Advice on farm rent issues in cashflow squeeze
© Tim Scrivener Tenants are advised to reassess cashflow requirements and identify potential pinch points over the coming months to avoid issues when rent is due.
While the Tenant Farmers Association (TFA) is not seeing more members than normal reporting issues with paying rent, the financial pressure is high, says adviser and rural surveyor Caroline Squire.
However, members currently going through rent reviews are particularly worried about future business viability, says Caroline.
See also: Farm cashflow advice as pressure mounts
“We’ve been dealing with a lot of rent reviews this autumn and many tenants say that if landlords get what they’re asking for, it will force them out of business.
“With Agricultural Holdings Act [AHA] rent reviews, landlords are supposed to back up proposals with a budget, but often the figures used are so unrealistic that tenants feel it is unachievable and they won’t be able to pay the rent.”
The issue is even more pronounced with farm business tenancies (FBTs), where rents are driven less by the farm’s earning potential, and more by going market rates, she adds.
“Market rents for new lettings have stayed artificially high because demand is outstripping supply; some landlords are using these high-tender rents as comparables to increase the rent on existing tenancies.
“There is quite a lot of worry from tenants as to whether they can afford rents if they are increased.”
The combination of falling Basic Payment Scheme (BPS) payments, finance costs, and a second consecutive below-par harvest is stoking significant cashflow pressure, particularly, but not exclusively, on those reliant on combinable crop income without diversification, says Brown & Co partner Paul White.
“While many farms got through the higher-cost year of 2023 on the back of a good 2022 harvest, for some, that cash is running out.
“After another below-average harvest in 2024, the question is how much cash remains.”
The pressure is compounded where businesses have large borrowings, or are overcommitted on hire purchase agreements.
“HP payments have typically been structured around the winter months when cashflow is usually greater, and there has traditionally been the added BPS income at the end of the year.
“But, the delinked BPS has already been paid, so there won’t be anything coming in December, unless it’s from an old stewardship agreement, or a Sustainable Farming Incentive (SFI) scheme that started around that date.”
Budgeting and cashflow
Farmers concerned about their finances are advised to act early, assess and revise cashflow requirements and identify pinch points, such as around spring rental payment dates.
Mark Webb, of agent WebbPaton, suggests the real pinch point for cashflow on cereal farms is likely to come next spring and early summer, when there will be less crop available to sell to cover any outgoings.
“There could also be some large tax bills at the start of next year based on the good year in 2022, which puts further pressure on cashflow.
Without BPS, the timing of crop sales to cover large outgoings gains greater emphasis, and lenders will need a clear plan in good time where increased borrowing is needed.
Any business that is constantly struggling may need to consider bigger changes to improve longer-term viability, such as changing the mix of enterprises, using contractors, diversification, and so on, Mark suggests.
Act early on rent pressure
Those concerned about their ability to pay the rent should have an early discussion with their landlord to try and agree a way forward, advises rural surveyor Caroline Squire.
“It’s always best to be open and honest.” There may be scope for the tenant to serve a rent review notice for a decrease, although this can only be done every three years under law, so may not be an option, she says.
“Even if that is an option, you can only argue for a decrease if it is backed up with good budgeting and comparable evidence – in the case of an AHA – and with an FBT, good comparable evidence.”
The success of negotiations depends on the openness, understanding and benevolence of the landlord and their agent.
In some cases, there may be scope to agree some kind of rent abatement, or realistic payment plan, while in others there may be no room for manoeuvre.
Landlord action
Should the worst happen, and a tenant is unable to pay the rent, the action a landlord in England and Wales may take varies depending on whether it is an AHA tenancy or FBT, explains Ellie Allwood, divisional partner in Brown & Co’s land agency team.
“Fundamentally, if you can’t pay the rent, the landlord can take action. Whether they do or not may depend on the landlord and tenant relationship, or what the landlord thinks the outcome will be.”
Rather than take action, landlords may instead allow an abatement, reducing or temporarily suspending rent for a set period due to special circumstances (such as during periods of flooding), or just allowing the tenant more time to pay.
But if they do take action, this will depend on the type of tenancy.
For an AHA, this involves serving a notice to pay. Key to this notice is that tenants have only two months to pay the amount due in full, she says.
“Once tenants have been served that notice, there is no leeway in the time for the rent to be paid, and it cannot be challenged.
“It’s not possible to offset or withhold any money due to the landlord, such as for outstanding farm repairs, or compensation. You’re in a very precarious situation if you do try doing that.”
Providing the full amount is paid within this period, no further action can be taken. If payment is not made, the landlord has the right to serve a notice to quit.
“There is virtually nothing the tenant can do about a valid notice to quit, even if they then pay the rent due. It’s an irreversible notice, and the tenant still has to pay the rent, otherwise can be sued for it.”
There must be at least a 12-month notice period in the notice to quit to terminate the tenancy at the end of a tenancy year.
Technically, it may be possible to challenge this notice within one month of receiving it, but only by contesting the common law validity of the notice to pay (for example, if it stated the wrong amount due or if some other detail was incorrect).
“The usual advice is to comply with the notice to pay, even if the tenant thinks the notice may be invalid due to the incorrect amount being asked for, but make the payment under protest and preserve the right to recover any excess payments,” advises Caroline.
“It would take a brave (or foolish) person to wait for a notice to quit to challenge a notice to pay, because that obviously comes with the risk of losing the tenancy.”
The situation is different for those on an FBT, says Ellie. Instead of issuing a notice to pay, the landlord must apply to the court to forfeit the lease, and the tenant can then claim “relief from forfeiture”.
If during that court process they are able to pay the rent due, the tenancy can be saved and the slate wiped clean.
“It’s a crucial difference between the AHA and FBT tenant. For that reason, the FBT landlord may actually give the FBT tenant more leeway, because if the tenant is going to pay anyway, rather than incurring the court costs, it’s better to accept rent being paid slightly late.
“Although remember, landlords and courts may not be as lenient for repeated late-payers.”
Harsh realities
As strong demand for land continues to be reflected in high FBT rents, Ellie suggests some landlords could be tempted to use non-payment of AHA rents as an opportunity to relet farms on an FBT to improve their own financial position.
“When you consider AHA rents usually include the whole farm, buildings, land and house for, say, £90/acre, whereas an FBT splits this out, to say, £150-£170/acre for the land, plus another £2,000-£3,000 for farm buildings and another £6,000-£10,000 for the farmhouse.
“That’s two very different rental incomes for exactly the same farm, but on a different tenancy agreement. It’s a harsh reality of the market.”
© Tim Scrivener
Key points
- Be clear when rent is due
- Identify pinch points in cashflow
- Speak to your landlord early if concerned about not being able to pay – explain why there is an issue and how you will address it
- Never ignore any notice from your landlord
- Seek expert advice to discuss your options
- Talk to the bank – can the rent be covered with an overdraft extension?
- Ensure they understand the significance of rent not being paid on time
- Consider ways to ease cashflow without the Basic Payment Scheme, such as the Sustainable Farming Incentive or diversification.
New guide to tenancy negotiations
Following Defra’s response to 2023’s Rock Review, a code of practice was published to encourage greater collaboration, communication and clarity between tenants, landlords and professional advisers.
The Agricultural Landlord and Tenant Code of Practice for England is a voluntary code on the standards of behaviour expected from all parties involved with agricultural tenancy matters. It covers all main events within a tenancy, including:
- Granting of tenancy, selection of tenant and agreement of terms
- Routine engagement during the tenancy
- Paying rent
- Rent reviews
- Repairs and improvements
- New opportunities, schemes and agreements
- Termination and renewal (including succession)
- Disputes.
Free business advice
Free business advice is still available through the government’s Future Farming Resilience Fund.
The scheme, which ends next March, was set up to help farmers in England adapting to the transition away from direct payments, and is delivered by various organisations.