How new review method could make rents more sustainable

Switching to a different review method could help individual landlords and tenants agree a more sustainable rent rate and encourage the reduction of values generally across the UK.

With the Basic Payment Scheme (BPS) reductions having begun and the funding due to stop entirely by 2028, rental values and the way they are determined are hot topics.

Values for both Agricultural Holdings Act (AHA) 1986 tenancies and farm business tenancies (FBTs) under the Agricultural Tenancies Act 1995 have risen steadily for a number of years, according to the latest data from Defra, peaking in 2016 (£181/ha) and 2018 (£231/ha), respectively.

Judy Holmes, head of rural landlord and tenant at Berrys, says: “We are still seeing people bidding more than £500/ha for arable land for cereals.

“As the BPS reduces, it’s not going to be sustainable in people’s budgets to pay that much anymore and the margins will become tighter.

“Any tenancy agreements drafted with a rent review mechanism that includes BPS may now be defunct, so these need looking at as soon as possible.”

See also: Find out average farm rents where you live 2021

What’s wrong with current rents?

Tenancy opportunities continue to be few and far between and with the price of land being out of reach for many farmers – particularly young farmers – the huge competition is causing tenders to continue to increase.

With so many options, many landlords are likely to go for the highest offer, rather than considering a potential tenant’s other merits.

Farmers and landlords will look at the evidence of open market lettings and give that factor the most weight when planning tenders or setting rental values – thus because other tenants in the area are paying over the odds, you have to as well in order to compete.

“If the tenant really wants it, they are willing to pay over the odds,” says Mrs Holmes.

“Farmers are increasing their own rents by competing with other farmers.”

Another reason this has become such a prominent problem in the tenancy sector is the difference in AHA and FBT legislation.

The AHA statutes are more specific, enforcing set rules for both landlords and tenants to abide by.

The introduction of the more flexible FBTs, however, saw freedom of contracts, making it easier for the parties involved to negotiate and agree terms between themselves on a more bespoke basis.

“The reality is this makes it harder for tenants, as landlords hold all the power,” says Mrs Holmes.

“Landlords have what the tenants want – the land – and there is more flexibility within the legislation for them to push the rents up.”

How can rents be reduced?

The current process for determining a farm rent varies between AHAs and FBTs.

For AHAs, the rent should take into account the terms of the tenancy, the character and situation of the holding, the productive and related earning capacity of the holding, and rents paid on comparable holdings.

FBT rents generally rely almost entirely on the evidence of what others are paying for similar holdings.

Mrs Holmes suggests changing the rent review method could be one way to agree a more sustainable rate.

For FBTs, which are more flexible and open to adaptation, the answer could be basing the value on the holding’s productive capacity – as with AHAs – or a commodity price.

This formulaic rent review could work, for example, by agreeing that the per hectare amount will be the spot price of wheat in the East Midlands as printed in Farmers Weekly in the first week of August, plus £20.

“This is the most interesting mechanism available as we can tie it in to the reduction of BPS – perhaps the rent will be a base price of £100/ha plus the BPS payment,” says Mrs Holmes.

Agreeing a more sustainable rent should be a win-win situation because there is no benefit for the landlord if the tenant runs out of money and they are left with no one to farm the land and further costs of re-letting and additional paperwork.

In addition, if the tenant feels more secure, they are perhaps more likely to invest in the farm.

“Some landlords have financial return as their biggest priority, while others are looking for a good return but equally want a tenant who will look after their property and has other attributes,” says Mrs Holmes.

“As the tide changes towards more environmentally beneficial farming, it is likely that this will also become more of a priority for landlords.

“The tenant could ask for a lower rent in return for making more investment in the holding – perhaps taking part in an environment scheme, planting trees, or improving hedgerows or fencing.”

In the AHA rent review formula, the whole of the BPS payment shouldn’t be included in the calculation for the earning capacity of the holding, so it is possible that tenants on these agreements may not see a change in values purely on the basis of the BPS reductions.

However, a proportion of the BPS is usually included because the tenant needs to have the use of the land to claim BPS, says Mrs Holmes.

The reduction of BPS will act as a catalyst for some farmers to make the decision to stop farming themselves and let their land or enter a joint venture, says Mrs Holmes.

“With this change we will see more landlords that are farmers themselves and they may be looking for a range of attributes in a tenant and a longer-term relationship in addition to financial return,” she says.

“The reduction of BPS will not reduce rents alone – this will only happen if people tender lower amounts. It all comes down to supply and demand.”

Major advantages possible

Another solution that the Tenant Farmers Association (TFA) has proposed to landlords who may prioritise the way a holding is managed over the income – such as the National Trust – is to remove the competition over rent altogether.

Instead, landlords should set the level of rent they wish to receive in the holding’s particulars and then select a tenant based on their business acumen and their plans for the holding’s management, says TFA chief executive George Dunn.

The answer to whether a more sustainable rent for the tenant is a big enough incentive for the landlord to agree to depends on what other benefits are being provided, he says.

“There could be major tax advantages afforded to the landlord. Alongside this, there may be returns that the landlord might receive for reserved matters such as trees, sporting, wayleaves and easements and renewable energy production from things such as solar arrays on buildings,” says Mr Dunn.

“Achieving the highest rent does not always deliver the highest return, particularly if the tenant selected is unable to afford to carry out necessary works of repair and maintenance to the holding or takes an approach to the land which mines it for its nutrients and organic matter. 

“Also, the higher the level of rent paid, particularly when it gets into very unsustainable levels, the greater the likelihood there is of default and costs associated with forfeiture and recovery.”

If there was a genuine commitment for parties to move together to find a more sustainable basis, changes could happen relatively quickly, he says.

While rent reviews tend to operate on the basis of the yearly cycle, there is no reason why this could not be determined earlier if both parties agree.