Many tenants and their landlords will not have discussed a rent review for up to 10 years.
The parlous state of farming meant there was little chance of increasing rents. With rising commodity prices that has now changed and landlords, understandably, are looking to improve the returns from their tenanted holdings.
Rent reviews, however, are not a simple matter and the process varies widely between traditional Agricultural Holdings Act 86 and Agricultural Tenancies Act 95 (Farm Business Tenancies) agreements. Understanding the rent review process is a vital part of negotiating a new rent, according to George Dunn of the Tenant Farmers’ Association.
Here he explains the difference.
TENANCIES UNDER THE 1986 AGRICULTURAL HOLDINGS ACT
The rent payable is defined as the rent at which the holding might reasonably be expected to be let by a prudent and willing landlord to a prudent and willing tenant, who is competently farming a system of agriculture suitable for the holding, taking into account all relevant factors including, in every case, the following:
1. The terms of the tenancy
2. The character and situation of the holding
3. The productive capacity of the holding and its related earning capacity
4. The current level of rents for comparable lettings
- The rental value of any tenants’ improvements must be disregarded when setting the rent.
- The rent review process begins through a trigger notice known as a Section 12 Notice which can be served either by the landlord or the tenant on the other party at least 12 months and no more than 24 months before the date of the rent review.
- The Section 12 Notice is a formal notice which requires the rent to be settled by arbitration. However, the rent does not necessarily have to be referred to an arbitrator if the parties agree the level of rent prior to the rent review date.
- Once served a Section 12 Notice cannot be withdrawn unilaterally. Either side can use it to make a case for an increase or reduction in the rent.
- Once the notice has been served, as best as possible, a budget should be prepared looking ahead three years based on what the hypothetical, average but prudent and willing tenant would achieve.
- It will then be important to gather comparable evidence of rents being paid on holdings on the same estate or elsewhere which are similar to yours including the terms under which they are let. Comparable rents are also available from the TFA’s rent databank available to members on line at the TFA’s web site www.tfa.org.uk or through contact with TFA Head Office.
- Following negotiations any rent change agreed will be fixed for at least the next three years. Agreed standstills will only apply for one year so long as either side has served a valid Section 12 Notice for a further review in the following year. Only standstills settled by arbitration will be binding for three years.
- If the rent cannot be agreed then it is open to either party to apply to the Royal Institution of Chartered Surveyors (RICS) for the appointment of an arbitrator. An arbitrator can also be agreed between the parties. Whichever route is chosen, the arbitrator must be applied for before the rent review date.
- The arbitrator will conduct the arbitration under the rules set out in the Arbitration Act 1996 but will follow criteria set out in the 1986 Act.
- The parties may also decide to use an alternative disputes resolution procedure such as an independent expert or mediation. Care must be taken with these routes as they are often not legally binding on the parties.
- It is vitally important that tenants take professional advice.
- The rent review can also be a good time to talk about other aspects of the farm with your landlord including permission for improvements, subletting of cottages, possible diversification or entry into Government schemes and succession.
TENANCIES UNDER THE 1995 AGRICULTURAL TENANCIES ACT
- Tenancies under the 1995 Agricultural Tenancies Act are known as Farm Business Tenancies (FBTs) and do not have the same statutory formula as those under the 1986 Act.
- In the absence of an alternative mechanism set out in the tenancy agreement, the default position under the 1995 Act is that the rent properly payable is 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 including the terms of the tenancy.
- Tenants’ improvements are to be disregarded in much the same way as under the 1986 Act.
- The rent review process begins through a trigger notice known in this case as a Section 10 Notice which must be served at least 12 months and no longer than 24 months before the intended review date.
- Comparable lettings under the 1995 are more important in the process of the rent review than under the 1986 Act. Whereas in the 1986 Act rents charged on comparable lettings were only one of four main factors to take into account in finally establishing the rent, it is comparable lettings which provide the best evidence of open market rents available under the 1995 Act. However, it will still be the case that no two farms are alike and the skill will be for the professionals to find the similarities and differences between comparable lettings and subject holdings.
- Other formulas which deviate from the statutory default position can be used so long as they do not preclude the rent from falling. Upwards only rent review clauses are illegal.
- As well as the ban on upwards only rent reviews, on FBTs prior to 19 October 2006 any alternative rent review formula had to be by reference to a formula which could be applied without having to use subjective opinion.
- Since 19 October 2006, subject to the continuing ban on upwards only rent reviews, FBT rent formulas can now be drawn up on any basis. It will now be possible, for example, to include a 1986 Act style rent review procedure in an FBT.
- Following negotiations any rent increase or reduction agreed will be fixed for the next three years (or for the period specified in the tenancy agreement). Agreed standstills will only apply for one year so long as either side has served a valid Section 10 Notice for a further review in the following year. Only standstills settled by arbitration will be binding for three years.
- The arbitration procedures are the same as those which apply under the 1986 Act except that arbitrators must take account of any formula contained in the lease so long as it does not preclude a reduction in the rent.
- If the FBT specifically refers to the rent being settled by a route other than arbitration then only that route can be followed – arbitration will not be available.