6 September 1996

Unsustainable rents put high pressure on tenants

By Philip Clarke

SOARING rents for farm business tenancies (FBTs) are putting undue pressure on many traditional succession or lifetime tenancies.

Too many farmers are agreeing to rises on the back of FBT rents which may be unsustainable, say farm business consultants Andersons. As such, they are doing themselves and their neighbours a disservice.

The 1984 Agricultural Holdings Act says that rents should take into account "all relevant factors", including the terms of the tenancy, the character of the holding, its earning capacity and the level of rents for comparable lettings.

"It is this last point that gives us cause for concern," says Mike Greetham of Andersons. He cites three reasons why FBTs are not comparable:

lDifferences in level of security.

lHigh incidence of "marriage value" for plots close to established holdings.

lMore frequent use of "key money" to secure land under FBTs.

With grain markets less buoyant and cuts in area aid on the table in Brussels, farmers should pay closer attention to the future earnings capacity when negotiating rents, says Mr Greetham. But they do not always have the financial security to challenge a landlord looking for an unacceptable rent.

For example, a producer may have a tenancy on 50 acres of off-lying land and face a 75% rent rise to £70/acre, with the landlords agent citing FBT rents of double this as justification for the rise. This will add £1500 a year to the rent bill. But going to arbitration could cost him another £5000, without any guarantee of a cut. More likely than not he will accept the increase. But this could then be used as a comparable rent for a neighbouring farm. For example, a 500-acre unit with three houses could find itself facing a similar rise to £85/acre, described by the landlords agent as "reasonable" against bare land at £70/acre.

According to Mr Greetham, these sort of rents cannot be justified economically. "Gross margins on cereal farms are currently around £300/acre, while fixed costs average £145/acre. Given the likely downturn in income and increase in costs, next year these figures could be £280 and £150, respectively."

This would leave £130 to share between the landlord and tenant. A rent of £65/acre would offer a fairer split. &#42

Earning capacity is the key to rent reviews, says Mike Greetham.