Andrew Entwistle, Partner and Head of Valuations, delves into the world of rent reviews, looking at what could change in this time of uncertainty.
Without mentioning the dreaded “B” word, it’s evident that uncertainty is more prevalent in farming than it has been for many years. It’s some time since agricultural rents have actually been reduced at formal rent reviews and the prospect of formal rent reductions now seem to be less distant than before.
There are two main types of tenancy for letting agricultural land. Theses tenancies are known as the “old style” Agricultural Holdings Act tenancies (AHA 86), and any tenancies created after the 1st September 1995; they are known as Farm Business Tenancies (FBTs) under the Agricultural Tenancies Act 1995 (ATA 1995). Both Acts allow rents to be increased or decreased.
The AHA 86 statute prescribes that a rent is based on a number of factors; the terms of the tenancy, character and situation, productive capacity and related earning capacity, as well as current level of rents for comparable lettings. These factors are known as the ‘rent formula’. Clearly, the key elements of productive capacity and related earning capacity in a potential world with reduced subsidies and increase export tariffs could lead to a reduction in rent.
When FBT’s were brought in, they offered more freedom of contract between Landlords and Tenants on the terms of the tenancy, but with some statutory safeguards. For example, an FBT agreement generally cannot prescribe that a rent can be reviewed upwards only. Usually, once a rent is fixed under a AHA 86 or FBT, there cannot be any rent reviews for another three years.
So, in a period of extreme uncertainty, what could change? Certainly the rent review process may become much more tactical. Perhaps issuing a rent review notice a year in advance may become less common, which may result in a last minute horse deal before the matter has to be referred to arbitration (which was prevalently a landlord activity). Once a notice (by either a landlord or tenant) has been issued, either party can instigate a rent review. Some landlords that have already served notices may be agreeing rent “stand ons” to secure rental certainty for the next three years. Others may be sitting quietly ‘on the fence’ in the hope that the tenant may not propose a new rent figure or renewing the rent review notice at the last minute.
In formulating strategies for rent reviews, the first item to look at is the term date within the tenancy. This dictates the timescale for serving notices and forward planning is essential. However, it still does not get around the fact that in most cases you a dealing with a set of circumstances a year in advance. With this period of extreme uncertainty on the horizon it is difficult to predict what the rent climate will be.
However, there are opportunities to mitigate the uncertainty. Landlord and tenants often forget rent reviews can be carried out by agreement at any time, outside the statutory time frame, if it suits the parties. Accordingly, there may be an opportunity to perhaps fix a rent for something in return such as a succession or some capital investment, however, anything that is agreed must be considered in terms of the statutory background to make sure it is not annulled or creates unintended consequences.
The last downward rent review trend happened around the 1980’s where decreases were tenant led; it’s not inconceivable that this trend could reoccur, but a trend of increasing rent cannot be ruled out either. In the interim, opportunities remain for both Landlords and Tenants to make arrangements between themselves to make their businesses and income more resilient to any change in the future.