TENANT FARMING FORUM (TFF)
RENT REVIEW WORKING GROUP
REVIEW OF AGRICULTURAL
RENT REVIEW PROCEDURES IN SCOTLAND
REPORT ON THE GROUP’S
DELIBERATIONS AND RECOMMENDATIONS
TO THE TFF AND THE SCOTTISH GOVERNMENT
28 November2012
Executive Summary
Contents of Report
Sections:
Section 1 Page 4 - Introduction and Background
Section 2 Page 6 - Analysis of evidence provided to the Rent Review Working Group
Section 3Page 11 - Recommendations
Annexes:
Annex 1 Page 18 - The Rent Review Working Group’s remit
Annex 2 Page 20 - Membership of the Rent Review Working Group
Annex 3Page 22 - The Rent Review Working Group Press Release
Annex 4Page 23 - Section 13 of the Agricultural Holdings (Scotland) Act 1991, as amended
Annex 5Page 26 - Analysis of written submissions
Annex 6Page27 - Organisations and Individuals who met with the Rent Review Working Group
Annex 7Page 28 - Explanatory Note – Rent Review Notice
Annex 8Page 29 - Map showing illustrative areas relative to creation of an Expert’s Panel
Executive Summary
Introduction and Background
- The Group considered a substantial body of evidence gained both from written submissions and meetings.
Evidence
- The relationship between the parties, their conduct in negotiations and the provision of information all affect the likelihood of a rent review being settled by negotiation.
- Section 13 of the Agricultural Holdings (Scotland) Act 1991, as amended is generally accepted as a tried and tested rent review formula but aspects of the methodology would benefit from clarification. Many contributions from tenants stated clearly that they did not agree with the findings of the Moonzie decision and its effect was that amendments made to Section 13 of the 1991 Act by Section 63 of the Agricultural Holdings (Scotland) Act 2003 had done little to vary the process.
- The more detailed rent review formula in Schedule 2 of the Agricultural Holdings Act 1986 and specifically the inclusion of ‘the productive capacity of the holding and its related earning capacity’ as a factor to be considered does not result in lower rents being paid for farms in England subject to 1986 Act tenancies than for similar farms north of the Border subject to 1991 Act tenancies.
Recommendations
- No adjustment of Section 13 of the 1991 Act, as amended but attempt to improve operation of the existing rent review formula in light of the clarification provided in the Moonzie decision.
- Improve understanding of Section 13 of the 1991 Act, as amended, by developing –
1.A practitioners guide;
2.An explanatory note for service with rent review notices; and
3.A lay persons guide.
- Improve access to comparable rents – establish and maintain a voluntary rent register.
- Accelerate the process and reduce the cost of dispute resolution –
- Engage with the Land Court to explore the possibility of a case management procedure applicable to rent review applications; and
2.Develop the alternative dispute resolution procedures of arbitration or expert determination.
Section 1 Introduction and Background
The Rent Review Working Group (RRWG) was formed in June 2012 to consider aspects of agricultural rent review procedures in Scotland. Specifically, rent reviews in terms of Section 13 of the Agricultural Holdings (Scotland) Act 1991 (“the 1991 Act”), as amended.
The Group’s remit forms Annex 1 to this Report. Biographies for the members of the Group form Annex 2 to this Report.
Section 13 of the 1991 Act was amended in 2003 bySection 63 of the Agricultural Holdings (Scotland) Act 2003 (“the 2003 Act”) with the Land Court being given primary jurisdiction over landlord and tenant matters referred to it and statutory arbitration per Schedule 7 of the 1991 Act being repealed. Section 13 of the 1991 Act was further amended by The Public Services Reform (Agricultural Holdings) (Scotland) Order 2011 and the Agricultural Holdings (Amendment) (Scotland) Act 2012.
Section 13 of the 1991 Act, as amended, forms Annex 4to this Report. Hereafter references to Section 13 of the 1991 Act are to that section as amended.
The terms of Section 13 of the 1991 Act are broadly stated and open to professional interpretation.
In the case of Richard Walter Morrison-Low v The Executors of the late Thomas Herbert Paterson [Record No SLC/223/08 2 June 2010] the Land Court determined the rent payable for Moonzie Farm, near Cupar in terms of Section 13 of the 1991 Act. The Land Court’s decision was appealed to the Second Division of the Inner House of the Court of Session. On 9 February 2012 The Lord Justice Clerk delivered his Opinion [Richard Walter Morrison-Low v The Executors of the late Thomas Herbert Paterson [2012] CSIH 10 XA82/10]. Hereafter that decision shall be referred to as the Moonzie decision. TheMoonzie decision made findings on the inclusion of Single Farm Payment in rent review considerations and the procedures that might be adopted in rent reviews more generally. These findings have created broad debate about the factors routinely taken in to account in rent reviews and whether they will make significant impacts on Scottish rent assessments.
Against that background the Group’s remit is:
1To consider Section 13 of the 1991 Act and related rent review matters;
2To consider how 1991 Act rent reviews are presently conducted in Scotland taking different factors in to account and to assess whether the advice on rent review procedures, including those in the Court of Session findings in the Moonzie Farm case will materially alter present procedures;
3To consider the strengths and weaknesses of the existing rent assessment model for 1991 Act tenancies both in principle and practice;
4To compare and contrast the Scottish model for 1991 Act tenancies with any comparable alternative models, including that set out in the Agricultural Holdings Act 1986 and to consider whether they would provide material differences in their outcome assessment; and
5.In light of the RRWG findings:
(a)to make recommendations, including those which may clarify and improve the operation of the system without changing current policy and any which would require a change in policy to implement; and
(b)to explain the reasoning behind any recommendations in the context of the TFF’s objective of promoting a vibrant tenanted sector which will encourage the letting of land in Scotland.
Process
The Group held its first meeting in July2012 and considered it was very important to obtain as much information on the subject as possible.A press release was therefore issued seeking answers to four questionsfrom all interested parties to assist the Group in producing this Report. A copy of that press release forms Annex 3 to this Report.
It was very evident from the response - over 100 written submissions – that there was considerable interest in the subject. All of the submissions were very informative and illustrated that a huge amount of thought, energy and passion had gone in to them.It was also excellent that submissions were received from estates, landowners, agents, tenants and interested parties providing the Group with a good cross section of opinion in the industry.
An analysis of the written submissions forms Annex 5 to this Report.
As part of the collection of information, various meetings were also held with organisations and agents from north and south of the border,estates and individual tenants. A list of organisations and individuals who met with the Group forms Annex 6 to this Report. All meetings were very informative and from those meetings and the written submissions received it was obvious thatthere was consensus of opinion on how improvements could be made to some areas of the rent reviewprocess.In other areas conflicting views were evident and the Group has spent a great deal of time and thought in analysing them in an attempt to reach the most appropriate conclusions. The Group’s findings are summarised in its recommendations.
There are approximately 6000 1991 Act tenancies in Scotland and although it is unlikely that many new 1991 Act tenancies will be created, it is crucial that the rent review process for the existing 1991 Act tenancies is effective and professionally conducted so that a vibrant environment prevails for these tenancies, leading to further sound investment in the holdings.
Section 2 Analysis of evidence provided to the Rent Review Working Group
2.1To consider how 1991 Act rent reviews are presently conducted in Scotland taking different factors in to account and to assess whether the advice on rent review procedures, including those in the Court of Session findings in the Moonzie Farm case will materially alter present procedures
All contributors to the Group referred in one way or another to the operation of Section 13 of the 1991 Act and the process it outlines. Responses from landlords, agents and some tenants indicated that Section 13 of the 1991 Act (as clarified by the Moonzie decision) gave a workable framework within which to undertake rent reviews and as such was still “fit for purpose”.
Evidence from most landlords and agents was that nearly all rents were reviewed and agreement reached satisfactorily by negotiation. Those negotiations usually considered rents on similar holdings, with appropriate adjustments being made.
It was brought to the attention of the Group on several occasions that in practice the actual process often did not follow the detailed procedure in Section 13 of the 1991 Act. There was general consensus that it was good business for landlord and tenant to meet on a regular basis to discuss matters that affected both parties in the relationship, and that the rent review was often the trigger for this process.
At one end of the spectrum, where there was a long relationship between landlord and tenant the review was often little more than a discussion on whether “things were better or worse than last time” with a new rent settled accordingly. Naturally this was seen as a good way to proceed.
At the other end of the spectrum, often associated with the instruction of an agent from an independent firm to conduct the review, the Group received evidence that:
- there was no “relationship”between landlord and tenant;
- often little or no attempt was made to calculate or justify a new rent in terms of Section 13 of the 1991 Act; and
- agents, often close to the review date, gave only superficial consideration to detailed lease conditions and the provision of fixed equipment on the farm, instead relying on “per acre” figures from elsewhere with little, or in some cases no, adjustments made for the farm under discussion.
This approach, together with the stark terms of the notice to review the rent, was stated by several tenants to put pressure on the tenant at an early stage with the effect that the tenant accepted settlement as the“least bad option”.
The Group received evidence from both landlords and tenants of delaying tactics in the process bringing added pressure to bear as the review date beckoned.
There were suggestions from both sides that a clear code of conduct is required on the practical way a rent review should be conducted.
Much of the evidence led to the Group was that the Moonzie decision would make little difference in principle. However, several articles have appeared in the farming press suggesting upward pressure on rents as a result of the findings on the hierarchy of evidence in the Moonzie decision. We received some evidence to that effect.
There was general agreement that the Moonzie decision gave helpful clarity to the process of rent review under Section 13 of the 1991 Act although many tenants felt very strongly that the “productive capacity of the holding and its related earning capacity” should be the priority and that Short Limited Duration Tenancy (SLDT) or Limited Duration Tenancy (LDT) rental evidence was not appropriate to 1991 Act tenancies for which there was no real market.
Somegave evidence that the consequence of the Moonzie decision was the intention behind the changes made to Section 13 of the 1991 Act by Section 63 of the 2003 Act had not been given effect. Minutes of meetings of stakeholders were tabled, confirmed verbally by others, whichrecorded agreement that equality be given to evidence of “economic conditions” and to “comparable farm rents”.
However the wording of Section 63 of the 2003 Act was agreed at an early stage of the Bill’s passage through Parliament and no moves were made to change or amend its terms during the parliamentary process to ensure that it gave effect to that agreement.
Many tenants stated their view that Section 13 of the 1991 Act was inappropriate as it did not give sufficient weight to “the economic capability of the holding” and they wished to see this introduced for 1991 Act rent reviews.
The Group also received representation that a formulaic process should be introduced, but there was little evidence put forward as to how such an approach might be implemented to take account of variations in factors including:
- farm types and lease conditions;
- the provision of fixed equipment; or
- how any budget surplus should be divided between landlord and tenant in the form of rent.
Several contributors raised the question of the treatment of environmental and other support scheme payments that are available to occupiers of agricultural and associated land. There was no clear evidence or conclusion on how these payments should be treated in a rent calculation.
Evidence from landlords and from tenants was polarised either in favour of or against the workability of Section 13 of the 1991 Act butagents all noted that they used information from a range of sources, including other farm rents, budgets and potential future outcomes, to arrive at the appropriate rent, and we were advised that the experienced practitioners considered “the tone of the market” or sat back and looked to see if the result “looked right”.
There was evidence that farmers considering offering in the open market or privately, for farms or blocks of land, did complete a budget as well as looking at other rents before deciding what offer might “win the tenancy”.
Many submissions commented that there had been no attempts to review rents from about 1995 to about 2007. As a result familiarity with the process was lost and in some cases the next review sought large percentage increases “as a catch up for the period since the last review”.
The period between reviews was raised with the Group.A minority did suggest a five year interval between reviews but overwhelmingly the view expressed was that three years was about right in a sector dominated by volatile commodity values.
Section 13 of the 1991 Act depends upon evidence of rents fixed on other farms and many contributors told the Group that this knowledge was not equally available to both sides.Tenants said that landlords, and in particular their agents, had an unfair advantage in having a better and wider knowledge of rents fixed elsewhere. A register of rents was suggested to the Group on several occasions, by landlords, agents and tenants.
2.2To consider the strengths and weaknesses of the existing Scottish rent assessment model for 1991 Act tenancies both in principle and practice
Through written submissions and discussions with individuals and organisationsthe Group received evidence and inputs from a wide cross section of the industry. The level of understanding of the detail of the rent formula in Section 13 of the 1991 Act was very diverse, perhaps due to different levels of engagement with the process.
Strengths:
The main strengths identified mostly by landlords and theiragents but also several tenants were:
- The rent formula in Section 13 of the 1991 Act is generally accepted as a tried and tested system backed with a reasonable body of case authority;
- The principles of the rent formula in Section 13 of the 1991 Act were acceptedalthough practice is less well understood and variable;
- There is a general understanding that the rent formula in Section 13 of the 1991 Act takes into account the equipment that the landlord leased to the tenant at the start of the lease or provided during the lease but that improvements undertaken by the tenant are disregarded;
- The Moonzie decision was generally agreed to have given further clarification to the process including clarifying the treatment of Single Farm Payment, use of comparable SLDT and LDT rental evidence and the hierarchy of evidence. However many contributions from tenants stated clearly that they did not agree with the findings of the Moonzie decision and its effect was that amendments made to Section 13 of the 1991 Act by the 2003 Act had done little to vary the process; and
- There is trust in the Land Court as an impartial dispute resolution forum.
Weaknesses:
The main weaknesses identified were:
- Many responses, particularly from tenants, noted that the existing system is complicated or unclear, with the practical effect that there is very often little attempt made to adjust rental valuation figures to take account of differences between farms. In many cases proposals for a new rent are confined to a statement of the rent expected without explanation, and with little or no discussion;
- Contributors from both sides commented that the requirement to make adjustments for differences between farms, types of leases, the conditions of the lease and other factors was very complicated, with the result that in many cases short cuts were taken or alternatively the adjustments were simply not made. There was evidence from both sides that the valuation concepts of ‘scarcity’ and ‘marriage value’ lack clarity. Even among contributions from professional valuers and surveyors there was no clear view as to how these valuation concepts should be treated to ensure consistent adjustment of evidence in rent reviews;
- Nearly all tenant submissions identified the requirement to take open market rents for SLDTs and LDTs (both governed by the 2003 Act) as evidence of the market when considering 1991 Act tenancy rents as a material weakness. Several contributors observed that differences in the conditions were so large that the required adjustments were too great to be meaningful; and
- All contributors were concerned that the process of resolving disputes through the Land Court was too long and too expensive.
2.3To compare and contrast the Scottish model for 1991 Act tenancies with any comparable alternative models, including that set out in the English Agricultural Holdings Act 1986, and to consider whether they would provide material differences in their outcome assessment