Hamish Lean

Currently, rents are reviewed according to an open market test.

This involves looking at rents offered for comparable holdings of similar character to the holding under review which have recently been let out on the open market.

There have been no traditional tenancy open market lettings for probably at least 40 years but the courts have ruled that it is possible to look at offers for fixed-duration tenancies as evidence of current market rent.

However, where open market rents are distorted as a result of scarcity driving high rental offers, this distorting effect of scarcity has to be identified and discounted.

Also, any rental value attributable to the holding as a result of the tenant’s own improvements also has to be disregarded. This involves calculating the rental value of the farm in its unimproved state.

The proposals in the bill represent the second attempt to reform rent reviews. The Land Reform (Scotland) Act 2016 attempted to do away with the open market test altogether by introducing a test based on the productive capacity of the holding.

However, detailed research and testing failed to make the test workable and the rules in the 2016 Act were never brought into force.

The new rent review formula which is being proposed requires the Land Court to fix a fair rent for the holding and that the court has to have regard to:

1. The productive capacity of the holding;
2. The open market rent of any fixed equipment provided by the landlord for a purpose that is not an agricultural purpose;
3. The open market rent of any land forming part of the holding that is used for a purpose that is not an agricultural purpose;
4. The rent payable on similar holdings;
5. The prevailing economic conditions in the sectors of agriculture relevant to the holding.

These criteria are not hierarchical and the Land Court is required to have regard to all of them.

In respect of diversified activities by the agricultural tenant using the landlord’s fixed equipment or land, the test applies the commercial open market rental of such use.

The formula still requires the court to disregard distortion due to scarcity and to disregard the tenant’s improvements. The new test is akin to the way in which rents are reviewed in England and Wales. The new rules are also applied to limited-duration tenancies and modern limited-duration tenancies but only by default.

There is considerable freedom of contract in such tenancies and where the lease provides for an alternative rent review formula it is the lease that will prevail, so long as the rent review clause in the lease allows both landlord and tenant to initiate the rent review and the formula allows rents to go down as well as up.

Hamish Lean is a partner at Shepherd and Wedderburn. This article first appeared in The Press and Journal.