreciation - number of years of remaining life ($4,000 ÷ 25 = $1.60/ha)
Average interest (use half rate to obtain the average) (2.5% x $4,000 = $1/ha)
Repairs (@ 2.0% = $0.80/ha)
Insurance (@ 0.25% = $0.10/ha)
Labour - time landlord spends on livestock
B. Labour charge
C. Hours/week (avg) x no. of weeks in lease x labour charge (6 hr/week x 26 weeks x $15/hr
D. Total pasture ownership cost ($426.90/ha x 100 ha)
E. Stocking rate
1.0 head/ha
F. Pasture Ownership Cost Per Head (Line D ÷ Line E/100 HA)

Note: Appendix 1 contains an explanation of the terms and calculations used in this sample.

Livestock Owner's Return Method

A budget format that may be used to determine the livestock owner's returns is outlined in Example 2. In this example for a 650-lb beef, current interest cost on the average investment value (usually half the total value) may be used. The use of imperial measurements reflects the standards used in the beef industry.

Negotiating the Rental Rate

In Examples 1 and 2, the analysis shows the landlord would like to receive $426.90/ha. The tenant could afford no more than $315.50/ha.

These figures would be the basis for negotiating the rental rate. The process of negotiation allows both the landlord and tenant to understand the other's point of view and to consider the contributions that each party is making and their costs. In general, the equitable pasture lease rate is usually somewhere between the landlord's and livestock owner's figures.

Example 2. Calculation of livestock owner's net return

Animal purchase weight
650 lb
Purchase price
A. Purchase price/animal
Livestock costs (as percentage of animal investment)
Average interest (interest required for only 1?2 year) (@ 3%)
Veterinary, insurance & miscellaneous (@ 3%)
Marketing, trucking (@ 2%)
Death loss (@1%)
B. Total Livestock Costs Per Head
Labour and management
0.5 hr/head
Value of labour(@ $15/hr)
Management (% of value of animal) (@ 1%)
C. Total labour and management
D. Total per animal costs
E. Total Animal Costs Per Head
Revenue from sale
Weight of animal
865 lb
F. Sale price (@ $1.20/lb)
G. Net returns (Line F - Line E)
H. Stocking rate
1.00 head/ha
I. Maximum tenant can afford to pay for rent (Line G x Line H)

Share of Gain or Flexible Rental Rates

Share of Gain

The landlord and tenant are sometimes interested in developing a share arrangement where the risk is shared. Under this type of arrangement, each party's contributions are used as the basis for dividing income. As outlined in Example 1, contributions of the landlord include interest, maintenance costs and taxes on the land, as well as taxes, depreciation, interest, repairs and insurance on the investment in fences, buildings, ponds and handling facilities. Other contributions may include fertilizer and other inputs. Contributions of the livestock owner may include interest on the livestock investment, operating expenses and management as outlined below.

The income to be divided is the value of the livestock gain the pasture produced. Sharing the gain in this manner requires the price and the weight of the animals to be measured at the beginning and end of the pasture season. The example below illustrates one approach to calculating each party's share of the gain or loss. The net return per head is divided based on the percentage share of costs contributed (based on Examples 1 and 2). This percentage could still be adjusted if the landlord and tenant wished to negotiate further.

Calculation: Landlord and tenant share of gain/animal

1. Landlord cost/head (Line F of Example 1)
2. Tenant cost/head (Line E of Example 2)
3. Total costs/head (Line 1 + Line 2)
4. Landlord's percentage of costs (Line 1 ÷ Line 3)
5. Tenant percentage of costs (Line 2 ÷ Line 3)
Division of net return based on the percentage of costs
6. Revenue/head (Line F of Example 2)
7. Minus purchase price (Line A of Example 2)
8. Net returns/head
9. Landlords share/head (Line 8 x Line 4)
10. Tenants share/head (Line 8 x Line 5)

Flexible Rental Rates

Two examples of methods of calculating a flexible rental rate for pasture are described below. The first method uses a base price and adjusts for the rate of gain of the animals. The second method uses a base price and adjusts according to the price of the animals.

Method 1: Base price adjusted for rate of gain

  • Pasture rent is estimated.
  • The cost per gain is calculated based on an estimated gain and the rent per hectare/acre.
  • This rate times the actual gain is then used to calculate the rental rate at the end of the grazing season.
  • Pasture owners may be unwilling to assume this kind of risk unless, on the average, a higher rent is charged.


Estimated lease/ha
= $150.00
Expected gain
= 265 lb
Cost of gain ($150.00 ÷ 265 lb)
= $0.57/lb
Total gain
= 300 lb
Rent (0.57 x 300)
= $171.00
Total gain
= 200 lb
Rent (0.57 x 200)
= $114.00

Method 2: Base price adjusted for price of animals

  • The rental rate (per head per season) adjusts based on the difference between the long-term average price for similar good-choice animals during the months of October and November at a terminal market and the current price.


Base rent
= $50/head
Current Oct.-Nov. price of animal
= $120.00
Long-term average
= $100.00
Rent = $50 x ($120 ÷ $100)
= $60.00


Pasture rental arrangements provide both the landlord and the tenant with the potential to use their assets in the most effective way possible. Good communication and the development of a written lease allow each party to benefit from the arrangement.

Appendix 1

Land - Land is valued at its current fair-market value for agricultural purposes. The influence of location near cities and other non-agricultural influences on value are ignored.

Returns to owning pasture may include capital gains as well as the annual income from renting the pasture.

Property taxes - Parties may choose to use the actual annual taxes.

Land development - Parties may choose to use the average dollars spent annually for land improvements, including conservation practices.

Building or facility investment - Parties may choose to assess a fair-market value on the fences, buildings, ponds, wells and handling facilities. Ownership costs on this investment include depreciation, interest, repairs, taxes and insurance (the "DIRTI five"):

  • Depreciation - Depreciation life for buildings and facilities usually ranges from 15-30 years, fences from 10-15 years.
  • Repairs, taxes and insurance - Facility repairs usually vary from 1%-3% of the investment value, with the charge for both taxes and insurance about 0.25%-1%.

Other costs - The average spent annually for fertilizer, especially if some minimum level is required for maintaining the grass, as well as any other costs, may be used.

Management - Management is an important contribution to a successful leasing agreement. The function of management may or may not be shared. If the landlord contributes management, then credit may have to be given. If the tenant bears all management responsibility, a value may be placed on this management function.

The value of management is subject to negotiation between the landlord and tenant. Two options:

  • A possible guide is 1%-2.5% of the average capital managed. The average capital managed is equal to the market value of items such as land, buildings and facilities, and livestock.
  • Professional farm managers commonly charge 5%-10% of adjusted gross receipts. (In the case of pasture, gross receipts may be equal to the total or per hectare/acre livestock income.)

Other OMAFRA Business Publications

Business Structures Series

  • Farm Business Joint Ventures
  • Farm Corporations
  • Farm Partnerships
  • Forming a Cooperative

Farm Management and Taxation Series

  • Budgeting Farm Machinery Costs
  • Field Crop Budgets (annual), Publication 60
  • Guide to Custom Farmwork and Short-Term Equipment Rental
  • Ontario Farm Record Book, Publication 540
  • Programs and Services for Ontario Farmers
  • Taxation on the Sale of Farm Business Assets
  • Taxation on the Transfer of Farm Business Assets to Family Members

Lease Agreements

  • Crop Share Leases
  • Farm Buildings
  • Farm Equipment
  • Flexible Cash Leases
  • Land Leases

The author would like to acknowledge the assistance of Douglas C. Grant, Barrister and Solicitor, Borden Ladner Gervais LLP, Waterloo, Ontario, Ed Mitukiewicz, C.A., and Douglas C. Jack, Barrister and Solicitor, Fergus, Ontario, in reviewing and editing this Factsheet. The authors would also like to thank Tom Blonde, B.Sc. (Agr.), C.A., of Collins Barrow, Elora, for his assistance in reviewing and editing this Factsheet. The author would also like to thank Nancy Noecker, Beef Cow/Calf Specialist, OMAFRA, Kemptville, and Jack Kyle, Grazier Specialist, OMAFRA, Lindsay, for their assistance in reviewing this Factsheet.

This publication is provided for information purposes only. It is intended as a general illustrative overview only and not as specific advice concerning individual situations. The examples provided are for illustrative purposes only and are by no means exhaustive or appropriate for every situation. This Factsheet should not be considered as legal advice. This Factsheet is not provided as an interpretation or complete coverage of the Income Tax Act or the various laws affecting land rental arrangements. The Government of Ontario assumes no responsibility towards persons using it as such. It is strongly recommended that all land rental and lease arrangements be reviewed with your farm management advisor, accountant and/or lawyer before you sign them.

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