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Agricultural Rent Reviews – A Change of Approach?

The last few years have seen some challenging conditions for farmers, especially in the arable sector who have suffered badly with extreme wet weather in 2012 and  poor conditions again in 2013. Despite this, there continues to be upward pressure on both capital and rental values.

Anecdotal evidence shows huge over subscription for rental opportunities and strong rents being paid for new lettings as a consequence.

It is notable therefore that rents for properties let under the Agricultural Holdings Act 1986 (‘The 86 Act’) remain at comparatively low levels, especially those with houses. Passing rents will often be a half or even a third of those tendered on the open market where land is of good quality with easy access.

Whilst different from the laws in England and Wales, Scottish Agricultural Tenancy Legislation has a strong correlation with that south of the border. In what is perceived by most to be a more tenant orientated environment, there have been some important precedents set in respect of Scottish Agricultural rent reviews which might filter through into England and Wales.

In England and Wales, the 86 Act rent review formula reads that:

‘the rent properly payable in respect of the holding shall be the rent at which the holding might reasonably be expected to be let by a prudent and willing landlord to a prudent and willing tenant, taking into account … all relevant factors, including (in every case) the terms of the tenancy (including those relating to rent), the character and situation of the holding (including the locality in which it is situated), the productive capacity of the holding and its related earning capacity and the current level of rents of comparable lettings’

The 86 Act requires the exclusion of three factors when assessing comparable evidence, these being:

  1. Scarcity
  2. Marriage value
  3. The effect of allowances/reductions associated with a premium

Following the case of, Childers V Anker  the court determined that marriage value can be reflected in the rent payable for the holding, however, had to be discounted from the comparables in undertaking an assessment of these. Scarcity remains excluded from the rent paid as it was not an issue which the case addressed, and it hasn’t been since. Whilst invited to comment on scarcity, the courts did not do so on the basis that the original intent of the Act was to remove the effect of over inflated tenders paid to initially secure (what was then, by default) a lifetime tenancy in the knowledge that the rent could be negotiated down at the next review.

When assessing rent reviews under the 86 Act , there has been widespread resistance to recognising current market evidence by way of rents paid for Farm Business Tenancies. As a consequence, when assessing the rents under the 86 Act it means that there is a growing disconnect between the reviewed rent and that being paid in the market place.

The Rent Act 1977 does for residential rents, what the 86 Act does for agricultural ones in that it discounts for scarcity. Two key cases under the Rent Act Curtis V London Rent Assessment Committee and Spath Holme V The Chairman of Greater Manchester and Lancashire Rent Assessment Committee held that the best starting point in assessing a Fair Rent under the Rent Act was to consider the lettings of Assured Tenancies (i.e. lettings in the open market) in light of the diminishing market lettings under the Rent Act.

In 2012, the Scottish Courts determined the case of Morrison – Low V Paterson’s Executives. Amongst many other matters, it was determined that evidence of current lettings of comparable holdings was the primary evidence which should be used in assessing the reviewed rent.

On 11th June 2014, the court reinforced this view in the case of Capital Investment Corporation of Montreal Limited V Elliot. It held that:

  1. Open market evidence is the starting point in assessing the rent properly payable for a holding and this is the pre-eminent evidence to be considered.
  2. The full range of offers made for a comparable holding had to be considered, not simply that made by the successful bidder.
  3. Where there is intense competition, scarcity will distort the rents tendered and the Court needs to hypothesise, in light of this evidence, what a balanced rent should be.
  4. Any premium associated with the amenity value should be taken into account as this is a distinctly different factor to scarcity.

In a market of rising tenders and increasing competition for new lettings, if unchecked, the differential between new rents and those reviewed under the 86 Act will continue to widen.

With growing pressure from non-agricultural land uses such as development, environmental management, energy and conventional forestry, scarcity is one of the factors which is clearly driving up agricultural rents. This is a challenge for Landlords, Tenants and their Agents.

There has not been a new letting under the 86 Act for nearly 20 years and yet, whilst an important factor to consider, rent reviews on other 86 Act holdings (which are a reflection of the negotiating strength of those particular parties, not the value which the holding might achieve if let on the open market) often remain the only real ‘’evidence’’ used to reflect market activity. The reality of the situation is that the best evidence for the rent which should be paid for a holding is that at which comparable land is being let in the open market with appropriate adjustments made to reflect the rent review formula under the 86 Act.

The case law on the periphery of the 86 Act has established open market evidence as the pre-eminent factor to consider. It is highly likely that practitioners are going to start trying to use FBT evidence in 86 Act rent reviews. It is only a question of time (and I suspect a relatively short one) before this is tested in the English Courts, but in the meantime, last month’s case of Capital Investments V Elliot is likely to be jumped upon Landlord’s Agents in support of a long held belief that the appropriate starting point for establishing the rent properly payable by a prudent and willing tenant is the rent which is paid for comparable holdings in the open market.

Whether a Landlord or a Tenant, this is a subject which needs to be carefully considered when preparing for a rent review under the 86 Act.

Calum Gillhespy, Director, GSC Grays Richmond T: 01748 829210

Calum Gillhespy -GSC Grays

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