Volatile markets complicate rent review process

Many Agricultural Holdings Act rents have not been reviewed for 10 years or so, and the improved outlook for farming last year encouraged landlords to serve notices to review rents this year.

But the current market volatility – for inputs as well as commodity prices – means the economic background is different from when many notices were served and the rent review must take “all relevant factors” into account (see below) and not be based solely on today’s market.

The first step is to review the type of farming system, the resources being supplied by each party, and the changes that might have been made to the terms of tenancy since its commencement. These factors are also relevant to a review of Farm Business Tenancy rents.

Reviews should seek to identify what a hypothetical, prudent and willing incoming tenant would offer to rent the holding, which, in turn, requires an understanding of where markets are likely to go over the next three years. A budget will then identify the reasonable expectation of the holding’s “earning capacity”. That can be compared with evidence of other lettings in the locality.

These operations by themselves create difficulty – the high volatility of markets makes it difficult for valuers to agree where these operations are going, and the absence of rent reviews for many years that comparable evidence is slim.

Claas tractor

Volatile commodity markets have complicated the rent review process this autumn

There are other important considerations, too. The terms of tenancy will vary from one holding to another. You must consider the rights and obligations of each party, particularly with regard to repair obligations, sub-letting opportunities, type of farming required, and so on.

Next, consider the character and situation of the holding, including factors such as soil quality, buildings and dwellings, the compactness of the unit, the provision of fixed equipment by the respective parties and the implications of special schemes (such as Environmental Stewardship).

With residential values having risen substantially in past years, the appropriate treatment of dwellings is particularly sensitive, especially where these are greater in number, or of higher specification than are normally warranted for the size of farm concerned.

There are various factors to be disregarded, including tenant’s improvements – and there are various ways in which to discount for the effect of those improvements. Similarly, tenant’s lack of repair is to be disregarded for this purpose.

Different needs

What is often forgotten is that the two parties are seeking very different things. The landlord is fundamentally an investor, looking for a fair return from his investment, all things considered. The tenant is a business operator, looking to create profit from his hard work and his provision of working capital.

The two parties are reliant on each other for their joint benefit. It is important that one does not suffer at the expense of the other, which would otherwise turn a beneficial symbiosis into a parasitic relationship, ultimately favouring neither party.

The rent review provides an excellent opportunity for both parties to review their respective positions, agree on the best long-term strategy for both the holding and the individuals involved, and to agree the fair split of profits between the parties. As such, the review process should consider more than just the rent concerned. Is there investment that should be made by one side or the other? Are there surplus assets that should be sub-let, or surrendered? Are there changes that should be made to improve the situation – for example, a consent to sub-let, or a change of policy that might avoid investment in fixed equipment, or the release of a surplus cottage?

The phrase “all relevant factors” is wide-ranging. It means you cannot ignore the single payment, which would otherwise not be included within the holding’s “earning capacity”, because this is a decoupled payment not linked to production. It requires ancillary factors to be taken into account, such as whether there is a marriage value between this and another holding. It requires the valuer to identify whether there are special opportunities that could be developed, such as a farm shop or tourism venture.

What is certain is that there is no standard answer as to what the rent should be. Every holding is different, and every situation must be assessed according to its particular circumstances. That is where the skill of the valuer comes into play.

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