Rent review advice for tenants as activity increases
© Adobe Stock Demands for higher farm rents have in some cases been driven by evidence of generally better arable results from harvest 2022, higher dairy profits in the milk year ended March 2023, or, more recently, higher sheep and beef cattle prices.
The introduction of Sustainable Farming Incentive (SFI) payments such as for herbal leys at relatively high levels have also prompted some landlords to seek a slice of the new support payments through higher rents, say advisers.
They point out that rent reviews are based on looking forward, not at past performance.
See also: Advice for tenant farmers on common issues
Tenant Farmers Association rural surveyor Caroline Squire says: “It’s been the busiest year for rent review activity in the four years since I began work for the TFA.
“It’s a very tricky climate for tenants. Prices have not been the best in some sectors, costs continue to rise and the weather has had a significant effect on many farm businesses.”
The review process has a legal framework, but this is not always followed, says Caroline.
First, for both Agricultural Holdings Act 1986 (AHA) tenancies and farm business tenancies (FBTs), at least a year’s notice must be given for a rent review.
Justify figures
The landlord must also provide justification for the increased rent they are seeking.
However, it is not uncommon for the landlord or their agent to simply serve the required one year notice for a review and to state what increase they are seeking.
“For an AHA tenancy, they need to provide budgetary and comparable evidence of rents of similar holdings, let on similar terms,” says Caroline.
“The budgetary evidence needs to consider not only the costs of production and income and what a farm can produce, but also the costs associated with the terms of tenancy, for example repairs and insurance.”
The budget and comparables carry equal weight in the AHA rent formula, Caroline points out.
However, a budget takes time, effort and cost to prepare, so it is not uncommon for a landlord’s justification to rely initially only on comparables.
Also, budgets often point to a lower rent than the landlord is seeking, so landlords and their agents tend to place more importance on comparables, she says.
“Those comparables must be genuinely comparable, and must be evidenced, so that the tenant can fairly assess the landlord’s case.”
This means that for an AHA they must relate to rents being paid only for other AHA tenanted farms or land.
FBT rents cannot be taken into account, as they are not let on similar terms to AHAs, but are nevertheless fairly commonly offered as comparables, which emphasises the need for scrutiny of the landlord’s case.
For both AHAs and FBTs, details of the comparable farms must be given and where there are differences between those farms and the holding subject to review, those differences must be accounted for and adjustments made.
Such differences might include the size of the holding; the quality of the land and any buildings; whether land is fenced and watered; the tenancy terms (obligations on the tenant or landlord); the size of the holding; the quality and extent of any accommodation included; and tenant’s fixtures and improvements.
For both AHAs and FBTs, any tenant’s fixtures and improvements on the farm under review must be disregarded in the rent calculation and the rent reviewed only on what the landlord provides.
One frequent argument by both AHA and FBT landlords for an upward rent review is that several years have passed since the rent was last reviewed.
“That is no argument,” says Caroline. “The length of time since the last review is irrelevant – what is relevant is budgetary and comparable evidence for AHAs, and comparable evidence solely for FBTs.”
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Arbitration
Where a landlord is determined to pursue a review without the agreement of the tenant and with no justification offered, they will not have a leg to stand on at arbitration, says Caroline.
“Such a course of action would be viewed very dimly by an arbitrator, with a likely impact on the award of costs, and the justification will have to be provided at arbitration in any case.”
An application for arbitration can be used to extend the negotiation period and does not have to proceed to a hearing and its associated costs.
“It’s a common tactic to spring a proposal [for an increase] on a tenant in the final week of the review period, with the threat of arbitration if they do not agree to the increase.
“That puts pressure on the tenant, but as long as an application has been made for arbitration by the review date, that can allow more time.
“Also, the new landlord and tenant code of practice requires the party instigating a rent review process to do so setting out a timetable, so again, a late proposal such as this would be viewed in a poor light by an arbitrator.”
If a review is under way and an arbitration application has been made, the negotiations can be kept alive by both parties asking for the appointment of an arbitrator to be put on hold, so that no fees are incurred but the review is still live, with the option of appointing an arbitrator at a later stage.
Rent outlook and considerations
There has definitely been an upsurge in activity on rent notices being served and more references to arbitration than in the previous year, says David Meredith of Shropshire based DJM Consulting.
“There’s still a lot of uncertainty in the marketplace as to what is the correct direction for rents,” he says.
“Landlords’ costs are rising, but whether its AHA or FBT, when you do the detailed analysis, the process is different but the budgets say rents should be edging down.
“It’s important to have a robust rebuff to any request for a rent rise. There’s a strong argument that some tenants should be looking for a reduction.”
While BPS is falling and SFI offers some alternative income and the cash flow of quarterly payments, it carries with it actions and costs.
“It’s still based on income forgone for the average farmer on average land, but for the better tenant, it’s not a replacement for BPS,” says David.
“You have to be quite critical about the economics of SFI and tenants should be doing gross margin and net margin analysis per acre to help build their arguments.”
Tenants are traditionally reluctant to serve a rent review notice on their landlord, says adviser Barry Meade of Davis Meade, based in Bath.
“A notice does not trigger a review for a further year and it is very difficult to know what profitability will be in a year’s time.”
Advice for tenants in the rent review process
- If the landlord serves notice for a rent review, ask for their justification – budget and comparables for an AHA tenancy, and open market rent comparables for FBTs unless the FBT agreement makes other provision as to how rent reviews are to be based
- Examine the landlord’s justification and look for opportunities to challenge it
- If a rent review notice is served, take advice – landlords sometimes rely either on a tenant’s lack of knowledge of their rights, or on a tenant’s willingness to keep the peace rather than challenge the landlord or their agent
- AHA and FBT reviews can be based only on what the landlord provides, disregarding tenant’s fixtures and improvements
- FBT rents cannot be used as AHA comparables
- The appointment of an arbitrator can be put on hold, and costs therefore limited
- When a landlord serves notice for an upward rent review, the tenant can make a counterproposal for a reduction. Budgets and/or comparables to support this must also be robust