With Michaelmas fast approaching, negotiations between landlords and tenants are likely to be well underway in respect to new rents to apply from autumn this year.
The default provisions for both the old style Agricultural Holdings Act tenancies and Farm Business Tenancies is for rent reviews to take place on a three year cycle subject to the service of 12 months’ notice by either party ending on the review date.
The Tenant Farmers Association have been quick to point out that “output prices are at best no better and at worst lower than the position of three years ago whilst the cost side of the equation has shown considerable increase” and that as a result “a properly conducted farm rent review three years ago will have set a level of rent which should not see an increase this year.”
This argument has some credence in respect to rent reviews under the Agricultural Holdings Act as the formula under this legislation dictates that the valuer should have regard to the productive capacity of the holding and its related earning capacity, commonly assessed using a budget which will obviously be affected by output prices.
However, the legislation governing Farm Business Tenancies imposes no such requirement. The parties are free to agree any rent review formula they like subject to certain conditions, but in the absence of such an agreement the statutory formula provides that the rent should be “the rent at which the holding might reasonably be expected to be let on the open market by a willing landlord to a willing tenant taking into account all relevant factors.”
Whilst many will argue that the holding’s economic potential is a “relevant factor” this is expressly an open market formula and good comparable evidence of open market lettings will therefore be preferable to an approach based on constructed budgets.
The level of rent being tendered for agricultural holdings is driven by supply and demand. Demand has increased in recent years partly because land is not just required for food production any more but a host of other uses including renewable projects such as anaerobic digesters which in some cases are supporting rents of over £300 per acre. Farmers in the proximity of AD plants, looking for land to grow feed for livestock, who cannot compete with the level of rent which can be offered by those growing crops as feedstocks for the AD plants are having to look for land further afield thus increasing the demand in other areas too.
We have yet to see evidence of the recent drop in commodity prices having a knock on effect on the rents being tendered for agricultural holdings. This will mean that FBT landlords who have not reviewed the rent since 2011 are likely to be setting their stall out for significant rent increases this autumn which will come as a real blow to tenants who despite the good harvest this year are likely have their margins squeezed by the fall in output prices.
Our advice to both parties would be to commence negotiations as early as possible with a view to reaching an agreement well before the review date. If the rent is not agreed by the review date usually an arbitrator will need to be appointed in order for negotiations to continue. Once one gets into the arbitration procedure things start to get expensive and the party with the smaller budget for professional fees unsatisfactorily may be forced to settle on poor terms not because of the weakness of their case but because they simply cannot afford to continue.
