3 Valuing the Rent

(a)The rent properly payable

6.129 The rent properly payable²³⁸ is ‘the rent at which the holding might reasonably be expected to be let by a prudent and willing landlord to a prudent and willing tenant’.

6.130 The valuation process envisaged by Sch 2 involves assessing the rent that a hypothetical ‘prudent and willing tenant’ would expect to pay, ie a reasonably competent tenant, who must be assumed to act free from financial exigency or other constraints. The ‘landlord’ is also, for the purposes of the rent valuation, a hypothetical creation who must be assumed to act free from financial or other pressures.²⁴⁰ He is a hypothetical landlord who wants to let the holding at a rent which is appropriate to all the factors which affect the marketability of the holding as an agricultural holding, including the market rent for competitive premises.

(b)All Relevant Factors

6.131 The arbitrator must consider all ‘relevant factors’ that appertain to the potential profitability of the farming enterprise, and not simply those set out in further detail in the following provisions of Sch 2. The exact boundaries of this exercise are, however, imprecise. The rent formula in the 1986 Act does not, for example, give any clear indication as to how CAP farm support payments under the basic payment scheme and its predecessors are to be treated on rent review; on whether payments under agri-environmental agreements are accountable; or whether non- agricultural income derived from assets leased to the tenant with the holding are accountable on rent review.

6.132 These issues turn on the interpretation of the ‘general clause’ in the rent formula, and in particular on the exact scope of the direction to the arbitrator to take account of all ‘relevant’ factors when valuing the rent. This was considered by the court of appeal in Trustees of JW Childers WT v Ankers.²⁴¹ The following points emerge from this and the other relevant case law.²⁴²

•the existence of an environmental land management agreement, and the likely remuneration under it, are relevant factors to be taken into account. The weight to be attached to the management agreement is, however, a matter for the arbitrator.²⁴³ The management agreement in Ankers was an SSSI agreement with the Nature Conservancy Council made under the Countryside Act 1968. The same principle would, it is submitted, apply to an agreement entered into under any of the other agri-environment schemes – for example an entry level stewardship agreement, countryside stewardship agreement, or a nature reserve agreement – at least insofar as they provide compensation to the tenant to offset restrictions on his farming operations on the land let to him by the tenancy (and hence restrict the profitability of the farming enterprise). Similarly, it is suggested, the fact that part of the holding has been notified by Natural England as an SSSI may be a relevant factor if it places restrictions on the tenants farming operations, thus depressing the potential rental value of the land let. This will be the case whether or not a management agreement has been offered by the regulator,

•the existing rental can be one relevant factor to be taken into account. It cannot, however, operate as a yardstick or benchmark requiring the landlord to justify an increase to the statutory rent level, however, large the increase.

•there is no duty on the landlord to motivate rent increases every three years. Failure to do so cannot be taken into account by the arbitrator,

•Non-farming income is a relevant factor in the statutory formula, in addition to farming income referred to in Sch 2, para 1(2) (below). So, income from a farm shop,²⁴⁴ rents from farm cottages sublet as holiday accommodation, or rental income from a caravan site can, for example, all be brought into account.

•It remains unclear to what extent the income generating potential of the holding from non-agricultural sources can be taken into account when assessing its rental value. The arbitrator is expressly required to consider the productive capacity of the holding (in the agricultural sense) in every case. Where the landlord has given permission for diversification by the tenant into non-agricultural land uses it should follow that the holding’s earning potential from non-agricultural activities should also be accountable.

•Marriage Value accruing to the subject holding, because the tenant occupies other land in the locality that can conveniently be farmed with it as one agricultural unit, was held by the court of appeal in Trustees of JW Childers WT v Ankers²⁴⁵ to be a factor to be taken into account. Marriage value in comparable holdings is, however, to be disregarded in the valuation exercise. The court of appeal expressly left open in Ankers whether scarcity value attaching to the subject holding should be discounted, although an analogy with the rule for marriage value (which is discounted for comparables, but relevant in the subject holding) might suggest it should be taken into account. To do so, however, would negate the fundamental objective of the complex valuation rules in Sch 2 viz. to tie the rent on review more closely to the productive potential of the holding, and not to inflated tenders in the land market.

6.133 Some of these issues were revisited in the Scottish Courts in Morison-Low v Paterson.²⁴⁶ The Court of Session gave important guidance on how payments under the single payment scheme should be treated on rent review, on the relevance of non agricultural income, and on marriage and scarcity value. Although not binding as to the interpretation of the English legislation, the decision has strong persuasive value: the Scottish legislation at issue²⁴⁷ is very similarly drafted to the 1986 Act, and English authorities were cited by the Scottish courts²⁴⁸ in support of the conclusions reached in the appeal to the Court of Session.

6.134 In reversing the decision of the Scottish Land Court, the Court of Session criticised the drafting of the Scottish legislation and held that the Land Court must take as its starting point the evidence of rents set in open market lettings on protected tenancies²⁴⁹ of comparable holdings. It should then adjust the evidence to take account of differences in the physical characteristics of the holding and the particular terms of the different tenancies. ‘It must adjust the evidence of the comparables if need be to take account of current economic conditions in the relevant sector of agriculture and apply the specific regards and disregards set out in [the 1991 Act]’.²⁵⁰ On the question of the relevance of the basic scheme payment, the Scottish Land Court had held that it could not be taken into account when assessing the ‘productive earning capacity’ of the holding, as the entitlements themselves are separate from the land let. The payment is ‘unlocked’ by matching the entitlements held by the tenant with land (comprising or including the land let by the tenancy).²⁵¹ Nevertheless, the Court of Session held that subsidies decoupled in this way were 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.²⁵² The Court of Session stressed the primacy of the evidence provided by the rents of comparable holdings, and endorsed the approach to marriage value taken by the English Courts in JW Childers Trustees v Anker viz.

(c)Specific Factors for Consideration

6.135 In addition to the above, the arbitrator is directed by Sch 2, para 1 to take into account in every case the following factors:

(i) Terms of the tenancy/character etc of holding

6.136 These are matters that an experienced arbitrator would take into account, in any event, when initially assessing the market rental value of the holding (above). All the terms of the tenancy must be considered including, for instance, repairing obligations. The specific injunction to consider those terms of the tenancy ‘relating to rent’ means that special terms providing for adjustment of rent, or suspension of payment, must be considered, eg a term making payment conditional upon the carrying out of repairs.²⁵⁴

(ii) ‘Productive Capacity’ and ‘Related Earning Capacity’

6.137 The arbitrator must in every case have regard to the productive capacity of the holding and its ‘related earning capacity’. These concepts are closely defined in Sch 2, para 1(2). The arbitrator must make a clear and separate assessment of productive capacity and related earning capacity, as failure to do so will constitute an error of law on the face of the award.²⁵⁵

6.138 ‘Productive Capacity’: this means ‘the productive capacity of the holding (taking into account fixed equipment and any other facilities on the holding) on the assumption that it is in the occupation of a competent tenant practising a system of farming suitable to the holding’. The hypothetical nature of the valuation is here made explicit. The arbitrator must look not at the production actually achieved by the sitting tenant, but at that level of production which a reasonably competent tenant would achieve, making use of the existing fixed equipment on the holding.

6.139 ‘Related Earning Capacity’: the arbitrator must consider ‘the extent to which, in the light of [the holding’s] productive capacity, a competent tenant practising such a system of farming could reasonably be expected to profit from farming the holding’.

6.140 As noted above, because basic scheme payment entitlements are decoupled from production, are not attached to the land let, and are allocated to the farmer and brought to the farming enterprise by the tenant, they cannot be taken into account as contributing to productive capacity or related earning capacity. They are not directly linked to production. In Morison-Low v Paterson²⁵⁸ the Scottish Land Court had initially concluded that single farm payment entitlements were irrelevant to rental valuation because they were an asset brought to the farm by the tenant and not attached to it. The entitlement must be matched to eligible hectares to unlock payment, but this could be achieved by the renting of ‘naked acres’ of eligible land elsewhere (for example hill land), for which there was a ready market in Scotland, with land available at relatively low annual rents.²⁵⁹ This approach was overturned by the Court of Session, who commented:

‘What matters is that [the single payment entitlement] is directly connected with the tenant’s occupation of the holding….it is directly related to the occupation of agricultural land. It is that occupation that unlocks the payment. It is paid to the recipient on the condition that the land is farmed or kept in good agricultural condition’.²⁶⁰

6.141 It follows that any increased rental value attributable to the ability of the tenant to access payment under the basic scheme payment will be accountable on review as a ‘relevant factor’ under the general clause in Sch 2, para 1 (above).

(iii) Current level of rents for comparable lettings

6.142 The arbitrator must take into account, in every case, ‘the current level of rents for comparable lettings’, determined in accordance with Sch 2, para 1(3).²⁶¹ In determining the current level of rents for comparables, Sch 2, para 1(3) directs the arbitrator to have regard to ‘any available evidence with respect to the rents…. which are, or (in view of rents currently being tendered) are likely to become, payable in respect of tenancies of comparable agricultural holdings on terms (other than terms fixing the rent payable) similar to those of the tenancy under consideration’. The arbitrator can consider evidence of rents arrived at either by agreement or arbitration, as well as tenders of rent for comparable holdings.

6.143 When assessing the rents of comparable holdings, the arbitrator is directed by the 1986 Act to disregard certain factors so as to arrive at ‘true’ comparison with the subject holding²⁶²:

(a)Scarcity value in comparable lettings²⁶³

6.144 The arbitrator must discount any element of the rents in comparable lettings that is due to an ‘appreciable scarcity of comparable holdings available for letting on such terms compared with the number of persons seeking to become tenants of such holdings on such terms’ (ie ‘scarcity value’). It is important to differentiate between recognising a scarcity in farms to rent, and disregarding the element of rental value in comparables that is attributable to scarcity. As the Court of Session put it in Morison-Low v Paterson (Executors of), ‘when assessing an open market rent of a comparable holding, [the arbitrator] should not disregard a scarcity of lets if [s/he] finds it to exist, but should disregard that amount of the rent that is caused by the scarcity’.²⁶⁴

6.145 Curiously, the 1986 Act expressly requires scarcity value to be valued out of the rent of comparable holdings, but is silent as to whether it is also to be disregarded if accruing to the subject holding itself. The balance of argument favours the view that scarcity value must also be disregarded in the subject holding, even if this is not expressly required by the Act. This certainly appears to have been the intention of the legislature when implementing the industry package on which the rent valuation provision were based when they were introduced by the Agricultural Holdings Act 1984.²⁶⁵ This assumption was shaken, however, by the decision of the court of appeal in Trustees of JW Childers WT v Ankers²⁶⁶ in relation to the disregard for marriage value. It was argued in that case that there was little point in valuing either scarcity value or marriage value out of the rental of comparable holdings if the objective were not to also arrive at an undistorted rental value for the subject holding itself.²⁶⁷ The Court of Appeal rejected this reasoning for marriage value, holding that marriage value in the subject holding is relevant and to be taken into account: the fact that it is to be disregarded in valuing comparables does not render it inapplicable per se at other stages of the valuation.

6.146 The court in Ankers expressly left open the question whether the same should be true of scarcity value. There is no direct authority in point. It is suggested, however, that notwithstanding the tenor of the remarks in Ankers (supra) scarcity value should be valued out of the rent of the subject holding, as well as that of comparables. The equivalent provisions of the Scottish legislation have been interpreted as requiring that scarcity value should be discounted in the subject holding.²⁶⁸ Significantly, however, the Scottish Land Court also assumed that marriage value in the subject holding was required to be discounted by the English statutory provisions: and the court of appeal in Ankers (supra) has now expressly held this not to be the case. The matter must await judicial clarification. It must be said, however, that allowing scarcity in the subject holding to affect the rental valuation on review would undermine the objective of the whole formula in Sch 2 viz to tie rentals to productive capacity and break the link with inflated tenders on first lettings. Allowing the relevance of marriage value in the subject holding, on the other hand, has no impact on this central policy objective of the rent formula. The significance of scarcity value and marriage values is quite different, and they should not, necessarily, be treated in the same manner.

(b)Marriage Value in Comparable Lettings

6.147 The arbitrator must disregard any element in the rents obtained in comparable lettings which is due to the fact that the tenant of, or the person tendering for, any comparable holding is in occupation of other land in the vicinity of that holding that may be conveniently occupied together with it (ie ‘marriage value’). As has already been noted, the court of appeal held in JW Childers WT v Ankers²⁶⁹ (supra) that marriage value in the subject holding is to be taken into account: marriage value attaching to comparables is not. The Scottish Court of Session came to the same conclusion in Morison-Low v Paterson (Executors of).²⁷⁰

(c)Premium value in Comparable Lettings

6.148 The arbitrator must disregard any element of comparable rents that is due to any allowance or reductions made in consideration of the charging of premiums ie a capital sum paid for the grant of the tenancy. Clearly, any reduction in rent to take account of the fact that the tenant has paid a capital sum for the tenancy by way of a premium will distort the rental as a comparable, and must be valued out. Premiums are rarely encountered in relation to the grant of agricultural tenancies.

(d)Relevance of Farm Business Tenancy Rents

6.149 A final question concerns the role of farm business tenancy rents as comparables – or otherwise – for the purposes of assessing the rent of an agricultural holding on rent review under the 1986 Act.²⁷¹ The liberalisation of the market for let farmland effected by the Agricultural Tenancies Act 1995 was closely analogous to the similar phenomenon in the residential sector, where the abolition of regulated rents for new lettings following the Housing Act 1988 led to an increase in the volume of residential property coming to the market. The relevance of market rents as comparables in the valuation of registered fair rents has been considered in several cases, most notably Spath Holme v Chairman of the Greater Manchester and Lancashire Rent Assessment Committee²⁷² and Curtis v London Rent Assessment Committee.²⁷³ These cases concerned the basis for valuing a ‘fair’ rent for residential dwellings under the Rent Act 1977, which includes an express direction to the rent officer to discount scarcity value.²⁷⁴ It was held in Curtis v London Rent Assessment Committee that the starting point when valuing a fair rent is now the market rent, which must then be discounted to eliminate any element of scarcity value.²⁷⁵ The court of appeal ruled, moreover, that the best evidence of market values was evidence of comparable rents for assured and assured shorthold tenancies under the Housing Act 1988, and that these should be used instead of the diminishing number of registered fair rent comparables fixed by the rent officer under the Rent Act 1977.

6.150 Although the context is superficially similar, in that (like the Housing Act 1988) the Agricultural Tenancies Act 1995 was a deregulating measure, the reasoning in the Rent Act cases must be treated with caution when applied to valuing agricultural rents. Schedule 2, para 1(3) to the Agricultural Holdings Act 1986 specifically directs the arbitrator to consider the current level of rents payable or currently being tendered etc. in respect of tenancies of comparable agricultural holdings. By reference to ss 96(1) and 1(1) of the 1986 Act it is arguable that a farm business tenancy is a tenancy of an agricultural holding for these purposes.²⁷⁶ However, where the arbitrator considers that the higher rental obtained for a farm business letting produced to him as a comparable is attributable to the continuing scarcity of land available for rent, he would be required to ‘value out’ of it any element of scarcity value under Sch 2, para 1(3) (discussed above). If he is satisfied, however, that the increase in land to let has produced a situation where the market is in equilibrium then he could admit it without discounting for scarcity. In any event, even in a market distorted by scarcity of land to let, the arbitrator may be able to consider evidence of farm business lettings under the general clause in Sch 2, para 1 as it ‘a relevant factor’ in assessing the rent. Any evidence of farm business lettings produced to him must be carefully considered, however. The terms on which an allegedly comparable farm business letting has been made must be considered, and their impact on the passing rent taken into account. The impact on rents of the relative insecurity of short term farm business tenancies will be particularly relevant when assessing their value as comparables for the rent payable under a fully secure periodic annual tenancy of an agricultural holding. Additionally, it must be remembered in all cases that the statutory context is different under the Housing legislation: there is no direction to consider earning capacity and productive capacity under the Rent Act 1977,²⁷⁷ and the use of comparables is only one of a number of permissible valuation techniques available to the rent assessment committee in housing cases.²⁷⁸ Under the Agricultural Holdings Act 1986 the arbitrator is required to consider the current level of rents for comparable lettings in every case.²⁷⁹

(d)Factors to be disregarded

6.151 The following factors must be disregarded in all cases (and not just when assessing comparables).

(i) Tenant’s improvements or fixed equipment

6.152 Schedule 2, para 2(1)(a) requires an arbitrator to disregard any tenant’s improvements or fixed equipment, other than equipment provided pursuant to an obligation imposed on the tenant by the contract of tenancy. By ‘tenant’s improvements’ are meant any improvements executed on the holding in so far as they were executed wholly or partly at the expense of the tenant, without any ‘equivalent allowance or benefit’ given by the landlord in consideration of their execution (Sch 2, para 2(2)). If the terms of the tenancy (for instance as to rent) have been varied as a quid pro quo for an improvement executed by the tenant, this disregard does not apply. ‘Tenant’s fixed equipment’ means fixed equipment provided by the tenant. Tenant’s improvements must be discounted whether or not they are executed with the aid of grant moneys provided by central or local government. Moreover, it was held in Tummon v Barclays Bank Trust Co Ltd²⁸⁰ that improvements of both an agricultural and non-agricultural nature must be disregarded (the creation of a caravan park was there disregarded as a tenant’s improvement under the 1948 Act provisions).

6.153 If the tenant has held a previous tenancy of the holding, the arbitrator must now also disregard any increase in rental value due to tenant’s improvements or fixed equipment provided during that prior tenancy – provided, however, that the tenant did not receive compensation for the improvement on termination of the earlier tenancy.²⁸¹ This provision was introduced by the 1984 Act, with the aim of protecting the tenant in cases of surrender and re-grant.

(ii) Adoption of special system of farming

6.154 The adoption by the tenant of a system of farming (‘high farming’) more beneficial to the holding than that required by the tenancy or, if there is no such requirement, than that normally practised on comparable holdings, is to be treated as an improvement carried out at the tenant’s expense.²⁸² Any increase in rental value attributable to high farming must, therefore, be disregarded.

(iii) Landlord’s improvements

6.155 The arbitrator is directed to disregard any increase in rental value attributable to landlord’s improvements, but only insofar as the landlord has received central or local government grant aid to execute the improvements concerned.²⁸³ Improvements made at the landlord’s own expense need not be discounted.

(iv) Tenant’s occupation

6.156 The arbitrator must disregard any effect on the rent attributable to the fact that the tenant who is a party to the arbitration is in occupation of the holding.²⁸⁴ This serves to emphasise the hypothetical nature of the valuation. The arbitrator must disregard any lowering of rental value attributable to the presence of a sitting tenant with security of tenure. Semble, also, any enhancement of rental value accruing as a result of good husbandry by the tenant, falling short of ‘high farming’, must also be disregarded.

(v) Dilapidations by tenant

6.157 Similarly, the arbitrator must disregard any detrimental effect on rental value attributable to dilapidation or deterioration of, or damage to, buildings or land caused or permitted by the tenant.²⁸⁵ Rental value must be assessed by reference to the potential of the holding if farmed by a reasonably competent tenant practising a suitable system of husbandry.

(e)Contracting Out

6.158 As seen above, Sch 2 to the 1986 Act not only makes detailed provision for the procedure to be followed on rent review, but also applies closely crafted rules for the valuation of rent. Perhaps surprisingly, there is no mention in the statute of the landlord and/or tenants ability to ‘contract out’ of the statutory rent valuation provisions or the three yearly rent review cycle for which it provides. They may wish to do this, for example, by agreeing the rent for the whole of the term of the tenancy, or by making alternative provision through an agreed rent formula, or by agreeing a ‘standstill’ rent. It has been cogently argued that there is no public policy imperative that should prevent the parties contracting out if they so wish.²⁸⁶

6.159 Until recently, perhaps surprisingly, there was little authority on the ability of the parties to contract out. It was noted above that it was held in Plumb Bros. v Dolmac (Agriculture) Ltd²⁸⁷ that a collateral agreement not to increase rent will be binding, even if not under seal, if the tenancy and the agreement as to rent are part of a single composite transaction. The more important and direct question – whether the parties can simply contract out of rent review under Sch 2 – was subsequently settled in Mason v Boscawen.²⁸⁸ It was there held that the parties could vary the rent formula and the procedure laid down in the 1986 act by agreement. The parties had agreed to vary the rent payable for an agricultural holding in 2001 by adding VAT to the rent previously payable. A subsequent notice to pay rent was challenged when the tenant failed to pay the full amount of rent including the VAT element. It was held that the notice to pay was valid, and that the VAT element was ‘rent’ within the meaning of the 1986 Act.²⁸⁹ One inconvenient consequence of this ruling would have been the unintended effect of triggering a new three-yearly review cycle every time a change in the rate of the VAT that is applied to rents was implemented. This was negated by a statutory amendment to the 1986 Act in the Finance Act 2009 that ensures that the review cycle is unaffected by any increase or reduction in rent arising by virtue of a change in the rate of VAT on rent.²⁹⁰

6.160 The decision Mason v Boscawen²⁹¹ is authority for the proposition that the parties can, by agreement, fix the rent otherwise than by reference to the Sch 2 criteria, and also in so doing effectively vary the three yearly cycle for rent review. It is suggested that it is not authority for the wider proposition that the parties can simply, by prior agreement, render the statutory rent review provisions under the 1986 Act wholly inapplicable – and thereby contracting out of them. They can achieve the same result by periodically agreeing to vary the rent, but either party will, it is submitted, remain in principle able to trigger a statutory review under Sch 2 at a minimum of three years following the last agreed variation in the rent.