Do you choose the farmer or the investor in the tenancy law?

The current lease law roughly comes in two flavours. There are long-term lease agreements in which the lease prices are strictly regulated. Wageningen Economic Research (WER) calculates the maximum lease prices per region on behalf of the Ministry of LVVN on an annual basis based on the earning capacity of the companies in the region in question. In addition, there is the liberalised lease. These are agreements of six years or less. The lease price is free and the agreement ends automatically. It is not uncommon for government institutions or semi-public institutions to issue land in liberalised lease by tender, whereby the highest bidder becomes the tenant. If long-term lease is to become the norm, the government could set a good example.

As an investor, it is understandable that liberalised lease is preferred with a view to maximum returns. The price can be freely determined and after a maximum of six years the land is free of obligations to a tenant. For a farmer, short-term agreements are much less favourable. Investments by the user in the land, such as the supply of extra organic matter or drainage, often have a longer payback period than six years. With a view to sustainability or, if we call a spade a spade, not using up the land, it is understandable that long-term lease agreements are preferred in the initiative note. This is apart from the fact that long-term lease agreements also offer more certainty for the business operations of the tenant farmer. It is clear that there is a tension between the interests of the tenant and the lessor.

Slum landlords
This is somewhat reminiscent of the housing market. With the Affordable Rent Act that came into effect on 1 July 2024, tenants are better protected and the government has given municipalities the opportunity to intervene if landlords charge too much rent. One consequence of these changes is that many landlords have sold their homes, which has reduced the supply in the private rental sector and increased competition between tenants. However, the homes have not disappeared, but are largely ending up with people who live there themselves. A similar effect could also occur with agricultural land. If the higher-yielding short-term lease agreements are discouraged, investors and investors could withdraw.

Incidentally, it is not the case that there is no return to be had on regularly leased land. Over the period 1990 to 2020, the nominal return on regularly leased land was around 7%, the WER calculated in 2022. A good 2% consisted of direct return (rental income) and just under 5% of indirect return through increase in the value of the land.

Ground lease
So far, this article has been about regular and liberal leases. However, a number of large investment companies are completely circumventing the lease legislation by focusing on leasehold. With leasehold, the investor buys the agricultural land from the farmer for a percentage of its value, for example 60% or 70% of the market value of the land in freehold. At the end of the term after, for example, thirty or forty years, the farmer can buy back the land, often at a (often higher) percentage of the then applicable market value. During the term, the farmer pays a canon, as the rent is called in leasehold, of for example 2% or 3% on the invested capital, which is indexed annually in most cases.

Leasehold is thus somewhere between ownership and lease. Investors often present it as a way to free up working capital or as a vehicle to finance an expansion or takeover of the agricultural business. But if you compare it to regular lease, it does come with a price tag for the farmer. When modernising the lease legislation, it would do no harm to also take a closer look at leasehold.

Distribution
Ultimately, the discussion about lease legislation comes down to how we want to distribute money earned with and on agricultural land and what we as a society consider important. If the Dutch agricultural sector has to extensify, as some political parties in The Hague would like, then you could steer this somewhat with lease prices. However, there is a risk that investors will be less inclined to invest in agricultural land, with the result that the area of ​​leased land will become smaller. It could also be a deliberate choice to erect barriers for investors who are after quick money and that you want to keep the market for agricultural land as much as possible in the hands of the agricultural sector itself and investors who are in it for the long term and accept a lower return in the bargain.