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Publication - Report

Testing the rent review system: report

Published: 26 Jan 2018

Report on secondary legislation needed to bring reforms to landlords and tenants agreeing agricultural rents in a cooperative process.

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1 page PDF

73.6 kB

Contents
Testing the rent review system: report
Appendix 2: Legal Analysis

1 page PDF

73.6 kB

Appendix 2: Legal Analysis

Section

Commentary on the Act

Areas to be considered for further regulation

Further regulations required (approved by Hamish Lean)

1

Rent review: service of notice

"(1) The landlord of an agricultural holding to which this paragraph applies may initiate a review of the rent that is to be payable in respect of the holding by serving a notice in writing on the tenant of the holding.

(2) The tenant of such an agricultural holding may initiate such a review by serving a notice in writing on the landlord of the holding.

(3) A notice served under sub-paragraph (1) or (2) is a "rent review notice".

(4) This paragraph applies to an agricultural holding in respect of which—

(a) the lease was entered into before 27 November 2003, ; or

(b) the lease—

(i) was entered into in writing on or after that date but prior to the

commencement of the tenancy, and

(ii) expressly states that this Act is to apply in relation to the tenancy."

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2

Form and content of rent review notice

"(1) A rent review notice must be dated and state the following —

(a) the names and designations of the landlord and the tenant of the agricultural holding,;

(b) the name (if any) and the address of the holding or such other description of the holding as will identify it,;

(c) the rent currently payable in respect of the holding,;

(d) the rent that the person serving the notice proposes should be payable,;

(e) the date by which the landlord and the tenant must reach agreement as to what the rent payable should be (the "rent agreement date").

(2) The rent review notice must be accompanied by information in writing explaining the basis on which the rent proposed by the person serving the notice has been calculated.

(3) For the purposes of sub-paragraph (1)(e), the rent agreement date stated in the rent review notice must not fall—

(a) earlier than 12 months from the date on which the notice is served, or;

(b) later than 2 years from that date.

(4) The Scottish Ministers may by regulations make further provision about:

(a) the form and content of rent review notices,,

(b) the information that must or may accompany them.

(5) Regulations under sub-paragraph (4) are subject to the negative procedure."

- Consideration of the practicality of including information on what the rent should be over a year in advance of the effective date.

- Consideration of the sensitivity of the productive capacity model for reviewing the rent and how the date of analysis will impact on the result.

- Consideration of whether proposed rental timeframes should be set by legislation or guidance.

- Removal of (d) the proposed rent cannot be calculated prior to a rent inspection which should not take place until after the notice is served. Requires amendment to primary legislation.

- Best practice guidance should be updated to dictate a timeframe for a rent review procedure similar to that which is currently outlined.

- It is felt dictating a timeframe within statute is too inflexible to cope with circumstantial delays caused by farming operations or unforeseen events.

3

Timing of rent review notice

(1) A rent review notice may not be served under paragraph 1 if the rent agreement

date stated in the notice would fall before the end of the period of 3 years

beginning with the latest of—

(a) the commencement of the tenancy,,

(b) the date as from which a previous variation of rent (under paragraph

7(2)(a) or otherwise) took effect,

(c) the date as from which a previous determination under paragraph 7(2)(b)

that the rent should continue unchanged took effect.

(2) For the purposes of sub-paragraph (1)(b), the following are to be disregarded—

(a) a variation of rent under section 14,,

(b) an increase of rent under section 15(1),),

(c) a reduction of rent under section 31,,

(d) a variation of rent arising under—;

(i) the exercise or revocation of an option to tax under schedule 10 of the Value Added Tax Act 1994, or

(ii) a change in the rate of value added tax applicable to grants of

interests in, or rights over land in respect of which such an option

has effect.

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N/A

4

Withdrawal of rent review notice

(1) This paragraph applies where—

(a) a rent review notice is served under paragraph 1,,

(b) no agreement has been reached between the landlord and the tenant as to the rent that is to be payable in respect of the holding, and, and

(c) no determination has been made by the Land Court under paragraph 7(2) as to the rent that is to be payable in respect of the holding.

(2) The person who served the rent review notice may withdraw it but only with the consent of the recipient of the notice.

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5

Termination of rent review notice

A rent review notice ceases to have effect on the earliest of the following—

(a) the date it is withdrawn,,

(b) the date the landlord and the tenant reach agreement as to the rent that is to be payable in respect of the holding,,

(c) where no referral is made to the Land Court under paragraph 6(2), the day after the rent agreement date,,

(d) where a referral is made to the Land Court under paragraph 6(2), the date on which the Land Court determines under paragraph 7(2) the question of what the rent payable in respect of the holding is to be.

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6

Referral of rent to the Land Court

(1) This paragraph applies where—

(a) a rent review notice is served under paragraph 1, and,

(b) no agreement has been reached between the landlord and the tenant as to the rent that is to be payable in respect of the holding.

(2) The landlord or the tenant of the holding may (whether the sender of the notice or not) refer the question of what the rent payable in respect of the holding should be to the Land Court.

(3) The landlord or the tenant may not make such a referral after the rent agreement date.

- Alternative methods of dispute resolution.

- Recommend that through the development of guidance the Land Court is advised to be the method of last resort with alternative methods of dispute resolution promoted.

- Dispute avoidance through the agreement of a statement of facts within the period of the amnesty should be promoted through best practice guidance.

- 'Without prejudice' correspondence should be banned in order to enhance transparency and remove the opportunity for debate.

7

Powers of Land Court on referral under paragraph 6

(1) This paragraph applies where a landlord or a tenant makes a referral to the

Land Court under paragraph 6(2).

(2) The Land Court must determine what the rent payable in respect of the holding

is to be as from the rent agreement date and may—

(a) vary the rent currently payable in respect of the holding, or,

(b) determine that the rent should continue unchanged.

(3) The rent that is to be payable in respect of the holding is the rent that the Land Court, taking account of all the circumstances, considers is the fair rent for the holding.

(4) In determining the fair rent for the holding, the Land Court must have regard, in particular, to—

(a) the productive capacity of the holding,,

(b) the open market rent of any surplus residential accommodation on the holding provided by the landlord, and,

(c) the open market rent of—

(i) any fixed equipment on the holding provided by the landlord, or

(ii) any land forming part of the holding, used for a purpose that is not an agricultural purpose.

- Fair rent is not defined and is open to interpretation in terms of its definition under RICS and its definition in line with residential regulated tenancies. Defined in the ITT as 'a rent which will be fair to both the landlord and their tenant farmer'.

- 'all the circumstances' and 'in particular' allows for the Land Court to consider other relevant factors outwith those outlined in (a), (b) & (c).

- Fair rent should be defined further in order to avoid ambiguity.

- The meaning of fair rent is believed to be derived from crofting legislation. Further research through an analysis of case law in this respect could be helpful in defining it.

- Recommend that the ability to account for non-surplus residential accommodation and be able to sense check using reference to relevant sitting tenant rents should be included when considering 'all the circumstances' in order to determine a fair rent.

8

New rent to take effect from rent agreement date

The rent agreed between the landlord and the tenant or, as the case may be, determined in accordance with paragraph 7 is to take effect from the rent agreement date.

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9

Productive capacity

"(1) The Scottish Ministers may by regulations make provision for the purposes of paragraph 7(4)(a) about the productive capacity of agricultural holdings, including —

(a) how the productive capacity of an agricultural holding is to be determined,,

(b) the information to be provided by the landlord and the tenant of a holding to the Land Court to enable the court to have regard to the productive capacity of the holding.

(2) regulations under sub-paragraph (1) are subject to the affirmative procedure."

Definition as set out in the ITT:

"The 'productive capacity of the agricultural holding' means the sustainable yield of agricultural products that would reasonably be expected from the agricultural holding under a system of farming suitable to it when farmed by:

  • a competent, efficient and experienced tenant farmer;
  • with adequate resources for that system;
  • with such assessment being made as at the effective date; and
  • taking account of any factors that might reasonably be thought to vary it before the next rent review.

Determination of the productive capacity:

The productive capacity of the agricultural holding is to be determined:

  • taking account of the physical character of the agricultural holding relevant to its use for agriculture as a trade or business, including but not limited to those factors detailed in the non-exhaustive list (on next page);
  • having disregarded the presence of fixed equipment and any tenant farmer's improvement so far as;

(i) it has been provided wholly or partly at the expense of the tenant farmer (whether or not that expense has been or will be reimbursed by any grant) without equivalent allowance or benefit having been made by the landlord in consideration of its provision; and

(ii) it has not been provided under an obligation imposed on the tenant farmer by the terms of the lease unless it was an item that the landlord was obliged to provide when the lease commenced in the circumstances on the agricultural holding at that date;

  • taking account of the fixed equipment provided by the landlord;
  • allowing for any land and fixed equipment provided by the landlord that is accepted as being used for a purpose that is not an agricultural purpose relevant to paragraph 7(4) of Schedule 1A;
  • having disregarded any dilapidation to, or deterioration of or damage to fixed equipment or land caused or permitted by the tenant farmer;
  • taking account of the extent to which the agricultural holding may reasonably be farmed with other land or to the extent an agricultural holding may be farmed with contractors providing machinery services in place of the overhead costs of owning machinery;
  • taking account of the terms of the lease by which the agricultural holding is let to the tenant farmer;
  • taking account of the terms of any other legally enforceable agreement or restriction affecting the use of the agricultural holding; and
  • using the yields that would reasonably be expected from the agricultural holding for that system of farming conducted by such a tenant farmer.
- Recommend that productive capacity can be calculated in terms of the likely output generated from the holding which includes the assumption that a hypothetical holding would have access to subsidy payments common at the time of the rent review.
  • The definition assumes that a 'hypothetical tenant farmer' would be expected to make the best use out of the farm productive capacity. A farmer would ensure the 'latent value' of the farm is utilised.
  • Latent Value can be defined as what a competent tenant would be expected to do to ensure productivity throughout his tenancy.
  • The reference to 'Trade or business' in section 1(2) of the 1991 Act allows potential to use standard % of output for costs used by banks as can assume 'a farmer' would not continue a business if it was not profitable in the long term. Recommend further research is done into what range of % banks would expect from a competent farm over a 3 year cycle.
  • Recommend a black patch approach to most tenants improvements;
  • Land improvements such as fencing, water troughs, access can be considered as reasonable in terms of the farmer extracting the 'latent value' from the farm and a deduction can therefore be made to account for these in terms of the impact their inclusion would have to the rent;
  • Grant Aid where the tenant has done something with grant aid this must be disregarded from the rent assessment. Recommend further research is done to determine whether this is 'fair';
  • Grant Aid where the landlord and tenant make a contribution –the tenant's contribution and the whole grant should be disregarded. i.e., if a building was put up with 40% grant, 30% tenant contribution, and 30% landlord contribution, 30% of that building could be considered in the analysis of rent. Recommend the element of grant funding which represents the landlord's contribution is accounted for in the rent assessment with the amount that reflects the tenant's contribution disregarded;
  • Further research is needed where the improvement is 100% grant aid funded to consider whether completely disregarding it is fair.
  • Recommend clarity that if a farm is let for a specific purpose this must be adhered to when defining the farming system.
  • Recommend presence of a post-lease agreement or pre-1948 Act must be considered in terms of placing a higher cost burden on the tenant which will impact productivity.
  • Recommend as a standard model the divisible surplus should be split 50/50 with adjustments potentially made to this where it is still thought to be unfair following the main discounts being made.

10

Surplus residential accommodation

"(1) Residential accommodation on an agricultural holding is surplus to the extent that it exceeds what is necessary to provide accommodation for the standard labour requirement of the holding.

(2) In determining, for the purposes of paragraph 7(4)(b), whether residential accommodation is surplus the Land Court—

(a) may take into account whether the standard labour requirement of the holding varies (seasonally or otherwise);

(b) must disregard —

(i) any accommodation all or part of which is occupied by the tenant of the holding,

(ii) any accommodation if the tenant is prohibited (by the lease or otherwise) from sub-letting it.

(3) But any such prohibition as is mentioned in sub-paragraph (2)(b)(ii) is to be ignored if the tenant has sub-let the accommodation by virtue of section 39(3) of the Agricultural Holdings (Scotland) Act 2003.

(4) In having regard for the purposes of paragraph 7(4)(b) to the open market rent for any surplus residential accommodation, the Land Court —

(a) must take into account all the circumstances, including —

(i) the condition of the accommodation and its location, ; and

(ii) where accommodation is occupied by a retired agricultural worker, under an arrangement or agreement between the landlord and the tenant of the holding, at no rent or at a rent that is below what the open market rent for that accommodation would otherwise be, that fact,.

(b) where the accommodation is not currently let, must disregard that fact.

(5) Where regard is had to the open market rent for surplus residential accommodation for the purposes of paragraph 7(4)(b), that accommodation is to be disregarded for the purposes of paragraph 7(4)(c).

(6) The Scottish Ministers may by regulations make provision about the standard labour requirement of agricultural holdings, including—

(a) how the standard labour requirement of an agricultural holding is to be determined,,

(b) the information to be provided by the landlord and the tenant of a holding to the Land Court to enable the court to determine the standard labour requirement of the holding.

(7) Regulations under sub-paragraph (6) are subject to the affirmative procedure."

  • how How the standard labour requirement ( SLR) is applied to the holding to calculate surplus property. Consider how relevant the SAC handbook SLR calculation is and whether it requires adjustment.
  • Consideration of seasonal need for accommodation; .
  • Farmhouse occupied by the tenant cannot be considered;.
  • Prohibition in the lease and no evidence of ever renting out cannot be rentalised.
  • Where sub-let under the 2003 Act the properties would be considered in the diversification section of the rent assessment.
  • Starting point is open market rent for the type of property and the area.
  • Where no rent is received and the property is occupied by a retired agricultural worker and there is a prohibition on sub-letting the property should not be rentalised. Where rent is being received and the landlord has consented to this formally or otherwise the open market rental can be considered.
  • SAC SLR data to be used. Recommend this is updated to reflect current agricultural practices.
  • Recommend further regulation to allow the calculation of rent to take account of the element of property which exceeds the labour required, i.e. if a holding requires 1.2 labour units and contains a Farmhouse and a Cottage, 80% of the market rent for the Cottage could be considered in the rent assessment.
  • Recommend clarification that the Farmhouse occupied by the tenant can only be considered in the productive capacity or 'all the considerations' element of the rent assessment.
  • Recommend it is made explicit that formal permission to sub-let or evidence that landlord has accepted sub-letting in the past will allow for consideration in the rent assessment.
  • Recommend the minimum standard for surplus accommodation should be based on the repairing standard for residential accommodation and the costs relevant to this should be accounted for regardless of if they have been undertaken by the tenant.
  • Tenants improvements should be black patched where possible and only included in order to assess comparables.
  • Non black patched improvements should be discounted through assessing what their presence adds to the rent via:

1) an analysis of rents with and without the improvement

2) Annualising then deducting the cost of the improvement.

  • Standard costs of improvements should be applied through availability of actual evidence (invoice) or an assessment of local costs (quotes from local contractors);).
  • The tenant's higher maintenance obligations and potential void periods should be taken into account before the surplus market rent is split 50/50 between the landlord and tenant. Such deductions are to be based on buy to let budgets produced by mortgage companies or industry practice (33%).

11

Open market rent

For the purposes of paragraphs 7(4) and 10(4)(a)(ii), the "open market rent"

means the rent at which—

(a) any surplus residential accommodation, or;

(b) any fixed equipment or land used for a purpose that is not an agricultural purpose, might reasonably be expected to be let on the open market by a willing landlord to a willing tenant.

  • Confirmation on whether a diversified use is to be rented at the open market for that specific use or at the open market for a commercial use.
  • Rental value is based on what a tenant would pay for the site for commercial purposes. This is based on what the landlord has provided and excludes all tenant improvements.
  • Where there is no comparable evidence available we recommend this is calculated through reference to the hypothetical use's net enterprise income.

12

Power of Land Court to phase in new rent

(1) This paragraph applies where the Land Court determines under paragraph 7(2)

that the rent payable in respect of an agricultural holding (the "new rent") is to be—

(a) 30% or more higher, or; or

(b) 30% or more lower,

than the rent currently payable in respect of the holding (the "original rent").

(2) The tenant or the landlord may apply to the Land Court to have the new rent

phased in.

(3) The Land Court may, if it considers that it would cause the tenant or, as the

case may be, the landlord undue hardship were the new rent to be payable from the rent agreement date, order that the new rent be phased in over a 3 year period in accordance with sub-paragraphs (4) to (6).

(4) The rent payable in the first year after the rent agreement date is—;

(a) where sub-paragraph (1)(a) applies, the sum of the original rent and one

third of the difference between the new rent and the original rent, or; or

(b) where sub-paragraph (1)(b) applies, the original rent less one third of the difference between the original rent and the new rent.

(5) The rent payable in the second year after the rent agreement date is—;

(a) where sub-paragraph (1)(a) applies, the sum of the original rent and two

thirds of the difference between the new rent and the original rent, or;

(b) where sub-paragraph (1)(b) applies, the original rent less two thirds of

the difference between the original rent and the new rent.

(6) The rent payable from the third year after the rent agreement date is the new rent.

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13

Interpretation

In this schedule—

"open market rent" has the meaning given by paragraph 11,

"rent agreement date" has the meaning given by paragraph 2(1)(e),

"rent review notice" has the meaning given by paragraph 1(3),

"surplus residential accommodation" has the meaning given by

paragraph 10.

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