There are several records that narrating people that rent a land to others, and this activity is allowed in Islam.
The people used to rent their land for cultivation for one-third, one-fourth or half its yield. The Prophet said, “Whoever has land should cultivate it himself or give it to his (Muslim) brother gratis; otherwise keep it uncultivated.” Narrated Abu Huraira: Allah’s Messenger (ﷺ) said, “Whoever has land should cultivate it himself or give it to his (Muslim) brother gratis; otherwise he should keep it uncultivated.” [Refer Sahih al-Bukhari, hadith no. 2340]
Ibn `Umar used to rent his farms in the time of Abu Bakr, `Umar, `Uthman, and in the early days of Muawiya. Then he was told the narration of Rafi` ‘bin Khadij that the Prophet (ﷺ) had forbidden the renting of farms. Ibn `Umar went to Rafi` and I accompanied him. He asked Rafi` who replied that the Prophet had forbidden the renting of farms. Ibn `Umar said, “You know that we used to rent our farms in the lifetime of Allah’s Messenger (ﷺ) for the yield of the banks of the water streams (rivers) and for certain amount of figs. [Refer Sahih al-Bukhari, hadith no. 2343 – 2344]
Hanzla bin Qais narrated:
Rafi` bin Khadij said, “My two uncles told me that they (i.e. the companions of the Prophet) used to rent the land in the lifetime of the Prophet (ﷺ) for the yield on the banks of water streams (rivers) or for a portion of the yield stipulated by the owner of the land. The Prophet (ﷺ) forbade it.” I said to Rafi`, “What about renting the land for Dinars and Dirhams?” He replied, “There is no harm in renting for Dinars- Dirhams. Al-Laith said, “If those who have discernment for distinguishing what is legal from what is illegal looked into what has been forbidden concerning this matter they would not permit it, for it is surrounded with dangers.” [Refer Sahih al-Bukhari, hadith no. 2346 – 2347]
The Prophet did not stop or prevent this activity. However, when land mas limited and the Ansar and Muhajirin were in great number, as a practical measure, he ordered land cultivated as much as possible. He did not want the land used on a produce – share basis (or muzara’a), but used on ijara (rent), because ijara provided ease for the tenants. Afterwards, when lands were plentiful, this restriction was lifted [Refer Subul us-Salam: 3/169]
Based on one view, zakat is obligated on land and its output when land is rented to the farmer for a given amount of money or any commodity. It (the 10% or 5%) becomes due from the owner, according to Abu Hanifah. He argues that zakat, though usually collected from the output, is, in fact, a levy on the land. In renting, the land remains owned by the owner and not by the user, and since zakat is a charge on the land, similar to kharaj (a type of individual Islamic tax on agricultural land), it is the owner’s responsibility to pay it. Renting is like farming, a sort of increase in the land, and out of this increase zakat is paid [Refers Al-Mughni and Fathul Qadir]
While, from another view, which the opinion of the majority is that zakat is changed to the renter on the grounds that zakat is a levy on the output and not on the land. Consequently, the owner of the output is responsible for zakat. It becomes obvious to us, along with Ibn Rushd, that there is a difference in the concept of zakat.
Is it on the land or on the output, or maybe on both? There doesn’t appear to be any consensus that zakat could be on both land and output together, although this appears to be the fact of the matter.
When the owner is the same as the farmer, the problem does not exist, but when the owner and farmer are not the same people, the majority argues that since zakat is paid on the output, it is a responsibility of the person who owns the output. Abu Hanifah, conversely, refers to the basis of zakat being on the growth of land itself [Refer Budahatul Mujtahid 1/239]
Justice requires that both parties share in the payment of zakat. Neither should be allowed to avoid it, while the whole burden is unjustly thrown on the other. Ibn Rush is wise enough to realize that zakat is in fact on the land and its output together.
The best view is, the farmer who pays rent should be allowed to deduct the rent along with other expenses and debt from the output and pay zakat on the residual if it reaches nisab. While the owner must be required to pay zakat on his share of the increase [value] of the land, which in this case, is the total rent he or she receives if it reaches nisab. Payment is calculated according to the rate that applies to the output itself, i.e. 10% or 5%. The owner is definitely permitted to deduct any expenditure paid on the rental property that might be involved, such as property taxes along with expenditures and debts [Refer Fiqh Az-Zakah 1/408]
Zakah According to the Quran & Sunnah: A Comprehensive Study of Zakah in Modern Perspective (2011), by Professor Muhammad Zulfiqar.