1. Introduction
2. The Nature and Context of Leasing Arrangements
3. The Principal Issues for Landowners and Tenants
Background and context
Aims of the Guidelines
Layout of the Guidelines
1.1 The leasing of land is a significant element of the environment in which farming operates throughout the world. Agricultural leasing arrangements are a ‘fact of life’. There is a large variety of such arrangements, from the small-scale labour tenancies and sharecropping agreements common in Africa, Asia and Latin America, to the highly mechanized agricultural tenancies of northern Europe and other OECD areas. While being very different in their contexts, they are all characterized by a similar form, involving a separation between the ownership and the use of land.
1.2 Leasing offers a means for farming families with little or no land and capital to gain access to land. As such, leasing arrangements are an established part of the fabric of the agricultural sector, often to the extent that their significance has been overlooked, down-played, or misunderstood. Indeed, the continued existence of such arrangements is a matter of concern in regions where they are associated with landownership concentration and imbalances of power in favour of landowners.
1.3 Rather than seek to address these structural imbalances through a review of leasing arrangements, some states have attempted to replace them with owner-occupation (see Box 1.1). However, as the example in Box 1.1 illustrates, the promotion of owner-occupation has not necessarily led to the demise of the leasing arrangement, nor to a greater balance of power in farming. Leasing continues to be significant, even where there have been official attempts to replace it. This division between policy and practice is a major characteristic of the agricultural sector even where leasing arrangements are officially sanctioned.
BOX 1.1 THE IMPACTS OF LAND TENURE REFORM IN INDIA
During the 1950s, all the Indian States abolished intermediary rights and interests in land. Those who were actually in possession of the land at that time, including tenants and sub-tenants, were given riyati (owner-cultivator) status. This meant that 8.8 million beneficiaries gained access to approximately 7.3 million hectares of land.
Despite this, it became clear by the 1960s that much of the land which had been legally retained by landowners for their own riyati interests, was now being cultivated through informal arrangements with, predominantly, sharecroppers. Further land reform legislation at the provincial level attempted to grant riyati rights to these tenants and sharecroppers, through the offer of land titles in exchange for an officially determined fee, payable in ten installments.
However, even this measure did not prevent tenancies from being created. According to recent data from the Government of India (48th Round of NSS Report, 1996), there are now 17.1 million households (15% of all rural households) engaged in leasing in or sharecropping land amounting to 9.4 million hectares (8% of all agricultural land). Of these 17.1 million tenants and sharecroppers, it is estimated that approximately 84% have no official record of their interests, no protection from eviction and, hence, no access to institutional credit or other inputs usually obtained through co-operatives or other formal channels.
1.4 A recent renewal of interest in land leasing is part of a wider recognition of the need to promote intensive family-based farming, as a means of harnessing the global abundance of unused and underutilized agricultural land (including land currently farmed extensively with the use of machinery). Against this background, new situations and opportunities are constantly evolving, with forms of tenancy allowing landowners and the land-poor to benefit, as is illustrated in Box 1.2.
BOX 1.2 LAND LEASING AS AN EQUALIZER OF FARM SIZE IN WEST JAVA
Land tenure in West Java is largely free of legal restriction. While approximately 70% of farm plots are owner-cultivated, the evidence shows that land leasing functions as an equalizer of farm size. This has occurred in upland areas, with a switch from traditional crops to vegetables achieved through contract farming arranged by intermediaries. The lease market has permitted an increase in access to land suitable for vegetable cultivation whereas, prior to vegetable growing, there was no leasing of land in these areas. Rather than lease land directly, land-poor farmers take a sub-lease from the intermediaries, on the basis that the vegetable crops will be sold through those intermediaries. During the season when the land is not used for vegetables, the intermediaries can often lease it out as paddy land. This type of arrangement is seen to be beneficial to all parties. The farmer gains by having access to additional land away from the village. The landlord gains through reduced transaction costs, as all the sub-leasing is conducted by the intermediary.
[Yokoyama, S. 1995. ‘Agricultural diversification and institutional change: a case study of tenancy contract in Indonesia’, Developing Economies 33(4): 374-396]
1.5 In addition, many land-poor sharecroppers - who do not have the capital to purchase land, even if it were available - are expressing a wish for greater freedom in the use of the land they farm. Elsewhere in former communist countries, the condolidation of small, fragmented land holdings that resulted from the process of land restitution and privatization into more viable holdings is restricted by the reluctance of many families to sell their newly acquired land. In each of these cases, improved leasing arrangements can offer potential solutions.
1.6 Leasing also has potential for the management of large-scale farming in developed countries. Although not faced with the extremes of land concentration and the lack of access to land found in developing countries, most developed nations still acknowledge advantages to leasing arrangements. This is particularly in separating the cost of purchasing land from the capital requirements of running an increasingly intensive, mechanized business. There is also an argument - largely unproven - that a healthy leasing sector allows good young farmers to extend and develop their potential, with resulting benefits for the sector as a whole.
1.7 As a result, land leasing has become an important issue for FAO, as one of the many ways in which it addresses its overall concern for food security and poverty alleviation. The interest of FAO in land leasing has a number of dimensions. At the operational level, the goal of promoting an increasing balance and ‘fairness’ in landowner-tenant relations requires a greater understanding of the elements that should be considered when agreeing to a lease. At the policy level there is a need to explore the types of conditions under which leasing may be appropriate and the extent to which it can be used to improve access to land where land concentration or fragmentation exist.
1.8 While leasing offers a way of improving access to land, there is as yet relatively little knowledge available about leasing, particularly where it involves private land. This relative lack of knowledge has led to significant mistakes being made, as well as wider opportunities being missed. This has had a number of potential impacts, particularly related to undermining economic and social development and maintaining outmoded farming systems. While there are existing sources of information on tenancy arrangements, it is apparent that there is no single source which addresses basic and fundamental questions such as the following: What are leases? When can - and potentially should - they be used? What needs to be done to create a lease? What social, political and economic framework needs to be present to support the introduction of leases? What measures are necessary for the effective implementation and realization of a leasing arrangement?
1.9 Through these guidelines, FAO wishes to inform governments and others about the main benefits that can be achieved from leasing. The aim is to provide information and examples for the development of policies and programs that facilitate access to land for land-poor farmers, in ways that improve both the productivity and the sustainability of farming systems. The guidelines have been prepared based on the premise that:
... it is possible to devise suitable arrangements which balance the interests of the landowner and the tenant and which can improve access to farms and lead to better agricultural production and improved stewardship of the land.1.10 The guidelines are intended for a broad-based audience of all those who are interested in leasing arrangements. This audience includes policy-makers, civil servants and other public officials, field officers and advisors, NGOs and landowner and tenant associations.
1.11 These guidelines are designed as a ‘state of the art’ review of the best available practice in land leasing. In common with other FAO guidance, these guidelines do not represent a blueprint. Rather, they attempt to promote thinking about, and analysis of, the issues facing those dealing with land tenure. They also provide a body of practical knowledge for decision-making. Recognizing that the nature of leases will vary according to individual circumstances, the primary aim of the guidelines is to promote a greater understanding of the processes through which it is necessary to go in developing suitable leasing arrangements.
1.12 In order for leasing arrangements to promote sustainable rural livelihoods and more equitable access to resources, they should demonstrate characteristics such as the following:
1.13 These guidelines are directly relevant to countries that are promoting reforms that support such characteristics, for example, through adherence to the rule of law. As these conditions are usually found in countries with well-developed markets, a number of the examples presented in the guidelines are of leasing arrangements in Western Europe, where the tenancy systems have tested many models during the past two centuries.
1.14 Leasing, however, also occurs in jurisdictions where one party in a leasing arrangement may be much more powerful than the other, and where little importance may be attached to the rule of law. In such cases, the promotion of good practice in the technical content of leasing arrangements will not remedy fundamental imbalances of power in the relationship between landowner and tenant. Indeed, the structure of arrangements tends to indicate that it is not so much the agreement itself that is at issue, but rather the continuing disparity of power between landowners and tenants. In these instances, the guidelines should be seen to be aspirational rather than normative.
1.15 The remainder of Part 1 describes the nature and context of leasing arrangements and identifies principle issues for landowners and tenants. Chapter 2 describes the nature of leases, as well as indicating the types of context in which they are likely to be appropriate. Chapter 3 addresses the need to balance the needs of landowners and tenants. It identifies the need for flexibility in leasing arrangements, to avoid the negative impacts associated with over- and under-regulation, both of which can result in highly exploitative relationships between landowners and tenants.
1.16 In Part 2 the guidelines deal with good practice in establishing the elements of a tenancy agreement - the essential elements that should be addressed in all lease arrangements. Chapter 4 presents the type of factors that should be included in typical leasing arrangements, while Chapter 5 describes the additional or different provisions that should be applied to licensing arrangements such as sharecropping. Chapter 6 presents recommendations for implementing tenancy arrangements.
1.17 Part 3 of the guidelines identifies the need for good practice in contextual issues required for the effective generation and maintenance of lease arrangements. For some jurisdictions, many or all of the elements of this arena (such as adherence to the rule of law) will already be in place. For others this section will be largely aspirational.
Introduction
A range of leasing arrangements
Contractual license arrangements
Labour tenancy
Sharecropping and other such arrangements
Fixed rent tenancies
Reverse agreements
2.1 In discussing leases and leasing arrangements, these guidelines address a wide range of practices and terminologies, which themselves emerge from both law and custom. Under both common and civil law codes, for example, a distinction is drawn between a tenancy (which creates a legal interest in the land in favour of the tenant) and a license (which is a contract to purchase services and giving a right to enter the land.)
2.2 In the case of tenancy arrangements, landowners grant occupation rights to tenants (usually for a specified period), with payment being in the form of a fixed or variable rent. There is often an expectation that the tenant will assume overall responsibility for the farming operations taking place on the land. This model is usually associated with developed nations, where the structure governing the balance of power between landowner and tenant has been established. It has also traditionally been applied to the leasing of complete farms, which provide the sole income of the tenant. However, the liberalization of tenancy relations in many countries means that this is no longer the dominant case and increasingly tenants, sometimes landowners themselves, rent portions of farms in order to make their farming operations more efficient.
2.3 In contrast, under license arrangements such as sharecropping, the landowner remains in legal occupation of the land while the farming operations are carried out by a sharecropper or labour tenant. The landowner grants some rights over land, usually in the form of a right to enter the land in order to carry out the specified farming operation. In such contracts the expectation is that the landowner will continue to make all major decisions. While, in law, the landowner is buying a service from the sharecropper (the service being labour and, often, seeds, machinery or draught animals), the balance of power is such that the sharecropper is effectively paying the landowner for the right to use the land.
2.4 The separation between tenancies and licenses has important legal dimensions, particularly related to issues of security, compensation and the ability to raise loan capital independently of the landowner or local money lender. However, given the absence or dysfunction (in many countries) of policy and legal frameworks the practical significance of the separation is often lost. As a result, for the purposes of these guidelines, all relationships involving landowners and others farming their land will be referred to as tenancies, with the parties known respectively as landowners and tenants. Where necessary in the text - and particularly in Part 2 - distinctions will be made between the types of agreements.
2.5 It is often the case that individuals may play the role of landowner and tenant simultaneously. Small-scale landowners may farm their own land, have tenancies of neighbouring land, and participate in sharecropping arrangements covering other land. Alternatively, many forms of ‘labour tenancy’ involve land-poor farmers entering either sharecropping or wage labour arrangements with landowners in return for a small parcel of land which they can farm on their account, effectively as tenants. Elsewhere, the community may continue to be the dominant unit, with families using land as their needs dictate.
2.6 Tenancy arrangements are used by tenants when land cannot be purchased, or when they prefer not to tie capital into long-term investments such as land purchase, and they can be used by landowners who want to avoid wage labour costs. Some farmers have labour and/or capital but do not have the land to fully use these resources. Others have land which they are not working, for example because of a lack of labour or capital or because they have no interest in engaging directly in agricultural production. The result, as Box 2.1 illustrates, is a wide variety of arrangements, extending from personal relationships based on usufruct rights to small parcels of land, to full tenancies of farms, held as interests in property.
BOX 2.1: A RANGE OF TENANCY ARRANGEMENTS
2.7 In each case, these different forms of leasing arrangement allow land to be farmed by someone other than the owner. The ways in which this is achieved reflect a number of specific attributes relating both to the relationship between the parties, as well as to the wider social, cultural and economic environment in which the arrangements operate. Probably the single most significant reason for the development of different types of arrangements is the structure of landowning. For example, in many parts of Europe and Latin America, large-scale landownership (often by absentee landlords) has necessitated the development of leasing arrangements. In contrast, in the customary tenure systems of Africa, the shortage of land at a community level may force land-poor farmers to leave the community and seek tenancy arrangements in communities where land is not scarce.
2.8 Beyond landownership structures and custom, one of the more significant factors in determining the types of arrangement used has been the relative development of markets, reflected primarily in the strength and direction of the power relationship between landowner and tenant. In regions where the markets (particularly in land and products) function relatively well - such as in Europe - tenants have gained a degree of independence that has been recognized and protected in law. Elsewhere, especially in parts of Asia, tenants have remained largely dependent upon their landowners, leaving them in a weak position to protect their rights. One of the primary results of this is that most European states have a highly formalized lease structure framed within a well-developed and enforceable rule of law, with built-in safeguards for both tenants and landowners. In contrast, many countries in Latin America, Asia and the Near East have regulations controlling leases but often lack institutional structures strong enough to enforce these regulations.
2.9 The tenancy arrangements that predominate in a given context do not always follow a linear developmental pattern (for example, from labour tenancy to sharecropping to fixed cash rentals) but tend to range back and forth from one type of tenancy to another, as conditions change. In illustrating the range of tenancies in this manner, therefore, it is not intended to imply that arrangements on the right of the range are in any way superior, or more formal, than those on the left. Rather, the illustration serves to show where each type of agreement lies in law, as well as in terms of the respective resource inputs of landowners and tenants. Agreements on the far left of the range are thus viewed firmly as personal contracts, with the expectation that all major decisions will be taken by the landowner. In contrast, those on the far right involve a transfer of property rights, with the expectation that the tenant will assume overall responsibility for the farming operations taking place on the land.
2.10 The most significant positions in the range are:
1. contractual license arrangements, in which the landowner determines and largely undertakes all farming decision-making and operations, but licenses others to perform certain functions, often involving crop planting and harvesting.2.11 It is usually presumed that the power balance is in favour of the landowner, i.e., that one of the key factors in determining where a particular arrangement fits in the range is the degree of direct control exercised by the landowner. However, in an increasing number of cases, the reverse situation applies. This is the case, for example, where the landowner holds little land and/or capital (and, hence, power), while the tenant is a larger operator, either being a farming company, or an individual farmer with access to sufficient capital to create a viable and sustainable unit. The significance of these scenarios lies in challenging the orthodoxy of power relations in tenancy arrangements, and the implications that this has for guidance on the essential elements of a tenancy agreement. So-called ‘reverse arrangements’ will thus be considered separately at the end of this chapter.2. labour tenancies, in which labourers receive a token wage or share of output, together with usufruct rights to a small parcel of land for their own purposes (usually subsistence);
3. sharecropping and other similar arrangements, in which the expectation is that both landowner and tenant share the cost of inputs and receive a share of outputs. This may vary from arrangements which look very similar to contractual labour relationships, to those where the scale of the venture more closely resembles a full tenancy; and
4. tenancies, in which there is a fundamental separation between the interests of the landowner (leasing out land) and the tenant (leasing in land). As Box 2.1 indicates, the tenancy arrangement is significantly different than the other forms of arrangements, principally in that tenancy involves the transfer of certain property rights.
2.12 Contractual license arrangements, in their various forms, are found throughout the world, particularly where there is a shortage of resources such as capital or skilled management. At its most basic, the contractual license arrangement involves the landowner contracting out (as opposed to leasing out) all or certain farming operations. This type of arrangement can relate to all farming operations (including marketing the produce), or it can be limited to certain activities (see Box 2.2, Indonesia). Although not formally a type of tenancy arrangement, most contracts include some rights over land, usually in the form of a right to enter the land in order to carry out the specified farming operations.
BOX 2.2 LICENSE CONTRACTS FOR STANDING CROPS IN INDONESIA
The system of Tebasan, as practiced in Indonesia, is based on an agricultural merchant agreeing a license with a farmer to harvest a standing crop. This is done to ensure that the merchant is able to control the harvest activities, thus effectively avoiding both the work and risk of growing the crop, as well as being able to determine its quality prior to purchase. Consideration for the crop (including the license) is usually part-paid in advance. The extent of this prepayment will depend upon the degree to which the farmer and merchant agree on the valuation, together with any discount the farmer is prepared to take in order to receive income prior to the harvest. The remainder is paid in installments, post harvest. By using this system, a farmer gains access to post-harvest storage, as well as to informal credit.
(Lastarria-Cornhiel, S. and Melmed-Sanjak, J. 1999. Land tenancy in Asia, Africa and Latin America: A look at the past and a view to the future. Working Paper No. 27. Land Tenure Center, University of Wisconsin-Madison)
2.13 The labour tenancy is found in the rural areas of many countries in Africa and Asia. In many ways, it is similar to contractual license arrangements, although rather than receive a direct payment or fee, the land-poor labourer receives usufruct rights to a small parcel of land (and sometimes a dwelling). The labourer often has relative freedom to use the land either for subsistence (its original purpose), or to produce a cash crop for sale. However, it is equally recognized that such forms of tenancy often amount to little more than ‘bonded labour’, with workers quite unable to earn enough from the small parcels to free themselves from what is often an exploitative relationship.
2.14 Historically, sharecropping has been favoured as a means of putting large land holdings into production without the risk and administrative problems of hiring wage labour. In addition, sharecropper families, certainly in Latin America, have also provided labour for the cultivation of the owner-occupied parts of the estate. As such, sharecropping has been popular with landowners, as a flexible form of labour that is created and disbanded according to production conditions. Sharecropping is also seen to be low cost and relatively low-risk for the landowner, as long as there is a sufficient supply of potential sharecroppers.
2.15 As a result, it is widely acknowledged that landowners have been able to use sharecropping arrangements as a means of extracting cheap labour from land-poor peasants. Indeed, with the situation existing in many countries that landowners are also the only money lenders, as well as the chief local law officers, sharecroppers have had to accept whatever terms have been offered, in the sure knowledge that they would be replaced if they did not comply (see Box 2.3 for an example).
BOX 2.3 SHARECROPPING IN PERU
An example of classic sharecropping is the introduction of yanaconaje for cotton production and other commercial crops on the coast of Peru after the abolition of slavery and of Chinese indentured workers. Initially sharecropping was convenient for landowners because little capital outlay was needed, risks were borne mostly by the sharecropper, while the sharecropper’s family provided additional labour, particularly during the peak harvesting time. In these sharecropping arrangements, landowners provided land, seed, oxen and tools in exchange for a percentage of the harvest. They also offered loans at high rates of interest. Sharecroppers were obliged to sell their share of the cotton harvest to the landowner at below market price. This imbalance led to the agrarian reforms of 1962 and 1969, which gave the yanaconas the opportunity to buy the land that they had been sharecropping.
(Lastarria-Cornhiel, S. and Melmed-Sanjak, J. 1999. Land tenancy in Asia, Africa and Latin America: A look at the past and a view to the future. Working Paper No. 27. Land Tenure Center, University of Wisconsin-Madison)
2.16 In its most basic form, sharecropping is an agreement to produce agricultural products, where the landowner provides the land (and sometimes the other inputs) and the sharecropper provides the labour (and occasionally inputs such as seeds). At the end of the agricultural cycle the harvest is divided between the parties on a pre-agreed basis. These types of arrangements allow both the land-poor and the cash-poor (whether landowner or not) to farm, as is illustrated in Box 2.4. Although some agreements may be more complex, in having additional responsibilities, all follow this basic pattern.
BOX 2.4 SHARECROPPING IN CHILE
The context for the use of sharecropping arrangements in Chile is one in which:
The advantage of using sharecropping arrangements, for both landowner and sharecropper, is that a minimum of cash (for either hiring wage labour or paying cash rent) is required. Landowners supply some inputs in addition to the land, while sharecroppers put up the balance of the inputs, including wage labour in addition to their own family labour. In the central valley region of Chile, sharecropping is increasing as the result of:
(Lastarria-Cornhiel, S. and Melmed-Sanjak, J. 1999. Land tenancy in Asia, Africa and Latin America: A look at the past and a view to the future. Working Paper No. 27. Land Tenure Center, University of Wisconsin-Madison)
2.17 Beyond the conventional sharecropping agreement, there are also many cases in Latin America and Africa of ‘equal input share’ agreements. These cases are characterized by the parties contributing more or less equal shares (often both consisting of some land and other capital), and gaining more or less equal shares of the outputs. These are often intra-family arrangements that effectively combine a number of smallholdings under one management.
2.18 Although not common in many parts of the world, ‘partnership farming’ has become established in Europe, as a means of combining a range of skills and access to resources in one business. Rather than the usual separation of interests of the landowner and sharecropper, a partnership implies a common business, in which the partners (usually the landowner and the tenant) work together for their common interest. As a result, resources are effectively pooled within the partnership and all produce is marketed as a single entity. Inputs to the partnership may be unequal (usually land and expertise), as can be incomes, which would reflect the different inputs of the partners.
2.19 While partnerships allow the farming partner greater certainty than under sharecropping, and allow the landowning partner to be less involved in the day-to-day management of the business, the debts of one party are generally the liability of the other party. In addition to a formal contract, partnerships therefore demand both trust and, ideally, longer-term continuity in order to prosper.
2.20 Fixed rent tenancies can be either short or long term, and can be subject to fixed or variable term lengths. Fixed rental agreements, more than sharecropping or partnerships, are used when landowners are absent from their estates, and require an income stream to be generated in their absence. Such tenancies are generally restricted to tenants of some socio-economic standing (and with access to capital), rather than being generally available to all resource-poor farmers.
2.21 In the more developed agricultural markets of Europe and North America, the fixed rent tenancy is a standard vehicle for delegating the management of a farm from its owner to a commercial tenant farmer. Although the actual lengths of the lease term can vary, the level of capital investment is such that many tenants remain in occupation for a number of years, adopting farming and management practices indistinguishable from owner-farmers.
2.22 Equally, fixed rent tenancies can be for bare land, taken on an annual basis. In these cases it is assumed that tenants already have a farmstead and access to other land, thus using the fixed rent tenancy land to supplement their farming operation, nominally in the short term. Again, practice indicates that successful tenants tend to remain in occupation of such land for considerable periods, despite short tenancy lengths.
2.23 The conventional model of lease arrangements assumes the involvement of a land-rich landowner and a land-poor working farmer. However, a number of examples can be found of reverse scenarios, in which owners of small holdings lease out their land to larger scale farming operations while also taking up paid employment, either on their own land, or elsewhere (see Box 2.5).
BOX 2.5 REVERSE LEASING IN MEXICO
Mexican ejidatarios are smallholder families that have secure usufruct rights to land adjudicated to the ejido community under land reform legislation. Typically, they have no capital and little access to credit. While until recently renting ejido land was illegal, rentals have been occurring for decades. In fertile agricultural areas, ejidatarios have been renting out their parcels to agricultural firms that bring in capital, machinery, and other inputs to produce a cash crop. These agribusiness ventures are able to consolidate many ejido plots into one medium-sized parcel. Often, the ejidatarios work as wage labourers on the land they have rented out.
(Lastarria-Cornhiel, S. and Melmed-Sanjak, J. 1999. Land tenancy in Asia, Africa and Latin America: A look at the past and a view to the future. Working Paper No. 27. Land Tenure Center, University of Wisconsin-Madison)
2.24 Reverse sharecropping arrangements can also be found in which many small landowners, who do not have access to sufficient capital to farm efficiently, enter an agreement with a single large scale sharecropper. Equally, a form of reverse sharecropping is practised in parts of Central Europe, with those gaining land under restitution choosing to allow the local co-operative to manage it, in return for employing them and providing them with a share of the produce from their land (see Box 2.6).
BOX 2.6 REVERSE SHAREFARMING IN CENTRAL EUROPE
It is recognized that for some Central European countries, changes in property rights, especially landownership, lie at the heart of the transition to a market economy. However, following 70 years of collective and state-run agriculture, the mere restitution of land, on whatever basis is decided, will not automatically create an economy of small-scale commercial family farmers. Indeed, many of those claiming land have sought simultaneously to shield their ownership from the forces of contraction by either leasing their land to, or arranging a reverse share cropping agreement with, the co-operative. In Romania, for example, land received through restitution can either be sold immediately, or more can be purchased, up to a maximum of 100ha. However, the average lot size under restitution is just 4-5ha, with most new owners joining producer co-operatives on a lease or sharefarming basis. A form of collective management has thus been created through leasing and reverse sharefarming contracts, which provides a gradual change in management, even if the redistribution of ownership has been rapid.
(Brooks, K.M. 1993. ‘Property rights in land’, pp. 125-136 in Braverman, A., Brooks, K.M. and Csaki, C. (eds) The agricultural transition in Central and Eastern Europe and the former USSR. Washington, DC: World Bank).
Introduction
Balancing the needs of landowners and tenants
Tenancy term length
Tenants and family succession
Renewal
3.1 At the core of effective leasing arrangements is an underlying assumption about the tripartite relationship between landowners, tenants and the state. This relationship is essentially one of mutual responsibility, in which each party has certain duties to perform. The most fundamental of these duties fall on the state, in creating an appropriate framework within which the landowner and tenant can operate.
3.2 Despite the variations in tenancies, there is much commonality at the scale of the individual agreement. At the core of most of the arrangements are the issues of risk, security and trust. Even under the most highly regulated systems, the landowner/tenant relationship is still dependent upon the level of trust that can be established between the parties. Where there is trust, the tenant in particular will gain more freedom and incentive to operate, regardless of the nature of the actual lease arrangement. Equally, where there is a lack of trust, the idea of the ‘joint venture’ is hard to sustain.
3.3 While recognizing the relative isolation and poor bargaining position of many tenants, good practice guidance should be based on establishing a better balance of power, which allows both parties to achieve objectives which are acceptable (if not ideal) to them. Within this framework, the principal issues to be addressed by both landowners and tenants are:
3.4 Thus the two fundamental issues relating to all tenancy arrangements are security for the tenant and flexibility for the landowner. This means that the promulgation of good practice is essentially concerned with achieving a sustainable balance between these competing claims. When leases become highly regulated and protected, they are generally unpopular with landowners, who perceive that their power and flexibility is being circumscribed by the state. When informal or under-regulated, however, tenancies are seen to deny the security desired by tenants. It is also argued that informal and under-regulated arrangements prevent the landowner from stipulating or enforcing requirements for sustainable use of the land, sometimes known as ‘beneficial occupancy’.
3.5 Rather than being part of a continuum in which the landowner seeks shorter terms and less formality, while the tenant seeks the opposite, the issues are more complex and multi-dimensional. These are modelled, in simplified form, in the figure below. In each case, the matrix sets the length of lease term against the level of formality of the arrangements. The upper left-hand quadrant thus refers to short-term informal arrangements, while the opposite quadrant, the lower right, refers to long term formal arrangements.
3.6 For each quadrant, positive and negative factors for landowners are listed in Box 3.1 and those for tenants are shown in Box 3.2.
BOX 3.1 LEASE ISSUES AND POSSIBILITIES: LANDOWNERS
|
|
Positive |
Negative |
|
INFORMAL SHORT TERM |
· Flexibility to exploit
lease markets |
· Uncertainty |
|
INFORMAL LONG TERM |
· Some
flexibility |
· Uncertainty |
|
FORMAL SHORT TERM |
· Certainty |
· Cost of setting up
agreement |
|
FORMAL LONG TERM |
· Certainty |
· Lower income |
|
|
Positive |
Negative |
|
INFORMAL SHORT TERM |
· Low transaction
cost |
· Little
certainty |
|
INFORMAL LONG TERM |
· Low cost |
· Little
freedom |
|
FORMAL SHORT TERM |
· Some security |
· Potential cost of setting
up agreement |
|
FORMAL LONG TERM |
· Security (lessee and
family) |
· Tied to
location |
3.8 A different balance of outcomes faces tenants. In general, they will benefit most from the security, certainty and transparency of a formal long-term tenancy. However, an informal short-term tenancy may present a relatively low cost route to land for a land-poor farmer. Indeed, it is usually the only route. Given the likely involvement of the landowner in the farming regime, this form of tenure may also provide the necessary access to capital with which to farm. Informal short-term tenancies also provide a level of flexibility absent from longer terms, allowing established farmers, in particular, to exploit market opportunities, or to make up for a potentially poor harvest or other shortfall on their own land. This has been the case in England and Wales following the liberalization in 1995 of the tenancy regime which facilitated short-term tenancies.
3.9 Ultimately, the question of which duration and level of formality are most suited to a particular person will depend upon their circumstances. The apparent disposition of landowners to short-term leases is predicated, for example, on the supposition that there are plenty of willing and able tenants to compete for the tenancy. In contexts where this is not the case, as in an agricultural depression in a developed country, the landowner could well be more intent on encouraging a tenant to stay - in part by offering long-term security. Equally, the apparent disposition of tenants to secure long term tenancies is predicated on an assumption that they are all capable and willing to take on this commitment.
3.10 Boxes 3.1 and 3.2 tend to suggest that both landowners and tenants are often best served by longer terms rather than shorter ones. In particular, longer terms tend to provide a greater level of certainty and sustainability than shorter terms. There also tends to be a greater separation of interests and influence between landowner and tenant, which allows the tenant greater freedom while guaranteeing a relatively low-risk return to the landowner. Against this, landowners often claim that longer terms are unacceptable if they diminish their flexibility to exploit market opportunities, quite often specifically related to non-agricultural development. Quite apart from questions about the desirability of losing land from agriculture, it is possible to add break clauses to leases, allowing the landowner to resume possession for certain defined activities, such as non-agricultural development.
3.11 It must be recognized, however, that this market-oriented perspective ignores the relative power imbalances between landowners and tenants (recognizing that this is not always in favour of the former). At the extreme, such power imbalances can render irrelevant the very idea of choice, and of trade-offs between the positive and negative aspects of lease duration and level of formality. This can lead to an enduring lack of stability in the landowner/tenant relationship, particularly if there is limited security for the party in the weaker relative position.
3.12 In reaching a balance between the needs of landowners and tenants, issues such as tenancy term lengths, succession by family members in the case of the tenant’s death, and lease renewal become significant element of policy. There are many examples of statutory controls to regulate minimum term lengths, while in other cases a strong customary tradition has been established. However, there is little apparent consistency over what represents good practice.
3.13 Where term lengths are imposed, as in much of northern Europe for example, these tend to reflect minimum terms that can be both extended to longer periods, and renewed prior to termination. In all these cases the minimum terms are long (in the order of 10 years), while agreed terms of 18 to 25 years are not uncommon. In most cases, renewal of the tenancy is automatic, unless either of the parties seeks termination, according to certain pre-defined terms [see Box 3.3 for an example of automatic lease renewal in England and Wales]. Few countries impose maximum tenancy lengths, although in Denmark tenancies are terminated after 30 years.
BOX 3.3 LEASE RENEWAL IN ENGLAND AND WALES
Agricultural Holdings Act 1948, section 2.
Restriction on letting agricultural land for less than from year to year
Where any land is let to a person for use as agricultural land for an interest less than a tenancy from year to year, the agreement will take effect, with any necessary modifications, as if it were an agreement for the letting of the land for tenancy from year to year.
Agricultural Holdings Act 1948, section 3.
Tenancies for two years or more, unless terminated by notice, to continue as tenancies from year to year
A tenancy of an agricultural holding for a term of two years or more shall, instead of terminating on the expiration of the term for which it was granted, continue (as from the expiration of that term) as a tenancy from year to year unless, not less than one year nor more than two years before the date fixed for the expiration of the term, a written notice has been given by either party to the other of their intention to terminate the tenancy.
Agricultural Holdings (Notices to Quit) Act 1977, section 2(1).
Service of a Counter-notice
A tenant in receipt of a notice to quit may, within one month of the giving of the notice to quit, serve on the landlord a counter-notice in writing requiring that the matter be referred to the Agricultural Land Tribunal (ALT) for the area in which the holding is situated. The notice to quit will then only be valid if the ALT consents to its operation on one of the limited grounds specified in section 3 of the 1977 Act.
3.14 Following the English and Welsh tenure reform contained in the Agricultural Tenancies Act 1995, the position for new farm tenancies is that there is freedom of contract, including term length and lease renewal. Evidence indicates that while conventional (i.e. pre-existing) lease structure continues to be followed, most new tenancies are for relatively short terms, and make no provision at all for renewal at the end of the term. Typically, private leases of bare land are attracting three-year terms, while for whole farms (less than 10% of all leases) the median term length is 7 years.
3.15 Relatively little has been written about good practice with respect to tenants and succession. Where succession provisions do operate, these rights are often limited to those living and working on the land, and are typically not transferable to a third party. However, in cases where succession provisions do not operate, there are concerns that the death of the tenant can lead to the eviction of the entire family, even if all or some of them were working the land and are competent farmers in their own right. In many countries, women play a vital role in farming and there is growing awareness of the importance of ensuring their access to land through inheritance.
3.16 This raises questions of public policy, about the extent to which tenants and their families should receive statutory protection from eviction, and over what period of time. In response to the death of the tenant, there is a widely shared concern that the tenant’s family should be allowed to remain on the land, at least during the remainder of the tenancy, or until more permanent arrangements can be made. In many cases, however, this is not likely to be a long period of time.
3.17 When tenant families live on the land that they work, eviction causes particular hardship. However, there are relatively few countries which seek to offer longer-term protection, either through law or custom (although see Box 3.4 for an example of customary succession in Uganda). Reference is often made to the fact that ‘good’ tenants and their families are unlikely to be evicted, since the landowner is unlikely to be able to find better ones. However, while this might possibly be the case for some landowners and tenants, particularly in situations where there are relatively few potential tenants, evidence does not suggest that it is the general case.
BOX 3.4 CUSTOMARY SUCCESSION IN UGANDA
In the early 1900s, the land tenure system in the Buganda area of colonial Uganda was transformed from a customary system based on a chief’s domain over land and community member’s rights to farm it, to a system approaching freehold tenure. The resulting ownership, vested in the chiefs and known as the mailo estates, was already farmed by peasants. These peasants were allowed to remain on the land, effectively converting them from customary usufructory holders into tenants of private property.
In an effort to prevent eviction of these tenants, legislation was passed in the 1920s giving them some security of tenure, while also establishing the amount of rent to be paid and the rights and responsibilities of the parties. As a result, eviction (only by court order) is now limited to a minimum of causes, such as failure to pay rent for three years. In common with the usufructory system, this right is inheritable, although it cannot be sold or otherwise transferred without the owner’s permission. The resulting system is thus a mix of private property rights overlain with customary norms and practices.
(Lastarria-Cornhiel, S. and Melmed-Sanjak, J. 1999. Land tenancy in Asia, Africa and Latin America: A look at the past and a view to the future. Working Paper No. 27. Land Tenure Center, University of Wisconsin-Madison)
3.18 Good practice indicates that rather than automatically applying a lease renewal or not, a variety of factors should be considered in order to reach an equitable decision. The considerations presented below are an amalgam of practices and does not relate specifically to any one country or situation. However, good practice in any individual country would be to ensure that both landowners and tenants are clear about the grounds for renewal and resumption.
3.19 One consideration in many systems is the extent to which the tenant has complied with the essential conditions of the lease. If the tenant has failed to discharge this duty, the landowner should be able to recover possession.
3.20 Another consideration that is often recognised is the situation and needs of the landowner and family. A strong argument is often made that the landowner should be free to resume farming at the end of the lease. In other cases, it is accepted that the landowner should be able to resume possession if the land is required for a family member to commence (or return to) farming. In India, the preceding lease period is known as a ‘disability’ period, during which the next generation of the landowner’s family is preparing to farm the land. A case may also be made for allowing the landowner the right to resume possession of the land for the purposes of amalgamating it with other land.
3.21 Yet another consideration is whether the tenant requires land to remain in the family home. This might apply in the case when the tenancy includes a family home, which would have to be vacated if the lease were not renewed. Linking lease renewal to the existence of the tenant’s home provides an incentive for landowners to forbid tenants from erecting homes, however temporary and fragile, and to remove those already in place. As a result, the term ‘home’ would require wide interpretation, to include not only physical structures, but also parcels of land which provide the sole livelihood for the tenant and tenant’s family, whether they actually live there, or not. A further consideration in favour of the tenant is that renewal should be granted if it would be unfair, or inequitable, not to do so.
3.22 In assessing the considerations listed above, it is clear that policy on lease renewal should driven largely by equity; what is perceived to be fair between landowner and tenant. While preserving a presumption that the landowner should be able to regain possession of the land, there is recognition that such a prioritization should only occur under specific circumstances when the landowner or landowner’s family require use of the land for direct production. Other than this, many countries recognize the claim of the tenant to remain in occupation. However, particularly in developed countries, landowners have sought to gain extra rights of repossession, largely linked to their ability to exploit the commercial potential of conversion to non-agricultural usage.
