Agricultural Tenancies: Rent Reviews
Agricultural Tenancies: Rent Reviews
Under the Agricultural Holdings Act 1986 (the 1986 Act), either the landlord or the tenant can “demand” that the rent “properly payable” in respect of the holding “from the next termination date” is determined by arbitration or by a third party.
The ‘next termination date’ will be the earliest date on which the tenancy could have been ended by a notice to quit given at the date of the demand, i.e. the first anniversary of the start of the term of the tenancy which is at least 12 months after the date of the rent review demand.
This means that this statutory method cannot be used to implement a rent review for a fixed term tenancy, because only yearly tenancies (including fixed term tenancies which have been continued under section 2 of the 1986 Act after the fixed term has expired) can be brought to an end by notice to quit.
This brings into question whether it is possible for the landlord and the tenant to vary the arbitration procedure and/or valuation formula provided by the 1986 Act, or to contract out of them completely.
The 1986 Act is silent on the point. There is a view that the parties to a fixed term tenancy should be able to incorporate their own rent review machinery in the tenancy agreement, and this view has received some judicial support.
The position about a yearly tenancy remains unclear.
The general position is that no demand for a rent review can be made within three years of the start of the tenancy, or within three years of a previous rent review. (Changes in the amount of the rent which have occurred as the result of changes in the boundaries of the holding, or the carrying out of landlord’s improvements, or various other matters, are ignored for these purposes).
The ‘rent properly payable’: The ‘rent properly payable’ is not the equivalent of the ‘open market rent’.
Schedule 2, paragraph 1 of the 1986 Act sets out the matters which the arbitrator must take into account when determining the amount of the rent. The arbitrator may review the amount of the rent upwards or downwards, or may direct that it remains unchanged.
Statutory arbitration procedure:
The statutory arbitration procedure is activated by the service of a ‘demand’ by either party, similar to a ‘trigger notice’ once common in leases of commercial property. Once the demand has been served, there is a strict time limit for the appointment of an arbitrator. Failure to comply with that time limit means that the demand will lapse.
However, the statutory procedure is seen as cumbersome and the valuation formula is complex. As a result, relatively few rent review demands are served, and even fewer disputes proceed to an arbitration hearing. In most cases the parties will simply agree a revised rent.
2.Agricultural Tenancies Act 1995
The Agricultural Tenancies Act 1995 (the 1995 Act) contains “default” rent review arrangements in relation to farm business tenancies. These are set out in sections 9–14 of the 1995 Act.
However, in respect of rent review provisions made on or after 19 October 2006, the parties to a written farm business tenancy agreement can opt out of the statutory default arrangements and negotiate their own rent review machinery, provided that it does not preclude a reduction in rent. This prohibits ‘upwards-only’ rent reviews commonly found in leases of commercial property. The prohibition applies whether the rent is to be determined in accordance with a formula set out in the tenancy agreement or by a third party.
Oral tenancy agreements are also within the scope of the statutory rent review procedure. Any term of such an agreement which is inconsistent with that procedure is unenforceable.
Contractual rent review:
The parties to a written farm business tenancy agreement can agree that:
- there will be no rent review.
This must be expressly stated in the tenancy agreement and may (for example) be adopted if the tenant is to carry out major building works, repairs or improvements under the terms of the lease;
- there will be a ‘stepped’ rent, i.e. that specified levels of rent will apply during specified periods.
- the rent will vary according to an agreed formula.
As above, the specified formula must not preclude the possibility of the rent going down: provided that it is does not do so, the parties can agree whatever formula they wish.
- the rent will vary in accordance with a determination by an independent expert.
Again, the tenancy agreement must not preclude the possibility of the rent going down as the result of the determination.
Alternatively, the parties can simply agree the date and frequency of reviews, leaving the actual amount of the rent to be determined under the statutory arbitration procedure.
Where the parties have adopted a contractual form of rent review which complies with the 1995 Act, they must abide by their agreement, and cannot then invoke the arbitration procedure provided by the 1995 Act.
Where the parties have adopted a contractual form of rent review which does not comply with the 1995 Act, they are free to implement that form of review, but can also invoke the statutory procedure instead, provided that they do so before any person has been appointed under the contractual form of review machinery to determine the rent.
Statutory arbitration procedure
Either party can implement the statutory arbitration procedure by serving a ‘statutory review notice’ in accordance with the 1995 Act.
The review date must be no less than 12 months but no more than 24 months after the day on which the statutory review notice is served.
Unless the parties have agreed the date and frequency of reviews (see above), a statutory review cannot take place within three years after the start of the tenancy or within three years of the last rent review.
The arbitrator will determine the ‘rent properly payable’ in respect of the holding, i.e. the rent at which the holding might reasonably be expected to be let on the open market by a willing landlord to a willing tenant, subject to specified matters which are to be disregarded.
(This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)