Testing the rent review system: report

Chapter 2: Remit & Scope: Testing of the Rent Review System

2.1 Approach

2.1.1 In 2011, the SNP manifesto made a commitment to undertake a legislative review within 18 months of the Agricultural Holdings (Amendment) (Scotland) Act 2012 coming into force.

2.1.2 The ministerial led Agricultural Holdings Legislation Review Group ( AHLRG) undertook that review in 2014 and completed their Final Report in early 2015. Evidence gathering work was supported by a Scottish Government research programme that was also undertaken in 2014.

2.1.3 Scottish Government noted in their Invitation to Tender ( ITT) that one of the main issues raised within the research related to the regulation of agricultural tenancy arrangements between landlords and tenant farmers. The report highlighted that the research had shown dissatisfaction with the current rent review system in Scotland and a high percentage of applications made to the Land Court under the rent review provisions contained in section 13 of the 1991 Act. It should be noted that the majority of such applications never proceed to a full hearing in the Land Court but are made to allow parties to continue negotiations past the review date. In reality there have only been three rent review cases in the last 14 years which have proceeded to a full evidential hearing before the Court where the Court has then fixed the rent.

2.1.4 In addition to those cases which have gone to the Land Court, the research programme, identified in 2.1.2 above, found that rent reviews were reported as being the most common source of dispute between Landlords and Tenants. When asked, 20% of landlords (50 respondents) and 15% of tenant farmers (150 respondents) stated that they had experienced a major dispute related to a rent review.

2.1.5 The AHLRG concluded that although the under-lying proposition that rent reviews should be fixed on an open market rent may be simple in principle, in practice it can be difficult to apply accurately and fairly in situations where demand exceeds supply. Due to such distortions caused by scarcity, they recommended a means of calculating the rent based on the productive capacity of the holding which should be kept under review in line with the supply and demand pressures within the market.

2.1.6 The AHLRG recommended a new approach to calculating rents, from one based on the concept of an open market, to one which will take account of the productive capacity of the agricultural holding. The Land Reform (Scotland) Act Part 10, Chapter 5 introduces provisions for the new rent review system, moving away from 'the open market' to a 'fair rent', which takes into account the agricultural productivity of the holding, the open market rent of surplus residential accommodation and non-agricultural use.

2.1.7 As the rent review system is significantly changing, the Scottish Government wish to ensure the new approach is tested to determine whether it is fit for purpose and works well in practice over the potential range of different agricultural holding types and sizes across the tenant farming sector in Scotland.

2.2 Definition of Productive Capacity

2.2.1 The proposed definition of Productive Capacity put forward by the Scottish Government in collaboration with the main stakeholder groups is:

2.2.2 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.

2.2.3 This definition dictates the form of the models tested within this report.

2.3 Overarching Aims of Rent Testing

2.3.1 The rent review testing work undertaken calculates the rent on a sample of ten different agricultural holdings across Scotland, identified and provided by the Scottish Government. The testing was carried out with reference to the legislative provisions contained within Part 10, Chapter 5 of the Land Reform (Scotland) Act 2016 with a variety of different models used in order to determine the best means of calculating the fair rent.

2.3.2 The provisions of the Land Reform (Scotland) Act 2016 set out the framework for assessing what is a 'fair rent' for the agricultural holding. A 'fair rent' was defined by the Scottish Government in the ITT for this project as 'a rent which will be fair to both the landlord and their tenant farmer.' This definition needs to be further explored to ensure an understanding of what a fair rent represents to both the landlord and tenant.

2.3.3 In determining the fair rent for the agricultural holding, regard must be had, in particular to:

(i) the productive capacity;

(ii) the open market rental value of any surplus residential accommodation; and

(iii) the open market rental value of any fixed equipment provided by the landlord or any land and buildings used for a purpose that is not an agricultural purpose.

2.3.4 The Scottish Government has instructed this work in order to gauge how rental valuations would be assessed by reference to the above approach in order that the secondary legislation and regulation can be framed to provide clarity in the methodology. The overarching aim of the testing work is to ensure the creation of a rent review system which is workable and fair to both tenants and landlords. This will involve:

1. Assessing the application of the 'fair rent' approach as outlined in Part 10 of the Act through consideration of productive capacity, residential surplus and non-agricultural/diversified use.

2. Considering budgeting models to examine the merits and difficulties with the AHLRG's recommendation of sharing a divisible surplus.

3. Considering alternative methods within the confines of Chapter 5 of the Land Reform (Scotland) Act 2016 which allow the rent formula to be applied.

2.3.5 The remit can be defined as adopting working models for the best application of the legislation as it stands. We are not tasked with adjusting the legislation in any way and therefore must work within its confines.

2.4 Specific Objectives

2.4.1 In order to meet our aims, rent analysis has been carried out on ten agricultural holdings based on the concept of a 'fair rent', taking account of the productive capacity of the agricultural holding as set out in the Land Reform (Scotland) Act 2016 and other considerations contained in Part 10, Chapter 5 of the Land Reform (Scotland) Act 2016.

2.4.2 This work has involved the adoption of the following specific objectives:

• assessing the productive capacity of the agricultural holding in accordance with the definition put forward by Scottish Government;
• consideration of how different tenancy arrangements including post-lease agreements and unusual lease terms would impact the calculations;
• identification of a hypothetical farming system for a holding based on what a competent, efficient farmer would do on the holding using the landlord's fixed equipment only;
• use of professional expertise and available costing data to prepare budgets for the agricultural holdings based on the hypothetical system identified;
• setting out problems, and proposing solutions and suitable alternatives within the confines of Chapter 5 of the Land Reform (Scotland) Act 2016;
• assessing the open market rent of (a) any surplus residential accommodation on the agricultural holding provided by the landlord, and (b) any land or fixed equipment provided by the landlord for which use is made by the tenant farmer in connection with any diversification activities on the agricultural holding carried out by the tenant farmer;
• considering options available to provide a reality check against the rent identified;
• considering the issues raised by the main stakeholder organisations; and
• identifying potential issues with data sources and local/regional issues in relation to the preparation of the budget.

2.5 Timescale

2.5.1 The Rent Testing Team were instructed in May 2017, following which inspections of all sample farms were undertaken and completed by mid July 2017. An Interim Report was submitted to the Scottish Government on the 11 August 2017 following which input was sought from the main stakeholder groups via a meeting organised by Scottish Government and formal written submissions.

2.6 The Report and its Recommendations

2.6.1 This report has been reviewed and signed off by all the members of the Rent Review Testing Team. Its submission should allow officials to complete an analysis of the work and produce a suitable analysis report for Cabinet Secretaries, Ministers and members of the Scottish Parliament's Committees to consider.