Farm Rent Determinations Minimising Uncertainty

Farm Rent Determinations Minimising Uncertainty A Joint Memorandum from the National Farmers Union of Scotland Scottish Land and Estates Scottish Tenant Farmers Association 28 July 2014 Introduction Fundamental to a healthy rented sector within Scottish agriculture is a reasonable degree of predictability about future rent levels for tenanted farms. Uncertainty makes it more difficult for landowners and tenants to plan and invest with confidence. A number of recent rent determinations in the Land Court have given rise to some uncertainty about future rent levels for 1991 Act tenancies, which could have negative consequences for the industry. The Agricultural Holdings Legislation Review Group (AHLRG) are already considering the rent review process, but their recommendations will not be published until December. In the meantime this increase in uncertainty, together with the high legal costs and delays that are sometimes involved, is having a negative impact on confidence in the sector, in some cases involving real personal distress. In the light of this the three main membership organisations representing landowners and tenants have jointly decided to launch an industry led initiative designed to encourage short to medium term stability and predictability with regard to rent expectations for 1991 Act tenancies. This draws on some of the early thinking of the AHLRG, and uses inflation figures from the Office of National Statistics to establish industry led guidance. Core Elements of the Initiative All rent reviews should continue to be conducted in accordance with guidance published in the TFF Introduction and Guide to Good Practice for Farm Rent Reviews, and in SAAVA s more detailed Practitioners Guide to Scottish Agricultural Rents Reviews. Statutory processes for rent reviews, including requirements for serving notice and deadlines for submission of applications to the Scottish Land Court, continue to apply. The guidelines referred to below provide a sense check after the standard rent review test has been carried out, with the aim of preventing extreme situations from arising. The central thrust of the initiative is an intention to minimise uncertainty by introducing guidelines to be taken into consideration by landowners and tenants following the standard rent review test. They are based on an assumption of reasonableness, and are not intended to create an artificial rent floor or cap. The aim is to discourage large and potentially destabilising rent increases unless there is exceptional justification, and by doing so to allay concerns and maintain confidence. The initiative will continue until the recommendations of the AHLRG can be implemented, and will be subject to regular review. The guidelines are based on the principle of self-regulation and apply to all 1991 Act tenancy rent reviews. Landowners and tenants who have already commenced proceedings in the Land Court, including sisted cases, are advised to take note of the guidelines and incorporate them into their evolving thinking, but such cases may not be referred to the rent panel (see below). The guidelines do not have legal force, but the industry bodies have decided to establish an Agricultural Rent Panel to which cases may be referred by or on behalf of the landowner or tenant involved in a particular rent 1

review where either party feels that the guidelines have not been followed or exceptional circumstances apply. The findings of the panel will be reported to the industry bodies and will be made public. The Guidelines in Practice The guidelines are based on the presumption that on a like for like basis and in the absence of exceptional factors a reasonable rent increase will broadly be aligned with inflation as measured by the Consumer Price Index (CPI). Any rent adjustment requested by a landowner or proposed by a tenant in such circumstances should reflect changes in the CPI index since the last formally recorded rent review (taken to be the CPI index for the month prior to the valuation date) if it is to be considered reasonable. The guidelines recognise the need for some flexibility around a CPI norm to accommodate minor changes in circumstances, and they allow for a reasonable variance of 50% on the CPI index point change since the last rent review in order to accommodate this. A table showing monthly CPI data since 1994 is given at appendix A, and worked examples of theoretical rent adjustment calculations showing reasonable margins are given at appendix B. The guidelines relate only to broadly like for like rent adjustments. They recognise that there will sometimes be genuinely exceptional circumstances that justify an adjustment outside these limits. For example additional land, equipment and/or cash investment may have been provided by the landowner since the last rent review, part of the holding may have been resumed, landowner s fixed equipment may have been removed or not replaced, a non-agricultural diversification may have been agreed, or there may have been agreement at the last rent review to defer increases for business reasons. The guidelines assume and require that both landowners and tenants will conduct all rent reviews according to the process agreed by the industry bodies and set out in the TFF Introduction and Guide to Good Practice for Farm Rent Reviews. A written and jointly confirmed record showing sequential adherence to the key milestones contained in the TFF guide should be maintained for all rent reviews (a suggested pro-forma is given at appendix C). Long Delayed Rent Reviews The industry bodies are aware of a number of cases where a rent review may not have been conducted for many years, sometimes stretching back to the 1990s or even 1980s. An increase in line with CPI for such a long period will result in a very substantial rent increase when the review is finally carried out, and this may constitute an unsustainable short term financial shock for the tenant s business. The guidelines therefore include special provision for a stepped approach to rent increases in such cases. As a rule of thumb the industry bodies are of the view that, in like for like cases, a single rent increase in excess of 30% has the potential to destabilise the tenant s underlying business unless it is implemented on a stepped basis. Where a rent review has not been undertaken since before 2001, any proposed single increase in line with CPI will be in excess 30%. Where a rent review has not been undertaken since 1995 this figure rises to 50%, if since 1990 it rises to 75%, and if since 1988 when the CPI index came into use the rise is just over 100% (in the rare cases that predate 1988 further advice should be sought from one or more of the industry bodies). The industry bodies consider it important that any stepped approach to a rent rise is completed if at all possible before the date of the next rent review, but they also emphasise the need for reasonableness in reaching agreement on the size of each step. They have therefore agreed a guideline whereby for any agreed rent increase in excess of 30% the amount in addition to 30% should be added in three equal annual 2

steps on each of the three subsequent anniversaries through to and including the date of the next rent review. Worked examples are given at appendix D. Complaints to the Agricultural Rent Panel The industry bodies are seeking buy-in from all players in the sector to ensure widespread compliance with the guidelines in the collective interests of all landowners, tenants and the wider rural economy. To this end they have decided to establish a three member panel to consider representations from individual landowners or tenants directly involved in rent reviews, or from third parties acting on behalf of and with the consent of either the landowner or tenant. Referral to the panel may be made on the grounds that a rent request or offer (including stepped increases where applicable) does not comply with the guidelines, and/or that the TFF guide has not been followed and/or the process duly recorded. The panel will assess matters of objective fact (have the guidelines and/or the TFF guide been followed). Where exceptional circumstances are claimed for not adhering to the guidelines, the panel will also assess the reasonableness of this claim. Decisions will be made on a consensus basis, and where agreement cannot be reached the views of each panel member may be reported separately. The panel will report its conclusions as a matter of public record, and industry bodies will make their own decisions as to what action, if any, to take with respect to any member who may be involved. Membership of the panel will comprise one senior office bearer (or recent former office bearer) from each of the three industry bodies. Both parties (landowner and tenant) to the referral will be asked to complete a standard form (see outline draft version at appendix E) detailing the facts as they see them, and this will provide the basis for the panel s deliberation. Where necessary further information may be sought by the panel from either or both parties. A small standard charge (expected to be in the region of 250) will be made for referrals in order to cover administrative costs. The establishment of the panel does not affect landowners and tenants rights to make applications to arbitration under the 1991 Act, or to the Land Court. In Summary NFUS, SL+E and STFA are concerned about current uncertainty and potential instability around rents payable for 1991 Act tenancies in Scotland. Recognising that the AHLRG are giving the matter serious thought on which they will report in December, the three organisations have decided to jointly launch an industry led initiative designed to ensure stability until any emerging recommendations can be implemented. The initiative requires landowners and tenants to evidence that they have followed the TFF guidelines on rent reviews, and introduces an additional reasonableness test after the standard rent review test that is based on published data for UK inflation. In cases of long overdue rent reviews additional guidelines have been agreed to ensure that rent increases are implemented in a series of reasonable steps. The initiative will be subject to voluntary self-regulation through a review panel comprising senior office bearers (or recent former office bearers) from the three organisations. Statutory processes for rent reviews continue to apply. The establishment of a self-regulatory review panel does not affect landowners and tenants rights under the 1991 Act. The initiative seeks simply to ensure that statutory processes and published TFF guidelines are followed by all in a reasonable manner. Ends 3

Appendix A CPI monthly data 1994 to 2014 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jan 82.5 84.5 86.8 88.6 89.9 91.4 92.1 92.9 94.4 95.7 97 Feb 82.9 84.9 87.2 88.8 90.3 91.5 92.4 93.1 94.5 96 97.2 March 83.1 85.3 87.5 89 90.5 92 92.6 93.4 94.9 96.3 97.4 April 83.9 85.8 88 89.4 91 92.4 92.9 94 95.3 96.7 97.8 May 84.1 86.2 88.3 89.6 91.5 92.7 93.2 94.7 95.5 96.7 98.1 June 84.1 86.3 88.4 89.8 91.3 92.6 93.3 94.9 95.5 96.5 98.1 July 83.6 85.8 87.8 89.5 90.8 92 92.8 94.2 95.2 96.5 97.8 Aug 84.1 86.3 88.3 90 91.2 92.3 92.8 94.5 95.5 96.8 98.1 Sept 84.2 86.7 88.7 90.3 91.6 92.7 93.6 94.8 95.7 97.1 98.2 Oct 84 86.5 88.7 90.3 91.6 92.6 93.5 94.7 95.9 97.2 98.4 Nov 84.1 86.5 88.7 90.4 91.7 92.7 93.7 94.5 95.9 97.2 98.6 Dec 84.5 87 89 90.5 91.9 93 93.7 94.7 96.3 97.5 99.1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan 98.6 100.5 103.2 105.5 108.7 112.4 116.9 121.1 124.4 126.7 Feb 98.8 100.9 103.7 106.3 109.6 112.9 117.8 121.8 125.2 127.4 March 99.3 101.1 104.2 106.7 109.8 113.5 118.1 122.2 125.6 127.7 April 99.7 101.7 104.5 107.6 110.1 114.2 119.3 122.9 125.9 128.1 May 100 102.2 104.8 108.3 110.7 114.4 119.5 122.8 126.1 128 June 100 102.5 105 109 111 114.6 119.4 122.3 125.9 July 100.1 102.5 104.4 109 110.9 114.3 119.4 122.5 125.8 Aug 100.4 102.9 104.7 109.7 111.4 114.9 120.1 123.1 126.4 Sept 100.6 103 104.8 110.3 111.5 114.9 120.9 123.5 126.8 Oct 100.7 103.2 105.3 110 111.7 115.2 121 124.2 126.9 Nov 100.7 103.4 105.6 109.9 112 115.6 121.2 124.4 127 Dec 101 104 106.2 109.5 112.6 116.8 121.7 125 127.5 Note that future CPI data and data back to 1988 can be found on the Office for National Statistics website: http://www.ons.gov.uk/ons/index.html 4

Appendix B Worked Examples Showing Reasonable Margins (Note that rent figures used are based on entirely fictional farms and are illustrative only) Farm A Date of rent review (valuation date under S13) 28 May 2014 Date of last recorded rent review 28 May 2011 Previous rent - 50 per acre CPI index at May 2011 119.5 CPI index at May 2014 128.0 Change in CPI index - +8.5 Reasonable variance range indicated by the guidelines = 8.5 x 50% = 4.25 index points Minimum reasonable index figure unless exceptional circumstances = 128 4.25 = 123.75 Maximum reasonable index figure unless exceptional circumstances = 128 + 4.25 = 132.25 Recommended new rent on like for like basis = 50 x 128.0/119.5 = 53.56 per acre Min reasonable rent demand/offer unless exceptional circumstances = 50 x 123.75/119.5 = 51.78 per acre Max reasonable rent demand/offer unless exceptional circumstances = 50 x 132.25/119.5 = 55.33 per acre Farm B Date of rent review 28 May 2014 Date of last recorded rent review 28 May 2004 Previous rent - 40 per acre CPI index at May 2004 98.1 CPI index at May 2014 128.0 Change in CPI index - +29.9 Reasonable variance range indicated by the guidelines = 29.9x50% = 14.95 Minimum reasonable index figure unless exceptional circumstances = 128 14.95 = 113.05 Maximum reasonable index figure unless exceptional circumstances = 128 + 14.95 = 142.95 Recommended new rent on like for like basis = 40x128.0/98.1 = 52.19 per acre Min reasonable rent demand/offer unless exceptional circumstances = 40x113.05/98.1 = 46.10 per acre Max reasonable rent demand/offer unless exceptional circumstances = 40x142.95/98.1 = 58.29 per acre 5

Appendix C Proforma Milestone Record Confirming Adherence to the TFF Introduction and Guide to Good Practice for Farm Rent Reviews Milestone Date completed in accordance with TFF Introduction and Guide Formal written notice issued Farm inspection agreed and conducted Written proposal for revised rent issued Written response to proposal issued Agreement reached Or - further discussions conducted Agreement reached Or - alternatives to Land Court considered and implemented Agreement reached Or final decision taken to refer to Land Court Signed by or on behalf of landowner Signed by or on behalf of tenant Note both parties are expected to complete the milestones listed fully and in a sequential manner, and any decision to refer to the Land Court should only be taken as a very last resort and after all previous milestones have been fully exhausted. 6

Appendix D - Worked Examples Showing Reasonable Stepped Increases for Rent Rises Above 30% (Note that rent figures used are based on entirely fictional farms and are illustrative only) Farm A Date of rent review (valuation date under S13) 28 May 2014 Date of last recorded rent review 28 May 1994 Previous rent - 35 per acre CPI index at May 1994 84.1 CPI index at May 2014 128.0 Change in CPI index - +43.9 Recommended new rent on like for like basis = 35 x 128.0/84.1 = 53.27 per acre Recommended rent increase on like for like basis = 53.27/35 1 = +52% Maximum recommended reasonable single step increase = +30% = + 10.50 = 45.50 per acre Additional reasonable stepped increase after one year = +8% = + 2.80 = 48.30 per acre Additional reasonable stepped increase after two years = +8% = + 2.80 = 51.10 per acre Additional reasonable stepped increase after three years = +6% = + 2.17 = 53.27 per acre (= new base rent subject to rent review May 2017) Farm B Date of rent review (valuation date under S13) 28 May 2014 Date of last recorded rent review 28 May 1988 Previous rent - 25 per acre CPI index at May 1988 63.4 CPI index at May 2014 128.0 Change in CPI index - +64.6 Recommended new rent on like for like basis = 25 x 128.0/63.4 = 50.40 per acre Recommended rent increase on like for like basis = 50.40/25 1 = +102% Maximum recommended reasonable single step increase = +30% = + 7.50 = 32.50 per acre Additional reasonable stepped increase after one year = +24% = + 6.00 = 38.50 per acre Additional reasonable stepped increase after two years = +24% = + 6.00 = 44.50 per acre Additional reasonable stepped increase after three years = +23% = + 5.90 = 50.40 per acre (= new base rent subject to rent review May 2017) 7

Appendix E Draft forms to be used for referrals to the Agricultural Rent Panel Form 1 To be used by the person or organisation making the referral Form to be used to make a referral to the joint industry body Agricultural Rent Panel Date: Your full name: Contact address: Address of farm that is the subject of this referral (if different): Are you the landowner or the tenant (or acting on behalf of either)? Date of this rent review: Date of last rent review: Current annual rent: Proposed new rent: Any significant changes to the terms of the tenancy, fixed equipment provided, etc. Please elaborate in section below if relevant: Please give your reasons as fully as you can for referring this case, making specific reference to the aspect(s) of the joint industry body guidelines that you consider has/have not been fulfilled. Please attach any supplementary material that you think may be of assistance to the panel. You should continue on a separate blank sheet of paper if you run out of space, and attach it to this form. If you are not sure how to complete this form please contact one of the three industry bodies. Signed: 8

Form 2 To be used by the person or organisation referred to the panel Form to be used in response to a referral to the joint industry body Agricultural Rent Panel Date: Your full name: Contact address: Address of farm that is the subject of this referral (if different): Are you the landowner or the tenant (or acting on behalf of either)? You will have been given a copy of the referral made to the panel. Please respond as fully as you can to the points made, paying particular attention to either rebutting any assertion that the joint industry body guidelines have not been followed or giving reasons as to why exceptional circumstances justified so doing. Please attach any supplementary material that you think may be of assistance to the panel. You should continue on a separate blank sheet of paper if you run out of space, and attach it to this form. If you are not sure how to complete this form please contact one of the three industry bodies. Signed: 9