3 Valuing the Rent

3.122 As we have seen, the parties can agree to vary the rent by or to a specific amount, or agree that it shall not be varied during the tenancy, or agree to a variation by reference to objective criteria.²³⁸ If no express provision is made in the tenancy agreement in these terms, or if review by reference to non-objective factors is provided for, it will be open for either party to seek a rent review by arbitration under the 1995 Act.

3.123 The arbitrator is required to determine the amount of the rent on free market principles, as directed by s 13(2) of the 1995 Act. This provides that the rent properly payable shall be:

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, taking into account … all relevant factors, including (in every case) the terms of the tenancy (including those which are relevant for the purposes of section 10(4) to (6) of this Act) but not those which preclude or purport to preclude a reduction in the rent during the tenancy.²⁴¹

3.124 The 1995 Act deliberately avoids the prescriptive approach to rent review under the Agricultural Holdings Act 1986, and envisages reviews determined by market forces of supply and demand, and not tied to the tenant’s profitability or the productive capacity of the holding. The reference to a ‘willing’ landlord and a ‘willing’ tenant involves making an abstract assumption viz. of a hypothetical landlord and hypothetical tenant willing to enter into a tenancy on the terms of the subject holding, but freed from any personal or financial exigencies affecting either of the (actual) parties to the tenancy.²⁴² Unlike the Agricultural Holdings Act 1986,²⁴³ the 1995 Act omits any reference to the landlord and tenant being ‘prudent’ as well as willing.

(a)Terms of the Tenancy

3.125 The arbitrator must take the terms of the tenancy into account in every case. The arbitrator is, on review, being asked to determine the free market rental for the particular letting, and this must, of necessity, involve a consideration of the terms on which the holding was let. The obligations of the parties under the lease will be of particular importance for rental valuation. Repairing obligations in a full repairing lease will undoubtedly, for example, depress the rental value of the holding, as will restrictive user covenants preventing the tenant diversifying his farm business. The terms of the tenancy (if any) as to the valuation and payment of rent are also relevant – for example terms as to the intervals at which rent can be reviewed, and whether it will be payable in arrears or advance. A term of the tenancy that precludes a reduction in the rent during the tenancy must, however, be disregarded by the arbitrator.²⁴⁴

(b)‘All Relevant Factors’

3.126 The arbitrator must have regard to all relevant factors in valuing the rent. This general clause also appears in the rent formula under the 1986 Act. In the 1986 Act context it has been held that this admits the existing rent as one ‘relevant factor’ to be taken into account.²⁴⁵ Similarly, income from environmental management agreements, such as SI agreements, or Environmentally Stewardship or Countryside Stewardship agreements, with Natural England will be relevant to rental value.²⁴⁶ Likewise, in Morison-Low v Paterson²⁴⁷ the Scottish Court of Session held that CAP subsidies like the single farm payment,²⁴⁸ that are decoupled from production, are nevertheless relevant on rent review, inasmuch as they will have an impact in the open market on the level of rent offers and tenders made for land – even though the payment entitlements themselves may be an ‘asset’ brought to the holding by the tenant.²⁴⁹ Also relevant will be any ‘marriage value’ attaching to the subject holding and attributable to the proximity of other land farmed by the tenant in the locality and which could conveniently be farmed with it.²⁵⁰ It will be for the arbitrator to decide the weight to be attributed to each factor when valuing the rent.

(c)Disregard of Tenant’s Improvements

3.127 The arbitrator must disregard any increase in rental value attributable to the provision of tenant’s improvements.²⁵² This is to protect the tenant from having to pay an increased rent based upon his own improvements, or at least on those which have a lasting impact so as to increase its rental value. By ‘tenant’s improvements’ in this context is meant any physical improvement made on the holding by the tenant wholly or partly at his own expense or by his own effort. It also includes any intangible advantage (such as a grant of planning permission) which is obtained by the tenant’s effort or at his own expense, and which becomes attached to the holding.²⁵³ In the case of planning permission obtained by the tenant for non-agricultural development the additional rental value could be considerable. The landlord’s position is protected in this case, however, by a provision that the tenant has no claim for compensation unless he has obtained the landlords written consent to the making of the application for planning permission.²⁵⁴

3.128 There are only three exceptions in which the arbitrator must take tenant’s improvements into account. These are:²⁵⁵

(i)Where the tenant’s improvement was provided under an obligation imposed on the tenant under the terms of the tenancy and which arose on or before the beginning of the tenancy,

(ii)Any tenant’s improvement in respect of which the landlord made the tenant an allowance or benefit in consideration of its provision, and

(iii)Any tenant’s improvement to the extent to which the tenant has received compensation from the landlord in respect of it.

3.129 These are all cases where the tenant is presumed to have already been adequately compensated for the provision of the improvement.

(d)Other Disregards

3.130 The arbitrator must also disregard any effect on the rent of the fact that the tenant who is a party to the arbitration is in occupation of the holding. Similarly, in order to protect the landlord the arbitrator is required to disregard dilapidations by the tenant. He is not to fix the rent at a lower amount by reason of any dilapidations or deterioration of, or damage to, buildings or land caused or permitted by the tenant.²⁵⁶

(e)Comparison with Agricultural Holdings Act valuations

3.131 The farm business tenancy provisions were a break with the past, and give greater flexibility to the parties to agree their own review terms. By providing that the parties can agree the periods and dates of review the 1995 Act allows them to opt out of the traditional three year rent review cycle, and make their own provision tailored to the terms and conditions of the particular letting. Similarly, the 1995 Act allows them to provide for dispute resolution by an independent expert, rather than mandatorily by arbitration, as under the 1986 Act. While the parties can adapt the timing of review and method of determination of disputes, however, they cannot exclude a statutory review from taking place – unless, of course, they contract out using one of the options in s 9. Either party can insist on a review taking place, therefore, if the other refuses to appoint an expert or arbitrator, by triggering the default provisions and securing the appointment of an arbitrator under the 1995 Act.

3.132 The 1995 Act also differs from its predecessor in that it frees the rent valuation from considerations of the productive and related earning capacity of the farm.