Land Reform - Proposed amendments to Agricultural Holdings Legislation – Rent Reviews

21 July 2015

Poppy Baggott takes a look at the proposal under the Land Reform Bill to provide a ‘model’ for deciding fair rents for agricultural tenancies.

The Policy Memorandum attached to the Land Reform (Scotland) Bill acknowledges that Agricultural tenancies are a critical part of Scottish Agriculture, accounting for 23% of agricultural land in Scotland, with 80% of the tenancies coming under the 1991 Act; and the Scottish Government recognizes that a vibrant agricultural tenanted sector is key to ensuring that Scotland gets the most from the land and the people farming it.  There is however a thorn in the side of this ideology, which is that since 1982 there has been a 44% decrease in the area of let land, resulting in Scotland now having one of the lowest proportions of rented land anywhere in Europe. (Land Reform ((Scotland) Bill: Policy Memorandum page 48) The challenge for the Scottish Government and for both the landlord and tenanted sector is where to point the finger for the reason for this, and one obvious place to start is a legislative system whereby there is no freedom of contract, leading to limited options and lack of security for both landlords and tenants ergo, the continuous rumblings of discontent, and unwillingness of landlords to let land under such a complicated and uncertain system. 

Part 10 of the Bill deals with proposals to amend elements of Agricultural Holdings Legislation, and while this area of law has long been a headache for all concerned, and any movement towards amendment or improvement will no doubt be welcome, there are mutterings that such a contentious issue is ostensibly being pushed through as a side-car attached to the vehicle of Land Reform.  Many are of the opinion that current Agricultural law is already scattered across too many areas of legislation, and have suggested in their responses to the consultation that there is a case to be made for some sort of consolidation bill to be introduced, in the hope that bringing everything under one roof would provide some much needed clarity and focus.   

Rather tellingly considering the above point, so many areas of Agricultural Holdings legislation are contentious, that to try and discuss or resolve them all in one article would probably result in further inadequate rantings, and so homing in on one area at a time will hopefully achieve some lucidity or at least provoke some focussed thought, and as such, the much argued area of rent review, which is addressed in Part 10 (chapter 4) of the Land Reform (Scotland) Bill seems a good place to start.

The current method for reviewing the rent of a holding under the 1991 Act is to look at the open market, and legislation for this was tested resoundingly during the much reported Moonzie case, which accepted the use of open market comparables and the rentals achieved under SLDTs and LDTs as evidence in deciding the rent.  Use of the open market is generally accepted as a fair and decisive method of establishing value, but a grey area is created as regards 1991 Act tenancies due to security of tenure which has resulted in limited movement in the open market, and as such it seems we have arrived at a requirement to provide a rent review mechanism.  Herein lies a paradox; security of tenure and the right to buy, in an open market or commercial negotiation would normally be expected to form part of the consideration for determining a rent, and would surely hold an exorbitant value, but as both the permanence of the tenancy and the right to buy are provided by statute rather than being an agreement between parties, their value is discounted.

In an attempt to introduce a ‘fair’ method for deciding rents, the Bill proposes utilisation of recommendations 3, 4 and 6 made by the Agricultural Holdings Legislation Review Group (AHLRG) in their final report which was published in January 2015.  These recommendations suggest that a fair rent method for deciding the appropriate rent for a holding could be based on a calculation which would take into consideration:

·         Productive Capacity: Rents be determined on the basis of the productive capacity of the holding, farmed by a hypothetical tenant (who is an efficient and experienced farmer of adequate resources who will make the best use of the land) using the fixed equipment provided by the landlord, taking account of the budget for the holding. (AHLRG Recommendation 3)

·         Excess Accommodation: Provision should be made for any housing provided on a holding in excess of that reasonably required for the labour requirements associated with that holding.(AHLRG recommendation 4)

·         Non-Agricultural Activity: rent should be paid for non-agricultural activity on a holding that reflects a fair market rent for the landlord’s asset being used for the activity.  (AHLRG Recommendation 6)

While the above suggestions do perhaps go some way towards providing a rent review mechanism which may be acceptable and transparent, as with much of the bill, this still has a long way to go, and definitions are required to prevent further legislative quagmire.

At present, the definition of ‘productive capacity’ is being left to the discretion of Scottish Ministers to determine, as is the decision relating to the accommodation necessary for the standard labour requirements of the holding, and this is perhaps where the rot behind the idyll starts to creep in.  In creating a ‘one size fits all’ calculation for deciding rents, contradictions are created if definitions are left open to interpretation.  As no two tenancies, holdings, tenants or landlords are the same, and while there are so many variables and unknowns, how can it be possible to effectively apply a formula which is fair to all. 

Added to the uncertainty created by the lack of definition, is the inevitable ambiguity of the market.   Under new guidelines, ‘productive capacity’ would probably need to be measured over a certain time frame, such as the intervening years between reviews, and so, if during this period the market was buoyant, would the tenant then face a bigger increase in rent than if the market had been poor?  This begs the question of whether a fixed and fair model can be based on a changeable entity such as the market, and unless this conundrum is given some serious consideration, it could give rise to substantial discontent.

It could be that a rent review mechanism is required, and perhaps the proposal within the Bill has set the wheels in motion down the right track, but at present it is difficult to predict whether this suggested formula would drive rents up or down or create more or less need for litigation, and while definitions lie open to interpretation and the variables are so great, it is probable that there is some way to go before an acceptable solution is reached.

Poppy is part of the Galbraith rural team.

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