Rent review – Is now the time?
Few issues are likely to cause more tension between landlords and tenants of agricultural holdings than a rent review.
Tenants are reluctant to seek a rent review for fear of upsetting a longstanding relationship with their landlord, and many landlords want to agree a compromise to maintain a sustainable relationship going forward.
Rent formulas are different for Farm Business Tenancies (FBTs) and Agricultural Holdings Act (AHA) Tenants, so it’s vital you understand how they work and consider your position to determine whether there is scope to review the rent.
As many farming businesses find themselves facing continued pressure relating to farm incomes, is now the time to consider whether the existing rent is appropriate, or a rent review is required?
Despite the recent Brexit uncertainty and BPS changes, there continues to be upward pressure on both capital and rental values. Low supply of farmland available to let on the open market has resulted in significant rents being tendered for let farmland, which may not be sustainable longer term. Negotiating a rent reduction for a Farm Business Tenancy, which is commonly based on open market lettings, may therefore prove challenging in current market conditions.
Many rents have not been reviewed for some time and following the government’s announcement outlining the Basic Payment Scheme (BPS) reductions from this year and moreover the UK’s exit from the EU and friction to trade, tenants may wish to consider requesting a rent review as the impacts of these changes may begin to impact farm rents. Most tenancies require at least 12 months’ notice to review the rent which would allow time to consider the economic climate and prepare for discussions with the Landlord. With Lady Day (25th March) just around the corner and BPS dropping by at least 20% next year, it is worth planning in advance.
Some tenants may be better served by negotiating improved agreement terms such as identifying opportunities to diversify, rather than a rent reduction. Changes set out in the Agriculture Act enable tenants to apply through arbitration or third-party determination if a Landlord refused consent for a tenant to carry out alterations to, or change the use of whole or part of, their farm in order to benefit from new schemes and grants.
We may see more flexibility in rent review clauses going forward to reflect the volatility, particularly under FBT agreements were the parties can move away from the common open market approach. The parties may wish to consider more flexible rent formulas, for example, linking the rent to the price of wheat.
Now is the time to start considering what changes might need to be made to your business and how these could impact existing tenancy arrangements so that your business is more robust and resilient to changes in the future.
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