Contracts

1. Contracts Unit 4: Agribusiness Management Lesson: AM4

2. Objectives Lesson Objective: • After completing the lesson on contracts, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on an SAE Ownership Contract. Enabling Objectives: • Define contract, identify three things to consider when making a contract, and identify three legal aspects of contracts. • Describe a lease and the relationship between the two parties involved and weigh the lessee’s advantages and disadvantages to leasing. • Justify the need for an automatic renewal clause and explain how to use arbitration. • Contrast a cash lease with a production share lease; identify and define three types of leases.

3. Key Terms • Contract • Lease • Arbitration • Lessee • Lessor

4. IS this binding?

5. Contract • Verbal agreement or formal written document that is legally binding between two or more people or businesses • Used to help reduce risk by agreeing on terms and conditions beforehand

6. Elements of a Contract • Two or more legal parties • Must have legal capacity to act • Offer and acceptance • An offer or proposal made by one party and accepted by the other • Sufficient consideration • Promise of each party to fulfill contract • May not offend public policy or morals • Contracts cannot involve unlawful or immoral acts

7. Making Contracts • Consider legal aspects • Insure economic gain for both parties • Agree on what records will be kept and who will keep them • Determine how differences in opinion will be resolved • Determine who has responsibility for what jobs or enterprises • Agree on the responsibility for maintaining buildings, facilities, and land fertility • Agree upon how compensation for improvements will be handled

8. Legal Aspects • Legal advice • Written contracts • May be NO more binding than oral contract if not written properly • May help avoid misunderstandings • Details of a contract • Statement of who furnishes what • Statement of who pays for what • Payment of rent – Terms of payment, including beginning and end dates, Division of Income • Restrictions • Method of ending contract

9. Lease • Common type of contract • Farm contract transferring use or occupancy of land, buildings, machinery, or equipment for some form of payment • May be written or verbal • Rent • Income received from leasing property • Lessee • Tenant • One who holds or has the use of property that is owned by another • Lessor • Landlord • Owner of leased property

10. To Lease Or Not To Lease Advantages Disadvantages Financial Limited borrowing potential because leased equipment cannot be used as collateral No gain from leased land appreciation Possible higher rental payments resulting from risks transferred to lessor • Financial • Lower fixed cost, more capital available, rent considered a business expense so deducted from income for tax purposes, no taxes paid on leased property • Risks of obsolescence and faulty property shifted to lessor • Timing • When use is only occasional • When capital expenditure is large

11. Automatic Renewable Clause • Allows a short-term lease to be continued under the same conditions unless either the lessor or lessee notify the other party before a given deadline • Less renegotiation time, and neither party is locked into a long-term lease

12. Arbitration • Method of settling differences between two or more parties • Lessor can select a member of an arbitration committee • Lessee can select one • Two arbitrators select one • Except for questions of law, decisions of the committee are final and binding to the lessor and lessee

13. Cash vs. Production Share Cash Lease Production Share Lease Lessee pays a share of the product produced with the leased property • Lessee pays a fixed amount of money for the use of an item for a set amount of time • May be used for land, livestock, machinery, equipment, and buildings

14. Types of Leases – Land Lease • Used when tenant rents land and pays landlord with cash • Tenant furnishes labor, management, machinery, livestock, and operating expenses • Tenant benefits because there is less capital required to operate the business • Less capital needed for land means more can be used for machinery and equipment • Expand business and lower fixed costs per acre • Landlord may also furnish buildings and some management in certain cases • Landlord benefits with fewer risks and a guaranteed income • Landlord is at a disadvantage because there is a lower income with less control of land • Rent may be difficult to collect if crops fail

15. Types of Leases – Crop Share Lease • Percentage of crop given as payment for use of land • Used by people entering or expanding in production agriculture without a large amount of capital available • Landlord may furnish buildings, a portion of management, and a percentage of expenses • Landlord benefits by more opportunity for supervision of land • Value of rent more accurately reflects the value of the land because rent is based on proportion of the crop • Tenant furnishes labor, machinery, equipment, part of management, and any operating expenses not covered by landlord • Tenant benefits with less operating capital needed • Landlords are more likely to make improvements because they are involved in what is happening • Less risk to tenant if crop fails because landlord shares some of risk

16. Types of Leases – Livestock Share Lease • Lessor receives percentage of livestock from lessee as payment for use of livestock • Lessor furnishes land, buildings, percent of livestock, part of management, and part of operating expenses • Lessee provides labor, machinery, part of livestock, part of management, and percentage of operating expenses • Lessee’s risk is less with payments based on production of livestock enterprise

17. Types of Leases – Financial Lease • Item is purchased by lessor and used by lessee • Lessee pays monthly or annual rental fees • Lessee can use item without making a large down payment, reducing capital requirements • Lease often contains agreement giving lessee option of buying item at a set price at end of lease

18. Types of Leases – Building and Machinery Lease • Buildings are usually cash leased • Machinery rentals may be cash or production share leased • Can be a financial lease • one year, or an operating lease – for an extended period • After life of lease, option to buy exists

19. Let’s Explore Other Types of Leases • Teacher will divide students into 5 small groups • Each group will be assigned one of the following types of leases: • Hunting lease • Windmill lease • Mineral lease • Coal lease • Oil lease • This one slide is worth 40 points – 5 points for each item to the right • Use the Internet to find information about the assigned type of lease and put into a one-slide PowerPoint presentation. Be looking for information about: • Cash or production share lease • Advantages to lessor • Advantages to lessee • Disadvantages to lessor • Disadvantages to lessee • 3 other fun or interesting facts about assigned lease (15 points total)

20. Conclusion • Contracts are very important in agriculture. They can be written or verbal. • Leases make up the largest number of contracts in agriculture. • In larger contracts, it is advisable to have a lawyer examine the contract to make sure it is fair. • Leases contain certain advantages and disadvantages that will be unique to each person’s own situation.

21. Exit Card • What did you learn today about contracts? • What questions do you still have about contracts?