Rent review notices: qualifications to the current open market test

Hamish Lean discusses the different factors that can impact on rent reviews for agricultural tenants. 

1st October 2019

I have been quite surprised recently to have a number of agricultural tenants approach me for advice about rent review notices served against the 28th November this year where the landlords concerned are actively pursuing an upwards rent review. 

The rent review notices triggering the reviews were all served prior to the 28th November last year. 

At the moment, a rent review of a secure traditional agricultural tenancy is conducted via a qualified open market test. 

This system will change when a test based on the productive capacity of the unit is introduced but that is not going to be in place until at least next year.

Under the current open market test, the rent to be fixed is the rent at which the unit might be expected to be let on the open market by a willing landlord to a willing tenant. 

There are a number of important qualifications to this test however.  All of the improvements carried out on the unit by the tenant have to be disregarded.

Also, and crucially, there have to be taken into account the current economic conditions in the relevant sector of agriculture.  

When trying to establish the likely open market rent, rents fixed for holdings that are broadly comparable to the unit under review are taken into account. 

There are no 1991 Act tenancies being let on the open market and accordingly, it is perfectly legitimate to look at fixed duration tenancies and the rents that have been offered for them on the open market. 

However, they are in scarce supply and accordingly, the rents that are offered are higher than would normally be expected because of the distortion caused by scarcity. 

This distorting effect has to be identified and removed from the rental calculation. 

It is also relevant to look at sitting tenant rents where rents have been reviewed under existing tenancies.

Often, on a larger estate, rents paid by other sitting tenants will be used as comparators to the holding under review.  

As mentioned above, the rent review test must take into account the current economic conditions in the relevant sector of agriculture.

Given the very great risks that surround the prospects of a no deal Brexit, it seems to me that this should have a strongly depressing effect on rental values. 

Arguably, in some cases, rent reductions might well be appropriate. 

However, it also seems to me that there is a strong argument that there is no upward pressure on rents because of the current circumstances in which the industry finds itself and at the very least rents should stand still.

Tenants should remember that if there is a rent increase as at 28th November this year it is fixed for a 3-year period until the 28th November 2022, regardless of what might happen to the farming industry in the meantime.