Many landlords are using increased commodity prices as an opportunity to review their tenants’ rents.

Increasing costs, however, means the case for an increase may not be as clear cut as some might thing, says George Dunn, president of the Tenant Farmers Association.

There might even be scope to reduce some rents in the livestock sector, says Mr Dunn.

Here he explains why.

Notices

It is no surprise that following improvements in some commodity prices landlords and their agents have been keen to trigger rent reviews with their farm tenants.

The first raft of landlords’ notices in the current campaign came in the spring of 2007 but significantly more were served last autumn and again this spring.

The expectation is that this trend will continue into the autumn so if you are a tenant, particularly in the arable and dairy sectors, and you haven’t yet received a rent review notice, the chances are that you will – so be prepared.

Prior to this year, rent reviews in recent years have been a relatively rare occurrence. This is evidenced by the minutes of the Tenant Farmers Association’s (TFA) regular meetings with its recommended professionals around the country where against the agenda item “Rent Reviews” the phrase “very quiet” was often recorded.

This of course in turn followed a period of high activity in the rental market which saw farm rents on holdings fall up to two or three times from their peak levels of 1996. Landlords are very much in the market to recoup some or all of those reductions in rent.

Inflation

Whilst prices in nominal terms in the arable and dairy sectors may have begun to return to the levels last seen in the mid 1990’s, in real terms they are very much lower.

If measured against the inflation experienced by farmers in their input costs then today’s farm gate prices are lower still.

Taking into account the increased costs already experienced by dairy farmers in power, feed, replacement animals and labour, then into the medium term, forecast margins look to be remaining fairly flat.

That is before we factor in the extra costs of compliance with the new regulations for Nitrate Vulnerable Zones expected soon. The TFA cannot see that there is any scope for average dairy farm rents to change.

Arable farmers have seen uplifts in cereal and oilseeds prices. However, in 2007 most farmers had sold significant amounts of their crop forward at prices well below the spot prices reported.

Cost increases

Forward selling is exactly what you would expect a prudent tenant to do to minimise risk.

The loss of profitability in the sugar crop also hit many farmers in the east of the country. Arable farmers too have experienced increases in the costs of fuel, power, labour and, most noticeably fertiliser.

At around £330 to £350/t, if you can get it, fertiliser costs alone are going to make a significant dent in arable margins for the foreseeable future.

However, whilst the TFA believes that there will be some upward movement in average arable rents, the increases will be nowhere near some of the inflated figures that landlords’ agents have been quoting.

The red and white meat sectors and farms in the uplands are still, unfortunately in the doldrums in terms of profitability. However, it does appear that landlords with tenants in these sectors have, by and large, avoided serving rent review notices and that must be the correct decision at this time.

Rent prices

Indeed, from the TFA’s perspective there could still be scope for rents to fall in these sectors.

Of course, one popular landlord’s agent’s ploy is the attempt to use rents in the private rented sector for residential tenancies to argue for farm rent increases due to the value of farmhouses.

This is one of those tactics that will have to be countered. The TFA is well aware that rents on residential tenancies are strong and in rural areas tend to be supported by commuters or those with second homes earning urban incomes.

This is very different to the situation experienced by farm tenants. The houses which they live in are part of a complete farm unit let under a different legislative code and often with very different repairing obligations.

It’s like comparing chalk and cheese and the TFA considers it sharp practice when landlords agents attempt to split out the value of the farmhouse in rental negotiations and inflate it on the basis of the value of residential tenancies.

Procedure

The TFA has been active in ensuring that farm tenants are up to speed with the procedures involved in rent reviews.

We geared our spring meetings road show towards rental issues and we have made our long-running rent databank available to TFA members on the TFA’s website.

We have also been inundated with insurance claims from tenants who have received rent review notices under our ground-breaking and market-leading Farm Business Protector Insurance that can cover the cost of rent review arbitrations.

That is exactly what the policy is there for and the TFA would advise any tenant farmer who has not yet received a rent review notice to consider taking out the policy now. Time and time again we hear reports from our Recommended Professionals of the major benefit of the insurance in rent and other tenancy negotiations.