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Agricultural Leases: Is Rent Review Ripe for the Picking?

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Agricultural Leases: Is Rent Review Ripe for the Picking?

Agricultural Leases: Is Rent Review Ripe for the Picking?

Leasehold farmland is typically governed either by AHA tenancies (named after the statute behind them – the Agricultural Holdings Act 1986) or FBTs (Farm Business Tenancies, which are governed by the Agricultural Tenancies Act 1995). Since 1995, no new AHA tenancies have been granted. Therefore, all new agricultural tenancies are FBTs, but many AHA tenancies remain.

It is important to note the key difference between the two main types of agricultural tenancy. On the one hand, the level of rent payable under an AHA tenancy corresponds to how much produce a farm holding can yield and is set by reference to comparable holdings in the area. On the other hand, the amount of rent under FBTs tends to rely more generally on external factors, such as what other farm tenants in a given area are paying for similar holdings. A common theme between the two, though, is that supply and demand is a major factor in driving rent up or down.

Why are AHAs and FBTs relevant at the start of 2021?

The global pandemic and Brexit continue to make up the most of farmers worries, but these abnormal forces have brought the mechanisms of AHA tenancies and FBTs to the fore. Following the UK’s departure from the EU, the Common Agricultural Policy (CAP) has been phased out and the new Environmental Land Management Scheme (ELMS) scheme introduced in its place. While the scheme is hailed as the cornerstone of the UK’s post-EU agricultural policy, there are already concerns that up to 50%[1] of tenant farmers may be excluded from participating in this and future agricultural schemes if their landlords refuse to cooperate, since their consent must be given to join them. 

"The UK government recently announced Basic Payment Scheme (BPS) reduction rates for 2021 to 2024."

As a result, tenants of farm holdings are likely to start looking for alternative methods of reducing their rent outgoings over the coming months and years. One option would be to consider requesting a rent reduction from their landlords pursuant to the rent review provisions in their leases. As it is clearly in a tenant’s interest to achieve a reduction in their farm holding rent, it is unlikely that landlords will be the ones to serve notice. Therefore, moving forwards from the UK’s departure from the EU and the global pandemic, tenants must be the ones to push for rent reviews to ensure a fair value and secure their businesses for the future. Such efforts are likely to be the most practical means of reducing a tenant’s outgoings on a farm over the coming years.[2]

Of course, whether a tenant decides to serve such a notice will depend on their individual situation. They must take certain factors into account, such as their current level of rent and when it was last reviewed, as well as other leasehold outgoings such as repairs and service charges.

Tenant’s toolkit: conducting a rent review

  • Agricultural leases, as with residential and commercial leases, should contain a rent review clause. This essentially does what it says on the tin: after a set period of time (usually an anniversary of the date of the lease such as three or five years) the annual rent can be reviewed and potentially revised up or down with the landlord.
  • In AHA tenancies, landlords and tenants have the right to hold a rent review every three years. Further, such tenancies usually include a lifetime security of tenure, meaning that a tenant has a right to request a new lease upon expiry, and they carry a right of succession.
  • However, in FBTs, both parties are free to decide between themselves how often rent reviews should take place. There is no automatic right to request a new FBT when the existing one expires, and there are no rights of succession.
  • Both tenants and landlords can serve a notice to review rent, provided that it is at least 12 months before the next term date.
  • The notice must be served following a strict form. EMW can assist with the drafting of this notice.
  • When the rent review date is approaching, tenants should prepare sufficient evidence to present to their landlords, taking several factors into account. These include considerations of how much rent they are currently paying, how much their BPS payment is set to decrease by each year to 2024 following the recent government announcement, and their budget which details all actual and projected income and costs for each element of the farm.
  • Remember also that Brexit and the uncertainties it has caused surrounding trade could even have a greater impact on rent than the BPS payment decrease

Other options?

Aside from a rent review, tenants may wish to negotiate improved lease terms with their landlords, such as greater diversification provisions governing succession and building usage. In the case of existing AHA tenancies, landlords may prefer to make deals with tenants, rather than risk surrendering of tenancy agreements altogether. Landlords are more likely to want to keep a current tenant in occupation than have to invest heavily in improving farm holdings before re-letting to new tenants.

Summary

Whichever route is taken to reduce costs in the current climate, tenants should always enter negotiations with landlords fully prepared with sufficient evidence to support their proposals. What landlords and tenants decide between themselves will depend on each individual relationship, but cooperation, rather than finding opportunities for disputes, is now more important than ever in the unstable world we find ourselves in. Both parties should be focusing on mutually beneficial plans rather than stalling meaningful negotiations with conflict. In many cases, tenants will be able to approach their landlord informally to discuss changes to their farm holding tenancies.

Remember: whatever is agreed between you and your Landlord, always make sure this is confirmed in writing and properly documented. EMW’s Agriculture sector specialists of the Real Estate department offer all necessary expertise to achieve this.

Get in touch

For more information on this update, please contact Tom Revitt.

[1] https://www.landlordzone.co.uk/news/tenant-farmers-need-their-landlords-consent-to-enter-post-eu-agriculture-schemes/
[2] https://www.fwi.co.uk/business/business-management/tenancies-rents/tenants-should-consider-pushing-for-rent-review-since-eu-exit