The tenant invests, but who benefits?

The tenants and lessees have a common interest in a lease system that is beneficial to the farmer, the soil and biodiversity. This also means that when interests differ, this must be considered in a fair and factual manner. That is why I am surprised about the recent interlocutory judgment of the court's lease chamber about the phosphate rights.

The Court's Lease Room states namely that the investments of the lessor must clearly be taken into account. However, I doubt for 3 reasons whether there is a fair and factual assessment in this interim judgment.

Mutual investments
To start with, it is necessary to look at the mutual distribution of the investments between the lessee and lessor. When entering into the lease agreement, the lessee and lessor agree that the lessee must use the farm or the land as a good farmer. And that good use quickly means that investments are made in the land and the buildings. This concerns maintenance, but also renewal or improvement.

According to the factor cost method, also known as the 'Tolner Method', the ratio between the efforts and investments of the tenant and lessor is on average as follows: the lessee takes on 75% to 80%, the lessor 20% to 25%. I therefore find it very remarkable that the 50/50 distribution key is used when granting phosphate rights to the lessor.

After all, the lessor's investments are also rewarded through the annual lease. In cases where the lessee has invested in the milk quota himself, the phosphate rights must in any case be allocated to the lessee. That is, in my view, only fair.

Yield requirement
There is also something strange going on with the yield requirement, in relation to the increase in value and depreciation of land. Landlords introduced the yield requirement of 2% in the last century. At the time, that 2% was derived from the return on Dutch government bonds minus the return on the appreciation of agricultural land. To illustrate: around 2000, the yield on government bonds was 5,3% and the long-term appreciation of agricultural land was 3,1%. The lease must then reasonably be 2,2% of the free traffic value.

In 2019 the world is different. The return on Dutch government bonds is approximately 0%. If we deduct the increase in value in the long term, then the rent should reasonably be -3,1% of the free traffic value. And that is without the 'incidental revenue' from the rights allocated to the lessor. That is something to take into account, especially since various lessors claim that their assets will decrease in value if they are not allocated phosphate rights.

Independent building rights
Also in the field of the melioration right the world is different today. Since 2013, the legal basis for classifying the melioration right (leaseholder's investment) as equity has disappeared. In practice, on the basis of the new legislation, the banks need an independent building right to arrange the financing of a stable. It is special that a tenant investment is depreciated over 20 years, while a tenant leases a building for as long as the tenant uses it. A building right can solve this.

LTO Nederland continues to argue in favor of retaining the long-term vision in the lease system. This also means that the interests of both parties must be viewed fairly and factually. That is why our position is that the phosphate rights belong to the tenant. 

Alfred Jansen

Alfred Jansen is a safety and lease manager at LTO Nederland, a steward and he has a farm with calves and arable farming. In his opinions he outlines the developments in the market for agricultural real estate and animal rights.

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