On reading the Rock Review it is easy to think that the entire agricultural tenancy market is completely broken. The fact is - it is not and the Rock Review, whilst identifying a large number of issues, has failed, as many previous reviews have done before, to identify the core issue which has led us to where we are.
The Review is, correctly, focused on how the landlord / tenant relationship can successfully navigate ELMs and other specific 21st century pressures to their mutual benefit. But it does not explore in any detail, the commercial footing on which this relationship is based which is, in my opinion, a major oversight.
Why are agricultural lettings not treated as commercial?
A number of years ago, I was chatting with a group of local councillors while standing on a tenanted farm on the Lanhydrock Estate in Cornwall overlooking Bodmin. In the middle distance there was a large collection of commercial buildings, leading me to muse on the key differences between commercial and agricultural lettings, concluding that agricultural landlords and tenants could learn a great deal from their commercial counterparts. Of course, there exist some excellent examples of co-operation between agricultural landlords and tenants - and which I’ve seen first-hand - and the Rock Review gives several examples of good practice. But good co-operation and collaboration is not universal, with other issues and personalities getting in the way all too often.
Risk analysis lies at the core of the landlord and tenant relationship. The landlord wants to minimise their risk and, either not wanting to or not being able to farm themselves, rents the land to someone who does. It is at this point the whole edifice is placed on poor footings. In the commercial world, yield is king and will often be around 6%. That is a good rate of return and, in times of lower inflation, would make many investors happy. By contrast, agricultural yields are abysmal - with yields of 1.5 to 2% considered exceptional. Obviously, such a low yield will prompt most landlords to seek other ways of generating income or worth out of the asset. So, it is not surprising that capital appreciation provided by, for example, land needed for development, is guaranteed to improve overall returns.
Can agricultural yields improve?
Why are yields so low? It is a combination of the lack of income generation opportunity on farms and the capital value of land. The capital value is driven by a combination of tax laws and supply and demand; we live on an island and are not making any more of it. Farming income has been heavily reliant on state subsidy because of a desire by the state to ensure cheap plentiful food which has led to degradation of the environment through successive policies.
As I have previously written, food can be cheap, nutritious, or sustainable, but only two of those at once. Raising yield therefore can only be achieved by either a significant downward revaluation of land or a significant increase in the profitability of farming businesses to enable the paying of a higher rent.
It is at this point that ecosystem services should come to the fore (and it must not be forgotten that growing food, is also an ecosystem service). The Rock Review recommends re-defining agriculture to include the provision of ecosystem services; such a change would then allow a tenant farmer to engage with various environmental management schemes as well as other diversification routes, allowing the business to drive income.
Tenancy agreements should be legally drafted
In tandem with a move to redefine agriculture, there is an urgent need to review the drafting and negotiating of tenancy agreements and to inject some real value into the document. The Review itself acknowledges that ‘FBTS are often used off the shelf without the flexibility that they offer’ which is borne out by my own experience. Too often I come across tenancy agreements which are simply not fit for purpose. Why would a tenancy for 25 acres of bare land have 20 pages of clauses relating to buildings? Or if it covers more than 7 years, and thus registrable, why does it not have the HMLR prescribed clause or a HMLR compliant plan? To me, this indicates that the inherent value of the tenancy document is not recognised.
Now the next bit is contentious but the main reason many FBTs are standardised is because neither side involves the person who has the knowledge, training, and experience of drafting contracts and agreements, namely the lawyer, and this is because of an exemption contained in the Legal Services Act 2007. One of the easiest ways to resolve a number of issues the Rock Review identified is to repeal that exemption. Only lawyers can draft a commercial tenancy, but a land agent can draft a farm tenancy which can be equally complicated, if not more so. Admittedly, the Rock Review cites some appalling examples of tenants receiving tenancy agreements which they are instructed to sign and not negotiate lest the FBT is withdrawn. Unacceptable though this is, it is an indicator of low yields and high demand for land. Involving a lawyer would introduce some rationality and help to inject some fairness into the process.
Recognising the value of tenancy agreements
Lastly, we come to the perceived value of the actual tenancy agreement. The Review suggests exempting a farm tenancy lasting more than two years from SDLT. The reasoning behind this is questionable as it is not a significant burden. For instance, a 10 year FBT at an initial rent of £100k will generate an SDLT charge of £6,816. Buying a similar farm would generate an SDLT charge ten times or more. A tenant considering a new tenancy of a large farm for a term of 10 years at £100,000 rent per year will be investing £1m over the period. If the tenant was buying £1m worth of freehold land, then the purchase would be the subject of a due diligence exercise but when the investment is a tenancy, due diligence is simply not considered. It is only later, after the tenancy has been entered into, that issues arise which, had they been discovered earlier, could have been catered for in the agreement between the parties.
Much in the Rock Review is sensible stuff but, frankly, reveals no devastating insights into an agricultural industry pulled from pillar to post by a political cadre that demonstrates a considerable lack of understanding of the countryside and the environment. Overall, the legislation does not need an overhaul. Commercial leases have operated under the Landlord and Tenant Act 1954 for nearly 70 years without significant change. Maybe we just need to change the way in which we think about agriculture and the work our farmers do and make sure that, like any other business, they receive a proper reward for their work, regardless of whether they lease or own their land.