Farm rents up 43% as landlords respond to commodity inflation

Published on 18/12/2008 21:10

CKD Galbraith said this week that farm rents had risen by an average of 43 per cent in a review of more than 50 tenancies.

The vast majority of tenants have seen their rents frozen since about 1995. Landlords and agents have to take into account the prevailing economic climate in the farming industry and it has been generally accepted that profits on most farms have been low for more than a decade.

However, as a result of substantial increases in most commodity prices towards the end of 2007 many landlords instructed agents to serve notices on tenants with a view to securing rent increases from Martinmas – 28 November – this year.

Galbraith's reviews were mostly on farms in east central Scotland, and agreements were reached with most tenants.

The 43 per cent figure will seem a considerable hike, but most tenants appear to appreciate that if landlords are to invest in buildings and other fixed equipment, then a higher return is necessary. It is also worth noting that the capital value of agricultural land has increased by at least 250 per cent since 1995.

The basis on which rent reviews are conducted is laid down in the Agricultural Holdings (Scotland) Act of 1991 and legislation enacted by the Scottish Parliament in 2003. There can be no deviation.

Factors to be considered are the rents of other holdings and circumstances affecting those rents and the current economic conditions. However, any distortion of rents due to scarcity must not be considered.

Fixing a rent can be complex. Chris Addison-Scott, of Galbraith, said: "Following receipt of instructions to undertake rent reviews, we inspect the subject holdings and obtain information on the rent of comparable holdings.

"In many cases we also have carried out a 'productive earnings capacity' calculation, by independent consultants, to determine whether the proposed rent can be supported by the farm."

Most of the farms that have recently been reviewed are historic secure tenancies under the 1991 legislation. These agreements allow the tenant to bequeath the lease to his successor. Very few farms in recent years have been leased on these terms resulting in a major shortage of land available for let.

In recognition of this the then Scottish Executive introduced two new forms of letting arrangements in 2003. The first was LDTs (limited duration tenancies) with a minimum term of 15 years. The second category, which applies mainly to arable land, was SDLTs (short duration limited tenancies) with a maximum term of five years.

There has been some debate over whether the rents paid on these new forms of tenancy should be considered when reviewing secure tenancies.

Addison-Scott said: "We do take account of rents offered for both LDTs and SDLTs although, in most cases, these require to be adjusted to take account of scarcity and other relevant factors. Rents paid for LDTs and SDLTs are usually higher."

Of the farms reviewed by Galbraith, only in five instances was it not possible to reach an agreement. The tenants have indicated they intend to take their cases to the Scottish Land Court in Edinburgh, the ultimate adjudicator. However, this can mean legal bills running into tens of thousands of pounds.

Addison-Scott commented: "Landlords have little or no desire to go to the Land Court, but have little choice where tenants, perhaps where their legal costs are supported by insurance policies, are determined to have their day in court.

"Landlords cannot offer one tenant a soft deal when the overwhelming body of evidence supports a rent increase at a level which may have been accepted by other tenants on the same estate. The majority of landlords resent the cost of Land Court referrals when the money could be spent on the estate or, indeed, the tenanted farm."

Typical of the new rents agreed are 70-90 per acre for prime arable land and up to 65 per acre for medium quality land and 45 per acre for poorer cropping land. With livestock farms the current rate is in the order of 15 per breeding ewe and 90 for each suckler cow.