What to consider before you agree your rent
If you are a tenant of an agricultural holding, you may already have a notice served upon you for a rent review and be awaiting your landlord approaching you or may be expecting a notice to arrive for a rent review in 2018.
There is a lot to consider before you finalise agreement to a rent review proposal. This article assumes the notice served by the other party to review the rent is valid and the terms of the tenancy checked to see if there is a mechanism or trigger to review the rent at the proposed date.
First, how the rent review is assessed depends upon the legislation your tenancy agreement falls under.
Agricultural tenancies fall under two different acts. Either the Agricultural Holdings Act or the Agricultural Tenancies Act. The formulas and basis of assessing rent are different in each act. Under the Agricultural Tenancies Act that governs Farm Business Tenancies the statutory basis is that the rent should reflect market rent with the focus being on assessing rent using the current levels of rent for comparable lettings as the primary evidence. Other procedures and formulas can however be adopted for the assessment of rent as the parties are free to contract to the terms they wish. Under the Agricultural Holdings Act comparable market evidence is to be taken into account however the key difference to the assessment of rent under the Agricultural Holdings Act to other agricultural tenancies is the fact that both parties need to be assumed to be prudent so it can be supposed that the landlord for example might discount extravagant rent bids and the tenant whilst not overly cautious would be prudent to the risks and returns from the farm.
In assessing rent on agricultural holdings, you are to disregard various matters. These include the following:
- Tenant’s occupation
When assessing rent, consideration is to be given to a hypothetical tenant rather than the actual tenant who is in occupation. This means matters personal to the tenant, for example a contract with a supermarket or a planning permission limited to the tenant, should be disregarded.
- Tenant’s improvements and fixtures
Any improvements made or provision of fixed equipment by the tenant should be disregarded. This may for example include a building provided by the tenant at their cost, with or without consent. The reason being that the landlord should not be benefiting from a rental return on a part of the farm to which they have made no investment or have any obligation to invest in.
- Tenant’s dilapidations
The rent should not be lower by reason of the tenant dilapidating or damaging the holding. Conversely where the landlord has not fulfilled their obligations and as a consequence the holding has deteriorated this can be taken into account in the assessment of rent and might be expected to lead to a lower rent.
Another factor to consider when faced with a rent review is any non-agricultural use on the farm and in particular where that use does not have consent by the landlord. Most agricultural tenancies restrict the tenant to using the holding wholly for agricultural use. By way of example, let’s assume a tenant diversified several years ago by operating a bed and breakfast from the farmhouse and had no consent from the landlord to use the farm for non-agricultural use. In diversifying, let’s assume the tenant at their cost made improvements to the farmhouse to be able to operate a bed and breakfast and that without those improvements the farmhouse would not be compliant with the legal regulations and standards for a bed and breakfast to be operated. Finally let’s assume that the landlord was fully aware that the bed and breakfast was in operation and they had not ever asked the tenant to stop the use. In such an instance there is no written consent to use the holding for non-agricultural use and the landlord would not necessarily be able to argue there had been a variation of the terms of the tenancy as a result of them never preventing the bed and breakfast. Of further consideration is that the bed and breakfast could only be operated as a result of the tenant’s improvements to the farmhouse which are required to be disregarded for the purpose of the rent review. In such an instance the likelihood is that the tenant would have a strong argument that the value of the bed and breakfast use could not be brought into the assessment of rent.
Finally many of us will be giving consideration to the likely implications of Brexit on rent. Brexit is certainly a relevant factor that can be taken into account at a rent review for several reasons. EU farm subsidies currently make up to around 50-60% of UK farm income and it is not yet clear on what levels of support the UK Government will be willing to provide beyond this, or whether it will target subsidies in a different way. There is uncertainty about the level of funding for agri-environment schemes. Brexit will have an effect on our ability to access the single market, trade relations, labour rules and exchange rates. All of these are relevant factors especially when considering budgets for the assessment of rent under the Agricultural Holdings Act 1986. The practical issue with carrying out rent reviews in the early stages of coming out of the EU will be the time it takes for market perceptions and evidence to become clear to inform rent review negotiations. At this stage, careful consideration should be given to the profitability and risk going forward and how this should be taken into account in the assessment of rent.
As with all tenancy matters, there are plenty of factors to consider when faced with a rent review and before an agreement is reached on the rent. Analysing all of the relevant factors is important and there should be certainly no obligation to instantly accept a rental figure proposed by the other side. A tenant should also be aware that they also have the right to serve a notice and instigate a rent review and also use a notice served by their landlord to proceed with a rent review. This is especially important where there are grounds for a rent reduction.
Jonathan Wallis is a Partner at the Wolsingham office of George F White and specialises in providing advice to clients on landlord and tenant matters, valuation and compensation and compulsory purchase matters. Jonathan is also a Tenant Farmers Association Recommended Professional.