Rent Reviews: an opportunity for both landlord and tenant
Those holdings that saw their rents reviewed in 2008 following the spike in commodity prices are likely to be facing the same process again this year with the value of feed wheat having doubled over the course of the last year. Prior to 2008, most farms will not have experienced a review for about 10 years however, as the agricultural industry grows ever more volatile the subject of rent reviews becomes increasingly topical.
However, farmers within the arable sector are experiencing their variable costs rising faster than inflation. With the Consumer Prices Index at 4% and the Retail Prices Index at 5.1%, Anglia Farmers put the Agricultural Inflation Index at 8.4%. Compare this with the RPI for food at just 3.6% it suggests that the increased production costs are not passing through to the consumer.
Agflation, as it has become known within the industry has been driven by increases in the cost of all inputs including fuel, fertiliser and seed. For example, Red Diesel prices averaged 63.81 ppl in February, a rise of 1.37 ppl on January. Whilst the impact of higher variable costs has been tempered somewhat on arable holdings by the increase in commodity prices, on dairy and livestock farms it is likely that the higher input costs will outweigh any modest improvements in the price of milk and red meat.
As far as tenancies governed by the Agricultural Holdings Act 1986 are concerned, the basis of rent review is set out as a very specific formula based largely upon four main points:
• terms of the tenancy – i.e. user clause, repairing obligations, farmhouse residency clause
• character and situation of the holding – i.e. area, topography, soil type, dwellings
• productive and related earning capacity of the holding – i.e. crop rotation, yields, soil types, drainage
• comparable rents – i.e. rents settled on similar holdings
Whilst it was reported that average rents increased by 20% in 2008, it is important to remember that every holding is different and as such each review needs to be negotiated individually.
Comparable rents are an important consideration however; caution needs to be exercised by each party when providing comparables as evidence. It is important to consider the circumstances behind the settled rent – was it settled at a higher level in return for a landlords consent for example? Alternatively, a tenant may promote a favourable comparable but the reality may be that the tenant of that particular holding has provided the fixed equipment and buildings himself – Tenant Improvements are to be disregarded from the assessment. The provision of landlords fixed equipment is essential to bear in mind when assessing the rent. For example the provision of grain drying and storage or cattle/sheep winter housing can effect the productive capacity of the holding.
Whilst a rent review is undoubtedly a topic most tenant farmers would prefer to avoid, it does provide tenants with a fantastic opportunity to sit down around the kitchen table with their landlord and the landlord’s agent and promote a holistic discussion about the holding.
If a farmer is looking to obtain landlords consent to promote a renewables project or undertake a diversification enterprise operated from the farm, it is likely that the tenant would be more willing to pay a higher rent to secure that consent.
Similarly, should the landlord wish to enter into negotiations to revise the terms of the tenancy thereby promoting a re-grant of the existing tenancy albeit on slightly different terms to benefit from 100% inheritance tax relief, the landlord may be willing to overlook the current rent review in return for the tenant’s cooperation and agreement.
With commodity prices forecast to remain strong over the next two seasons, rent reviews are likely to become an increasingly common topic for farmers to get their heads around. Negotiating early can be beneficial to both parties and some of the worry, stress and bad feeling cold possibly be avoided.
Whilst the prospect of a rent review may appear daunting, there is the opportunity to promote a mutually beneficial conclusion and not just an excuse for Landlord and Tenant to declare open warfare.