The fermage and other types of agricultural lease

Most wine producers in France are familiar with agricultural leases as many of their businesses are structured on the basis of an operating company, such as a S.C.E.A., that leases the vineyard from the landowner or from a landowning company, such as a G.F.A. Agricultural leases also offer a useful mechanism for landowners to maintain and generate income from land they do not wish to farm themselves and for new or existing farmers to commence or expand a farming activity without the need to purchase land.

The most common form of agricultural lease in France is the “fermage”. It can include both land and buildings, covers all forms of agriculture and is widely used in viticulture. The fermage fulfills a particularly useful role in the context of French inheritance laws. Under these laws children inherit equal shares of their parents’ property so it is not unusual to find individuals owning land that they are unwilling to sell but do not wish to farm themselves. By entering into a fermage they can retain ownership of the land while also ensuring that it is properly looked after.

Fermages are governed by a complex set of rules, particularly in relation to the duration of the lease and the calculation of the rent:

A fermage has a minimum duration of nine years with an automatic right of renewal granted to the tenant at the end of the lease. In practice it can be relatively difficult for the landowner to terminate a fermage and regain full use of the land. Circumstances under which a landowner can refuse to renew a lease include where a tenant has breached the terms of the lease, has reached retirement age (although it is possible for a tenant who has reached retirement age to pass their rights under a fermage to a spouse or child) or where the landowner wishes to farm the land themselves. However, in the latter instance the landowner must meet a strict set of conditions, such as having the necessary experience, equipment and financial resources to farm the land themselves. If they are not currently engaged in a similar farming activity they are unlikely to be able to meet these conditions. It is therefore possible that a fermage signed for the minimum duration of nine years could last for 18 years or more. One way of overcoming this is to agree a long-term lease, which is fixed at 25 years and does not have an automatic right of renewal. Another alternative is the “Convention de mise à disposition” (see below).

The amount of rent payable under a fermage for bare land or buildings is based on a national index.  However, the rent payable for vines is calculated on a hectolitre per hectare basis and differs from one appellation to another. Each parcel of vines is assessed according to various measures, such as the quality of the soil, the state of the vines and their age, and the parties to the fermage then agree a number of hectolitres – from a minimum of three to a maximum of twelve – corresponding to the quality of the parcel. The number of hectolitres is then multiplied by the price per hectolitre for the relevant appellation. This price is fixed each year by a prefectural decree and is based on the average sales of wines from the appellation during the course of the previous year. For example, a one hectare parcel of vines producing AOC Bordeaux Supérieur wine that is of average age, produces average yields, where the vines are in good condition and less than 5% are missing might be valued at nine hectolitres. The price per hectolitre for AOC Bordeaux Supérieur for the 2009-2010 campaign was fixed at € 104.50 so the annual rent for the parcel would be € 940.50.

Convention de mise à disposition
Another increasingly popular method for leasing agricultural land is the “Convention de mise à disposition” (“CMD”). This system is operated by the regional SAFER (Société d’Aménagement Foncier et d’Etablissement Rural) and is designed to offer a secure and simple structure for both landowners and tenants to enter into a short-term lease. The landowner agrees to lease their land to the SAFER for a fixed period of between one and six years. The SAFER then leases the land to a tenant for the same period. The rent is calculated on exactly the same basis as for a fermage except that the tenant pays the rent to the SAFER, rather than directly to the landowner, and the SAFER then pays this sum to the landowner, less a 10% “commission”. The system is designed to be used in circumstances that require greater freedom and flexibility than offered by a fermage; for example where a landowner wishes to retire, is looking for a long-term tenant or is awaiting a potential sale. It also has the advantage of being underwritten by the SAFER. As the contract is not governed by the same set of rules as a fermage (other than for the calculation of the rent) the parties also have the flexibility to add clauses relating to how the land is farmed, for example requiring the tenant to adopt environmentally responsible practices.

In practice this type of lease is often used where an estate wishes to increase their production on a short-term basis, perhaps following the loss of some of their existing production due to a one-off event, such as frost or hail. Although the authorities might grant special permission for producers to purchase grapes through an “achat de vendange” (as was the case for areas of Bordeaux badly affected by hail in 2009), the wine produced from these grapes cannot be sold under a “Chateau” name. By contrast, wine made from vines leased from another producer via a CMD can carry the “Chateau” name.

Given their widespread use and the complexity of the rules governing them any would-be or existing French vineyard owners need to be aware of the different types of agricultural lease and their relative advantages and disadvantages.

Alexander Hall