TFC Blog: Level Heads Key to Succeeding with Rent Talks
Few issues are more likely to cause tension between landlords and tenants of agricultural holdings than the periodic rent review.
The landlord hopes to get a rent for the capital assets (land and buildings) provided that generates a reasonable rate of return on the value of that capital.
And the tenant seeks a rent that leaves him or her with a sufficient share of the divisible surplus to enable the business to survive, the tenant to earn a reasonable income, and a return on the tenant’s capital to be had.
Landlords will claim, with some justification, that the return on capital from rents is very low, and tenants will claim – with some justification – that in some cases they are left with a very modest income and no return on tenant’s capital.
The basic problem is lack of profitability within the sector, leading to a debate between landlord and tenant over how to divide up a pretty small cake.
The extent to which the main ingredient of the cake is support payments, rather than enterprise profits, is a further matter of concern.
The Scottish Farm Business Income Estimates, a report published annually by the Scottish Government, shows that in 2017-18 the average farm business made a loss of £7,400 without support payments.
Interestingly, while rent reviews continue to be a source of tension, the Scottish Government figure on farm rents – obtained from the annual agricultural census results – suggest that rents have, on average, remained relatively unchanged in real terms over the past 10 years.
Against this background, and with the uncertain impact of Brexit of farm incomes, rent negotiations are likely to continue to be difficult and the statutory basis for most rent reviews has understandably come under scrutiny.
The current system, as set out in the 1991 Agricultural Holdings Act, has pluses and minuses, with the issue of the use of comparable farm rents often being a contentious issue – but the proposed new system as set out in the 2016 Land Reform Act, but not yet enacted, also has pros and cons.
The Scottish Government has yet to decide if/when the new system will come into play and may find it difficult to recognise a consensus amongst the key stakeholders as to which system is preferred.
Sticking with the ‘devil you know’ or moving to a completely different basis for agreeing rents is the dilemma.
What is clear, however, is that if the landlord and tenant involved in a rent review are both reasonable people who want to achieve a settlement that is fair to both parties, they will be likely to succeed, regardless of the methodology used.