Testing the rent review system: report

Executive Summary

Aim of the Research

The Land Reform (Scotland) Act 2016 sets out the framework for assessing what is a 'fair rent' for an agricultural holding. The concept of a 'fair rent' underpins the ethos of the Act and therefore drives the recommendations and conclusions reached in this report. It is implicit that a 'fair rent' must be a sustainable rent for both landlord and tenant. This dictates a need for codes of practice to outline how this can be produced in a reasonable and proportionate manner.

Overarching Philosophy

The overarching philosophy of creating a 'fair rent' should be based on transparency of process. This can largely be achieved though "open" as opposed to "without prejudice" correspondence and agreed statements relating to factual matters and evidence.

A rent review can be settled along the following three different pathways:

1. Litigation and/or Arbitration

2. Alternative methods to dispute resolution

3. Dispute Avoidance

The preference should always be dispute avoidance which we believe is possible if best practice guidance facilitates that the following processes are put in place by both parties to ensure positive engagement:

1. No documentation between parties being labelled as 'without prejudice' will encourage correspondence to be open, reasoned and justified.

2. The disclosure of insurance details in terms of litigation cover at the start of rent review negotiations so parties are aware of where they stand and this is not used as a 'bargaining chip' later in the negotiation process. There should also be an acceptance of the fact that insurers would be updated on the likelihood of success throughout the process of litigation.

3. A statement of facts on the capability of the holding is produced between the two parties prior to the creation of any budgets. This will employ a level of agreement and range of reasonable figures prior to a proposed rent being put forward. It will therefore ensure boundaries for working and transparency in approach.

4. A 50/50 split of the divisible surplus is used unless it is fully justified why an alternative approach should be put in place.

We believe that a cultural change should underpin the implementation of this Act. In order for the provisions to be workable in practice there needs to be valid and accepted codes of practice which dictate the expected conduct of both parties and the main steps which should be taken to come to a fair rent. The promotion of professional practice is seen to be very important in order to make the new system workable in practice.

Recommendations

Our recommendations can be summarised as follows:

Form & Content of a Rent Review Notice Summary

• Removal of Sub-section 2(d) to ensure a rent review notice does not need to include details of the proposed rent. However, we observe that this would appear to fall outwith the scope of Section 2 (4) of the Act which allows Scottish Ministers by regulations to make "further" provision about the form and content of rent review notices. We do not believe that removing an existing requirement is making further provision and any such change may require primary legislation.

• Best practice guidance should be updated to dictate:
  • A timeframe for a rent review negotiation 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.;
  • completion of the tenant's amnesty should be encouraged in order to improve records for rent review purposes.;
  • completion of a Statement of Facts should be undertaken alongside the Tenant's amnesty procedure prior to a rent review notice being served under the new system.

Productive Capacity Summary

• Clarity is required to ensure that the productive capacity can be calculated using the Gross Output model proposed. Further research into what percentage of Gross Output would reflect the expected Gross Profit of a competent farmer, how this may vary and what factors would allow it to be varied is required.;
• a black patch approach to tenant's improvements should be adhered to except where the improvement is required to be considered in order to derive a sensible farming system for the holding. ;
• non black patched improvements should be accounted for and deducted in terms of the additional rent a tenant would pay for them. This may be done using a relevant cost and deduction method agreed to be reasonable by both parties.;
• where an improvement is undertaken using grant aid, the amount that represents the landlord's contribution should be taken into account in the rental assessment. The amount which represents the tenant's contribution should be disregarded from the rental assessment. This approach would be considered as fair to both parties but different to what has been done in the past and what is outlined in the Rent Review Tender document.;
• as standard, it is recommended that the divisible surplus is split 50/50 before deductions for improvements and additions for surplus residential accommodation and non-agricultural use. Adjustments to the 50/50 split will only be justified where the result of this is considered to be 'unfair'.;
• the inclusion of adequate residential accommodation for the holding can either be accounted for by varying the gross profit percentage used in the gross output model or by considering this in terms of 'all of the circumstances' outwith the three statutory considerations of the Act. Further research is required to ensure a fair means of accounting for non surplus residential accommodation.;
• use of comparable sitting tenant rents agreed or set in the previous three years should be allowed as a reasonable sense check for productive capacity. ;
• guidance should encourage parties to complete a 'Statement of Facts' and record all tenant's improvements and tenant's fixtures within the timeframe of the Tenant's amnesty.

Residential Surplus Summary

• An update of the Standard Labour Requirement ( SLR) data contained within the Scottish Agricultural College ( SAC) handbook should be undertaken.;
• surplus residential accommodation should be defined using the SAC handbook's SLR figures for a holding.;
• the open market rent should be calculated on the proportion of residential accommodation over and above what is required for the holding. Regulations and/or Best Practice Guidance must allow this to be calculated using the method outlined in paragraph 7.2.2.1 of this report.;
• clarity needs to be added to ensure that compliance with the Housing (Scotland) Act is accounted for when calculating the cost to be deducted from the open market rent.;
• tenant's improvements should be black patched wherever possible unless they are considered when analysing comparable evidence to come to the open market rent.;
• non black patched improvements should be deducted through assessing the amount of additional rent the improvement warrants through an analysis of comparables then deducting it from the market rent or spreading the cost over the likely lifetime of the improvement and deducting its annualised rate from the market rent. The overall basis for the deduction of non black patched improvements should be to reasonably consider how much the improvement adds to the rent and deduct it on that basis.

Non-Agricultural Use Summary

• Clarity is required to ensure it is possible to cross check the comparable approach with the hypothetical tenant net enterprise income approach in order to promote a reasonable sense check where there is a lack of comparable evidence to allow for the calculation of a 'fair rent'.;
• the ability to both black patch and deduct tenant's improvements through a cost and deduction method should be clarified in the regulations. The overall basis for the deduction of non black patched improvements should be to reasonably consider how much the improvement adds to the rent and deduct it on that basis.