4.1 In considering whether the grant was for full consideration in money or money’s worth, CTO will need to look firstly at the rent passing under the tenancy and consequently will call on the DV for advice.
4.2 S.16 refers to the grant of a tenancy; that is, the creation of a new tenancy. The test as to what is the appropriate rent under such a grant is whether it is the full open market rent, namely the rent which would be expected to be achieved in the open market on the grant by a willing landlord to a willing unconnected tenant of a new tenancy of the subject land, having regard to all the other terms on which the tenancy is actually granted, including provisions for rent review and repairing obligations.
4.3 In forming an opinion as to the full open market rent, the DV will need to consider all the rental evidence available for that type of property in the locality. This will include the level of arbitrated rents, tender rents and rents freely negotiated between unconnected parties.
4.4 (i) New rents charged on review to sitting tenants, often referred to as arbitrated rents are considered generally to be below full open market rents, although this is a matter for local evidence in individual cases. There were good reasons why this was so with arbitrated rents fixed under s.8 AHA 1948. These reasons were summarised in the RICS/CAAV Guidance Notes published in June 1980, notably:-
- Increases in rental value due to tenants improvements are to be disregarded, as are landlords improvements, where the landlord had received grants out of public money.
- No account should be taken of the relief from payment of rates by occupiers of agricultural hereditaments.
- Any decrease in rental value should be disregarded where this arises from dilapidations or deterioration of the holding permitted by the tenant.
(ii) Furthermore, it had been common practice for some time for arbitrators to value by ignoring scarcity even though not statutorily required to do so, and new rents agreed on review without recourse to arbitration tended to follow this practice.
(iii) S.12 AHA 1986 (which replaced s.8 AHA 1948) provides a completely new rental formula for determining the arbitrated rent. Amongst the substantial changes made are:-
- Statutory authority has now been given to the previous practice of arbitrators of excluding scarcity.
- The formula omits any express reference to the ‘open market’.
- The relief from payment of rates provision is abolished.
Levels of rent so determined will need to be weighed most carefully in making a judgement as to whether or not they may be regarded as a measure of full open market rent.
4.5 Rents obtained by owners inviting tenders for the grant of a new tenancy, often referred to as ‘tender rents’, will usually be acceptable and afford appropriate evidence to which proper weight must be given. It is possible nevertheless, that a particular tender rent may be out of line with the general level of tenders; this might indicate a change in the market and constitute acceptable evidence of new levels; or it may be a ‘one off’ tender genuinely ill-considered and not constituting acceptable evidence of the rent which would be freely negotiated between the landlord and a new unconnected tenant, in which case it should be rejected.
4.6 Rents achieved on new lettings made by agreement at arms length would be consistent with what is meant by full open market rent and would provide pertinent evidence when the DV is weighing up all the information available.
4.7 An existing tenant may be able to take a new holding from the existing unconnected landlord. In considering the rent so obtained the DV may regard the arbitrated level of rent on the existing holding to have limited the landlord’s freedom to manoeuvre in the negotiations, although by the same token, the “marriage value” to the existing tenant may have strengthened the landlord’s negotiating position. For the avoidance of doubt, persons in partnership would be considered to be connected.
4.8 To summarise, the DV must not exclude any evidence and should compare all rental evidence for similar agricultural property in the area, ascribing such weight to the available evidence as meets the appropriate test of what is full open market rent having regard to relevant local practice and custom. Care should be taken not to draw too fine a line between the actual rent and the full open market rent especially where firm evidence is hard to come by. The taxation consequences of the decision can be substantial.