Agricultural rent reviews have been a source of controversy within the industry for many years. After a period of 15 years or so where there was little rent review activity in the agricultural tenanted sector between the early 1990s and the mid-2000s, a sharp spike in commodity prices during the course of 2007 led to a large number of rent review notices being served. Rent review notices must be served on at least a year’s notice against the next rent review date and accordingly, by the time the rent reviews became due under those notices in 2008, commodity prices had collapsed but the cost of inputs had soared.
The economic basis for serving the rent review notice from a landlord’s point of view was no longer as clear-cut as it might have been and a number of very difficult rent reviews ensued, including two very high profile Land Court cases conducted at vast expense. Difficult issues to resolve included whether or not fixed duration tenancies introduced after 2003 were suitable open market comparables for existing secure tenancies and how agricultural support payments should be dealt with.
As a result of unrest within the sector, particularly on the part of tenants, one of the things looked at by the Agricultural Holdings Legislation Review Group, established by Richard Lochhead in 2013, was a new system of determining rents. The Review Group suggested that it would be appropriate to move from a qualified open market test for fixing rents to one based on the productive capacity of the holding looking only at the fixed equipment supplied by the landlord. Enabling legislation was contained in the Land Reform (Scotland) Act 2016.
However, despite detailed research and testing on how such a productive capacity test might work, the difficulties have apparently proved insurmountable. It appears unlikely that a productive capacity test as originally envisaged by the Review Group and as sketched out in the 2016 Act will be introduced.
Bob McIntosh, the Tenant Farming Commissioner, is known to be unenthusiastic about the productive capacity test because of the practical difficulties of its introduction and how it would actually work in practice. He has been looking south of the border where rent reviews for agricultural tenancies are dealt with on the basis of a model that blends an open market test with a productive capacity test. Rent reviews in England and Wales do not appear to attract the controversy that they do in Scotland. The Scottish Government is looking again at how best to address the rent review process and has just concluded a survey of tenant farmers seeking their views.
Most of the controversy surrounding rent review relates to traditional agricultural tenancies regulated by the Agricultural Holdings (Scotland) Act 1991. There is no provision for rent review in a short limited duration tenancy (of up to five years) and there has been substantial freedom of contract in respect of rent review provisions for limited duration tenancies and modern limited duration tenancies. The only restrictions in such tenancies are that the rent review must be capable of being initiated by both the landlord and the tenant and that the rent review formula must allow a decrease as well as an increase in rent.
It seems right that agricultural rents should reflect the health or otherwise of the relevant agricultural sector. It is obviously correct that the tenant’s improvements should be left out of account when assessing the rent. It also seems apparent that an open market rent review test for secure traditional tenancies doesn’t seem to be appropriate where there is no open market in such tenancies and there hasn’t been for the last 40 or 50 years.
On the other hand, where there is open market evidence of the range of rents offered for modern limited duration tenancies, it doesn’t seem reasonable to ignore that evidence, properly weighted. The productive capacity of the holding that is being let by the landlord should also, it seems to me, play a part in the formula.
It’s not surprising, in light of all of the above, that it is difficult to come up with a rent review formula that properly takes into account all of the relevant factors in relation to fixing an agricultural rent, particularly for a secure agricultural tenancy. However, it is obvious that the Scottish Government does see a need to make legislative changes in this area of law and the government’s deliberations after the survey findings have been analysed are awaited with interest.
For more information please contact Hamish Lean, Partner and Head of Rural Property and Business, or your usual Shepherd and Wedderburn contact. This article was first published in The Press and Journal.