Every year as we approach the traditional farm rent term dates of Whitsunday (May) and Martinmas (November), tension in the agricultural letting market tends to rise to the surface. The age-old issue always emerges that the cost of reviewing the rent rarely justifies the increase in rent, thus creating jeopardy for the parties on both sides. For landlords, they may be faced with rents that have been sitting well below market for some years, yet the cost of realigning them is potentially significant, if a Land Court reference is required. For tenants, while they have a strong card to play by simply refusing to agree, if they are ultimately faced with a potential Land Court reference by a landlord who feels backed into a corner, conversely the cost and risk to the tenant is high.
I remember some years ago, in the early stages of my career as an agricultural lawyer, how rents seemed to be agreed much more easily. A phone call and some “news”, a pound or so on the rent per acre, some fencing material, a pheasant at Christmas in one direction and a bag of tatties in the other, and life went on. Of course, the world has moved on, and we could debate whether for the better or not, but everyone is much more focused on rights and obligations than before.
In many cases even today rent reviews are agreed easily, but not always. There have been calls this year from some quarters for the rent review process to be put on hold for another year due to COVID-19. This, it is argued, is to recognise the disruption in the markets and the practicalities of inspections and so on. However, for parties where rent is out of line with the market, it is a big ask for them to postpone the rent correction for a further year. Bearing in mind that rents are set as at the rent review date, the current rent will be at least 3 years old, and possibly more.
It seems to me that at any rent review date there will always be a good reason not to do it; if it’s not COVID-19, it’s Brexit, CAP reform, or global markets – and so the list continues. What is missing, it seems, is commercial imagination on how rents are set. If it is accepted that setting rent is not about one party trying to ambush the other, but about setting a reasonable allocation of cost and return for the land between the tenant’s business and landlord’s business, it would seem appropriate to consider what factors affect the tenant’s and landlord’s businesses, and perhaps agree that if those factors change between now and the next rent review, then so should the rent adjust to reflect that. Such a flexible rent could relate to whatever indices are relevant to the circumstances of the parties. It might be interest rates, or exchange rates, or commodity prices depending on the business in question – that is a matter of commercial negotiation.
The Land Reform (Scotland) Act 2016 introduced a new rent review mechanism for fully secured agricultural tenancies, but it is not yet fully in force, largely because of difficulties in making it work. It relies on productive capacity, but precisely how to operate that may potentially throw up more issues than it solves. Perhaps what is needed instead is a change in culture to an approach which is more flexible, more commercial and if required, that’s where the legislative focus should be. That would be a much more collaborative way to drive the agricultural industry forward.
Short Limited Duration Tenancies and Modern Limited Duration Tenancies already have considerable flexibility to agree rent terms, although the idea of pegging a rent to an index or commodity price is still not widely used. It seems to me that by taking such a flexible approach, it’s possible for parties to reach agreement more easily, by agreeing that whichever party proves to be right about what the future has in store, the rent will reflect that, and thus have an element of fairness about it. Whilst it isn’t suitable for every case, it is widely used in other sectors; wind farms and aggregates being two positive examples. Change is often born out of adversity, so perhaps the new normal will bring about some new thinking in agricultural rents too.
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