AGRICULTURAL RENT REVIEWS - MARTINMAS 2008
As a consequence of the substantially increased commodity prices at the end of the 2007 harvest, many landlords took the opportunity to serve Notice on their tenants for a rent review at Martinmas (28th November) 2008. The Notices generally follow a long period from the mid/late 1990’s, during which farm profitability had been modest and landlords accepted that there was little scope for increasing rents.
Acting principally for landlords, CKD Galbraith were instructed to conduct reviews on over 50 farms, mainly in East Central Scotland but also in the west, including some islands.
This report assesses the outcome of these reviews which have generally shown a large increase in percentage terms although, in most cases, there had not been a rent review for over 10 years.
Legal Basis for Rent Reviews
The basis on which agricultural rent reviews are conducted is laid down in the Agricultural Holdings ( Scotland ) Act 1991 (Section 13) as amended by the 2003 Act (Section 63). The legislation requires that, at review, the rent properly payable for an agricultural holding is based on the following:
- Rents of other agricultural holdings and when fixed
- Any factors affecting those rents.
- Current economic conditions in the relevant sector of agriculture.
To be excluded is any distortion due to scarcity of lets.
Following receipt of instructions to undertake rent reviews, we inspect the subject holdings and obtain information on the rent of comparable holdings, including open market lettings and other agreed rents. In many cases, we will arrange for a Productive Earnings Capacity calculation to be carried out by independent consultants which will determine whether the proposed rent can be supported by the farm.
Open Market Evidence
Most farms being reviewed are historic “secure” 1991 Act agricultural tenancies. Following the introduction of Limited Duration Tenancies (LDTs), there is, in effect, no evidence of open market rents on a similar tenancy basis. Consequently, we do take into account rents offered for LDTs and Short Limited Duration Tenancies (SLDTs) although, in most cases, these require to be adjusted to take account of scarcity and other relevant factors. Rents paid for LDTs and SLDTs are usually higher.
Of the reviews carried out, all have been settled amicably with the exception of 5 that have been referred to the Scottish Land Court . We are hopeful that 2 or 3 of these outstanding cases will settle without going to court.
In our experience, landlords have little or no desire to go to the Land Court but have little choice where tenants, perhaps where their legal costs are supported by insurance policies, are determined to have their day in court. Landlords cannot offer one tenant a “soft” deal when the overwhelming body of evidence supports a rent increase at a level which may have been accepted by other tenants on the same estate. In our experience, landlords resent the cost of Land Court referrals when the money could be more usefully spent on the estate or, indeed, the tenanted farm; the only real winners being the professionals involved.
The overall average increase on the rents which we reviewed was 43% of rents passing immediately prior to the review. Rents varied between land types and stocking approximately as follows:
|Prime Arable||£70 - £90 per acre|
|Medium Arable||£60 - £65 per acre|
|Poor Arable||£45 per acre|
|Pasture||£30 - £40 per acre|
|Per Ewe||£15 per ewe|
|Per Cow||£90 per cow|
In all the above cases, the rent is for secure agricultural tenancies on equipped farms including farmhouse, tied cottages, and a significant level of landlords’ fixed equipment with the cost of repairs and renewals being shared between landlord and tenant. The Landlord pays the cost of insurance.
With vastly improved agricultural productivity, there are now surplus cottages on farms which can, with landlords consent, be sublet by the farm tenants. Where this is the case, our practice is to divide the market rent of the cottage equally between the landlord and tenant. This, we believe, fairly reflects the tenant ' s input into management and gives him a return on the cost of any improvements which he may have made, whilst the landlord receives appropriate benefit for his ownership and the cost of insurance which he undertakes.
Cottage rents can add significantly to the average rent over the whole farm acreage, in some cases, cottage rents have equated to the “entire farm rent”.
Mr Charles Gow, an Angus based Chartered Surveyor specialising in rural property management, comments:
‘’On one Estate with 8 holdings let to seven different tenants we decided to ask Chris Addison-Scott of CKD Galbraith to carry out rent reviews, the notices having been served prior to Martinmas 2007. The holdings ranged in size from 24 acres to 366 acres with most of them held on traditional agricultural tenancies but with one LDT. The decision to use an outside firm was made on account of the changing times, new legislation and sparse evidence etc. Many of the rents were last reviewed 12 years ago.
Inspections were made in early May and advice as to suggested revised rents was received once comparable evidence had been acquired. As the harvest became more and more difficult, it was decided to delay negotiations until the weather improved. In October and November, amicable agreements were reached with all the tenants without recourse to Land Court applications. This was a most satisfactory situation and could only have been achieved by someone with both a wide knowledge of the market and a practical sense of agreeing rents acceptable to both parties.’’
At CKD Galbraith our objective, when undertaking rent reviews, is to agree rents amicably at a level which appropriately recognises the relative position of Landlord and Tenant and, as far as is practicable, assures the long term nature of the relationship between landlord and tenant. In some situations it is very difficult to reach agreement where one or both parties take an intransigent position.
The areas of discussion this year were mainly concerned with whether the use of open market LDT comparable rents was possible. Some agents, usually those acting principally for tenants, do not accept that LDTs and SLDTs can be taken into account for rent reviews of 1991 Act tenancies. If this proposition were accepted, the result would be that rent reviews would not be related to the open market and would become much like ‘fair rents’ under Regulated Tenancies which are anything but fair. We argue that LDTs are relevant in that they relate to the open market and we shall continue to use them as a basis for 1991 Act rent reviews.
Another point raised by many of the tenants, or their agents with whom we negotiated, was the use of the legal costs insurance policy referred to above. Far from righting the perception that the landlord – tenant relationship is unbalanced it has done little to help the negotiation process where some tenants or their agents feel that the only objective is to end up in court. Although designed to put the parties on a more equal terms, it does little to achieve this as no such policy is available to landlords.
For further information on agricultural rent reviews, contact Chris Addison-Scott.