Scottish Tenant Farmers Association

Scottish Tenant farmers Association

Culmaily farm

Golspie

Sutherland

KW10 6TA

STFA Submission to Rent Review Working Group

SUMMARY OF VIEWS

Following extensive consultation with members about both the methodology and the process of reviewing the rent, STFA would like to summarise its recommendations to the RRWG:

A simplified method of reviewing the rent and a rigorous code of practice will be key to the success of a reformed rent review system

The establishment of a register of rents to create transparency and benchmark rental values on comparable holdings

Rental assessment should be based on the productive capacity and the related earnings capacity of the holding. That is, what can be produced from the holding occupied by a competent tenant who is practicing a system of farming suitable to the holding, taking into account the provision of fixed equipment, the type of land, location of the farm and other general factors specific to the farm.

In assessing the rent, account must be taken of tenant’s and landlord’s improvements (including those carried out by the tenant under a previous lease), the condition of fixed equipment and of the terms of the lease, always following the principle that the tenant should only be rented on what the landlord provides.

The fact that the tenant is in occupation should be disregarded so that rent is assessed on a hypothetical “average” tenant reasonably skilled in husbandry. High farming should continue to be treated as a tenant’s improvement.

A range of other factors will also need to be considered: a) Evidence of settled rents on comparable holdings. b) Economic conditions in the relevant sector of agriculture including; c) Non-agricultural use of the land for diversification or conservation purposes.

Open market rents should not be regarded comparable evidence due to the difference in terms of the tenancy and the complexity of analysing scarcity and marriage value;

Provision should be to clarify the role support payments, such as the SFP, play in relation to farm rent.

A continuing 3 year rent review cycle will only be appropriate if there is a simplified method of rent determination based on the productive capability of the holding which will allow rents to track the profitability of farming.

A Code of Practice for the conduct of rent reviews must be agreed.

Revision of the powers of the Land Court to increase greater flexibility to allow it to operate as an expert court in parallel with a system of voluntary arbitration should be considered.

BACKGROUND

The rent review system has been a source of dissatisfaction for many years and, ten years on we are now facing the same concerns today as in 2003 when the rent review process was one of the main bones of contention for tenant farmers. Discussion on rent reviews as part of the 2003 Act resulted in general agreement (including the SLF) that equal consideration should be given to economic circumstances as to comparable evidence on assessing rents. However, the 2003 Act’s attempt to address this has not been successful, apparently due to lack of clarity in the drafting of the legislation.

The Moonzie judgement has now confirmed the primacy of the open market as comparable evidence in determining rent, in effect overruling the intention of the Scottish Parliament to give equal consideration to economic conditions. The presiding judge, Lord Gill also expressed his opinion that the rent offered by a hypothetical incoming tenant to a 1991 tenancy would be significantly higher than that offered for a new tenancy due to the advantages it has in terms of security, rights to buy, waygo compensation and so on. This has already been taken as a green light for rent increases whether or not justified by economic circumstances. Indeed, in a briefing note, Turcan Connell have expressed the view that “….rents in LDTs might require to be adjusted upwards to make them comparable with 1991 Act tenancies. Time will tell, but, if correct, this would result in a step shift in agricultural rents, to the landlord’s advantage.”

Following widespread consultation with tenants over a number of years their concerns on the rent review system can be summarised as follows:

• The way in which rent reviews are conducted and the pressure it puts on tenant farmers and their families. This is compounded by the frequency of rent reviews.
• The length of time taken to resolve a rental dispute – there are at least six rent reviews in the Land Court process, the longest dating back to 2004, most of these have no particular legal issues beyond a valuation of rent.
• The cost involved in rent reviews. The complexity of the methodology in valuing rent requires costly professional advice and recourse a court process can lead to costs getting out of hand as legal teams examine the minutiae of every scrap of evidence produced. This was demonstrated in the Moonzie land court case in 2010.
• The primacy of comparable evidence in rent assessment and the difficulties experienced by tenants in obtaining sufficient evidence of comparable holdings. This will now be further exacerbated with the quest for scarce open market evidence.
• The emphasis now placed on the open market will lead to increased rents, many of which may become unsustainable to the detriment of the tenant farmers business. Landlords stand to accrue huge capital benefit should a tenant be forced to quit his holding due to rental pressure and this may play a part in decisions taken by landlords seeking vacant possession.

An online survey of STFA members illustrates the points above:

• 73% of respondents thought rent reviews would be more difficult since Moonzie
• 75% believed the use of open market comparables would make rent negotiations difficult and lead to escalating rents
• 90% thought rents should be based on the productive capacity of the farm rather than on the open market
• 75% favoured a move to a 5 year break between rent reviews
• 33% wanted disputes resolved through a more flexible Land Court and 67% wanted a robust voluntary arbitration system introduced
• 93% wanted the introduction of a code of practice for land agents

The survey results have been confirmed by recent views expressed at tenant meetings and around the agricultural shows. A copy of the survey can be made available to the RRWG if required.

There is no doubt from the tenant’s perspective that the rent review process, as it stands, is too one-sided and disadvantages the tenant. Although there are challenges with the dispute resolution mechanism which need to be addressed, the main difficulty in settling rents lies in the excessive complexity in the rules which have to be applied to determine the rent. It is this complexity which leads to the employment of lawyers and land agents and enormous cost of rent reviews.

There has not been an open market in tenancies since the mid 1970s. The majority of farm leases on recent years have been granted for “bolt-ons” to existing businesses rather than whole farms and the rents offered have reflected the marriage value and scarcity of the extra land. The dearth of true open market comparables has led to the engagement of expensive professional advice to adjust or massage rents to arrive at a mythical and undistorted open market value.

As stated in the STFA briefing paper to the RRWG, the concept of open market comparables was introduced in 1958 AHA and amended in 1983 to make allowance for scarcity. In contrast, in England, the legislation was amended in 1984 to exclude reference to the open market and subsequently consolidated into AHA 1986 Sch. 2. In practice the open rental market in England is only considered as one of a range of factors. Rents of AHA tenancies in England tend to fluctuate according to economic circumstances. Evidence from the TFA rental database indicates a drop in rents between 1999 and 2006 as tenants served notice to reduce rents as a consequence of low commodity prices and reduced profitability. At the same time FBT rents continued to rise.

The overwhelming view amongst tenant farmers is the need to base rent on the potential productive capability of the unit rather than on the increasingly artificial concept of an open market.

The rent Review Working Group has posed four questions to inform its examination of the rent review process:

1. Section 13 of the 1991 Act contains the legal framework for a rent review, what do you consider to be its main strengths and weaknesses, both in principle and practice?

It is important to remember that s13 of 1991 Act was amended in 2003 with the intention of apportioning equal weight between comparable evidence and economic conditions. Unfortunately the drafting of the 2003 was not clear and these amendments have subsequently been declared to be “inept” by the Court of Session.

Strengths:

Regards and disregards: S13 sets out to ensure that the tenant only pays rent on what the landlord has provided, for example by taking into account tenant’s improvements. It also protects the landlord by taking account of any dilapidations or the use of the land for not agricultural purposes.

The farm is to be assessed as though the tenant were not in occupation – this introduces the concept of “Mr Average” and doesn’t penalise the good tenant or reward the bad one.

S13 takes account of a range of factors and has a body of case law to fall back on.

Weaknesses:

S13 is based on the assumption that there is an open market for letting land under 1991 tenancies and that a prudent tenant will not offer an unviable rent. This is clearly not the case and consequently, the use LDTs and SLDTs as comparable holdings requires a complex range of adjustments, many of which are subjective and open to challenge. For example, how is scarcity quantified? In an “open market” prices are determined by supply and demand. There is a demand for tenanted farms, but limited supply. The numbers of SLDTs and LDTs advertised in the last few years can be counted on the fingers of one hand. Does that merit an adjustment of 30% or 60%? Both figures can be justified. Marriage value is more quantifiable, but still requires a complex analysis of figures.

Traditionally rents have been based on comparable evidence of settled rents. In practice this translates into a shorthand use of per acre or per ewe rates. Justification of these figures requires an extensive analysis which is rarely carried out. Rents are generally carried out by firms of land agents who have access to rental values throughout Scotland; this puts tenants at a disadvantage despite the existence of the STFA rental databank. One solution may be greater transparency through the creation of a register of rents.

S13 takes no account of the productive capability and earning capacity of the holding beyond the rent it could be expected to achieve on the open market.

S13 takes no account of the treatment of the subsidy regime and, in particular the role of the SFP in rental valuations. The need for clarification has been demonstrates by the diametrically opposite views of the Land Court and Court of Session.

S13 does not disregard improvements made by the tenant during a previous lease which have been omitted from the current lease, even though no compensation has been paid for those improvements. In contrast, AHA 1986 allows improvements from a previous lease to be disregarded (Schedule 2, 2(3)(a)&(b)). This is becoming a more frequent problem as many tenants have agreed to new leases to allow their landlords more favourable IHT treatment, and are now discovering that their improvements from the old lease have not been carried forward to the new lease. Similar problems arise where a tenant’s family have been in occupation of the holding for a generation or more before a lease was signed, and difficulties can arise as landlords seek rent for tenant’s improvements carried out prior to the start of lease. The same issue arises for pre 1949 Act tenants who are likely to have had several limited term leases prior to the introduction of security of tenure.

2. Rent reviews of 1991 Act tenancies presently take different factors into account. How do you consider 1991 Act rent reviews are presently conducted in Scotland and will the Court of Session findings in the Moonzie Farm case materially alter present procedures?

Rent reviews are conducted in a variety of ways ranging from casual negotiation over the kitchen table to an in-depth consideration of relevant factors. Generally speaking, where there is a residential factor and a good relationship between landlord and tenant rent negotiations are a matter of horse-trading and the strict rules of the game play little part, in this situation, rents are usually settled amicably.

In contrast, where an outside firm of land agents is engaged to carry out rent reviews there is often no relationship between land agent and tenant and little ability or appetite to horse-trade. Land agents who are carrying out a large number of rent reviews annually are reluctant to produce facts and figures to justify their rents preferring to set rents by experience or “feel” using the shorthand of livestock or acreage figures to assess rent. In these cases tenant’s improvements and adjusted stocking and cropping rates are frequently ignored.

STFA survey results have shown that over 60% of landlords engage outside agents to conduct rent reviews, even where there is a resident factor in post. This is a growing trend and one of the main reasons for problems at rent reviews and the consequent souring of relationships between landlord and tenant.

Where an analysis of rental value has taken place it has usually been based on comparable sitting tenant rents often with some reference to budgets. Pre-Moonzie it was usually argued that LDTs and SLDTs were not suitable as comparable evidence as is the case in England. Finding suitable comparable evidence has been the biggest problem.

In the first Land Court Moonzie decision, the court accepted that an open market rent would not be beyond the capacity of the holding, however Lord Gill expresses a different opinion, that it is possible that open market bidders might offer a greater rent than a budget would justify. This means, for the first time, that an open market rent could be higher than a viable rent, which raises the question as to the suitability of the open market test being used to determine a sustainable and viable rent for a sitting tenant.

The Moonzie decision has raised the bar for rent reviews and the expectation on the part of land agents is to close the gap between 1991 tenancy and rents offered on the open market. The farmhouse, which has always been regarded as part on the fixed equipment is now coming under the spotlight in terms of expected rent on the open market, amenity value and character.

The Court of Session’s articulation of a hierarchy of evidence starting with the open market LDT and SLDT lets has led to open market evidence being drawn form all parts of the country, for instance an open market LDT on Bute has been cited as evidence in a rent review in Roxburghshire.

3. Where a landlord and tenant are unable to agree a revised rent themselves, how best should that dispute be resolved?

There is a strong view that problems with rent reviews do not lie in the mechanism but rather the complex nature of the legislation. However, methodology and process are closely linked but it must be a truism that the simpler the set of rules the easier it should be to resolve a disagreement.

The Land Court

The Land Court was given universal jurisdiction over landlord and tenant matters in response to the findings of the Land Reform policy Group and the Report on Agricultural Holdings Jurisdiction by the Scottish Law Commission abolishing compulsory arbitration. The stated aim was to make a better quality of justice; deal with disputes expeditiously; and as economically as possible with the minimum of expense. This has clearly not been the case with rent reviews to date. Although the Moonzie case should be viewed as a “one off” it has demonstrated the complexity of the legislation and the need for simplicity, it has also shown the need for greater flexibility on the part of the Land Court in dealing with rent review cases which should essentially be valuation exercises.

The Land Court is probably the most appropriate arena for resolving disputes, but could be more effective given greater flexibility in the way in which it dealt with rent disputes and by having the ability to agree and support codes of practice with the industry. There is a compelling case for the Court to act as an expert court in determining rents as has been the case in the past and as is the case with crofting rental disputes. Another alternative may to grant the power to appoint an arbitrator to act on its behalf. STFA members strongly believe that the Court should have the ability to limit the cost and the level of representation in rent reviews (88% favoured capping costs in rental disputes in the survey). In many cases more use could be made of written submissions where appropriate.

Arbitration

Voluntary arbitration has been proposed as an alternative way of resolving rent disputes and, indeed two thirds of respondents in the STFA survey favoured it over a more flexible Land Court. There is no doubt that a suitable framework of short form arbitration using the 2010 Arbitration Act could be agreed and put in place within a short time, however, the difficulty will be inspiring sufficient trust in the process and in a panel of arbitrators. Arbitration is still tarred with the same brush as the previous compulsory system and it will always be difficult to inspire the confidence of all sides in what will be an inexperienced panel of arbitrators.