7. Contextual Factors
Land tenure policies
Fiscal and financial policies
Land use policies
7.1 Part 3 addresses contextual factors that relate to the environment in which leasing can be used to bring land into production while maintaining basic criteria of fairness. Outside the agreement itself, which was described in Part 2, there are some wider issues and this chapter presents some ways to deal with them.
7.2 At the core of policy areas, and often taken for granted in developed nations, is the need to create a stable environment in which farmers - whether tenants or not - can operate effectively. Although this is complex and can be elusive, it essentially rests on an ability to assert, maintain and enforce political institutions such as the rule of law in such a way that they create a climate of clarity and certainty. Beyond this, sustainable farming operations are based on the ability to acquire the appropriate inputs (thus requiring the availability of affordable finance) and to sell outputs (thus requiring suitable food distribution and marketing networks).
7.3 It should be recognized that leasing reforms may affect power relationships in communities. In putting forward a series of signposts to good practice, it is recognized that the implementation of these must reflect an acute awareness of the delicate balance involved. While the factors outlined require implementation for leasing arrangements to function effectively, many of these factors also involve a redistribution of power, from the landowner to the tenant. If the scale of this redistribution of power is seen to be too great, or the resulting responsibilities too onerous, landowners may stop leasing out their land. Alternatively, they may begin to consider new modes of leasing out which avoid these regulatory liabilities. Neither of these eventualities would promote the cause of private sector leasing in the longer term. In all cases, therefore, implementation should reflect this balance between the needs and wishes of the landowner and the tenant.
7.4 The nature of landownership is one of the most important factors in the development of leasing arrangements. Leasing where family farms predominate will tend to differ from leasing where there is land concentration. Leasing is also impacted by institutional arrangements to encourage or regulate the efficient utilization of land. At its most basic, efficiency will be improved by bringing derelict or unused land into production. This will be particularly important close to urban settlements, where there will be both a need and an established market for agricultural products.
7.5 There has been much debate about the role and influence of landownership in the management of agricultural land. In many countries it is considered desirable, for example, to promote and maintain ownership at the scale of the family farm. Land tenure systems that promote family-sized farms allow farming families to farm the same land for generations. This undoubtedly builds in a level of stability that tends to secure family-based employment and thus underpins the rural economy, even if the level of farm productivity and profitability is compromised. Examples of this type of arrangement can be found in many parts of the world, especially continental Europe and Asia. In these cases, leasing operates largely as a short-term vehicle for the inter-generational transfer of land. In addition to the maintenance of the family farm, intra-family leasing also offers incentives to co-operate, thus increasing the level of resource (labour) input than is the case for farms leased outside the family.
7.6 Some jurisdictions encourage family farming by restricting the amount of land that can be farmed as an individual holding. One example is Denmark where the maximum farm size is currently set at 125 ha. While still being relatively small compared to the size of large farms elsewhere in northern Europe, this restriction is an increase on the previous maximum, to allow farmers greater commercial viability. Equally, in other regions there are restrictions on the creation of smallholdings, or minifundios.
7.7 A number of countries, including France, use systems of guided or preferred ownership controls to ensure the continuity of family farming (see Box 7.1). In controlling local land markets, the French SAFER committee system ensures, for example, that the purchase of agricultural land for investment purposes or speculation (on any scale) is discouraged. This effectively favours ownership by farming families. Although expensive to operate and often uneven in their practices (largely due to regional variations in farming practices and conditions), the SAFER system has underpinned the continuation of family farming throughout France. However, there are suggestions that such control can lead to a lack of investment in farming, while also failing to bring all suitable land into cultivation.
BOX 7.1 LAND MARKET REGULATION IN FRANCE
The twenty-seven Societes pour lAmenagement Foncieret lEtablissement Rural (SAFERs) (corporations for land planning and rural settlement) were created by the Agricultural Guidance Act of 1960 as non-profit public corporations controlled by the government and owned by farmers unions, mutuals and other agricultural, or administrative entities. They may buy agricultural land, should it come on the market. Since 1962, they have a legal option to purchase. They are to sell this land to young and new farmers or to sustainable family owned units; since enactment of a new law in January 1990, they may lease the land. The SAFER are very active and effectively control the farmland market. Nevertheless, they cannot exercise their legal option to purchase farmland that will be converted to residential, industrial or commercial use (Law of 8 August 1962, article 7-IV-5).
(Lorvellec, L. 1992. Agrarian land law in France, pp. 51-70 in Grossman, M.R. and Brussaard, W. (eds) Agrarian land law in the western world. Wallingford, Oxon: CAB International).
7.8 Alternatively, some countries operate a less regulated policy towards landownership, effectively encouraging land concentration and absentee landowners. In these cases, leasing is the primary means through which the land is managed and farmed. Where land ownership is concentrated in the hands of a few, it can assume many functions of the state, including education and health-care (see Box 7.2).
BOX 7.2 THE OWNERSHIP AND MANAGEMENT OF SUGAR CANE PLANTATIONS IN BRAZIL
The Usina Sierra Grande sugar cane plantation covers 100 square miles in the state of Alagoas and has a resident population of 10,000 people. The workers, who have no land rights, cut the cane by hand for $15 to $30 per seven-day week. In addition to basic housing and a guarantee of year-round work, the plantation provides schooling and some health care for its workers. On this plantation and other similar latifundos, approximately one million people live under the control of a few estate owners.
(Bellos, A. 1999. The fat-cat controllers of Brazils landless peasants. The Guardian, 6 March, 1999, p. 18)
7.9 One of the major costs of such operations is a progressive substitution of capital for labour. This is allied to a continuing concern that allowing ownership to become too separate from farming contributes to an eventual lack of flexibility in the agricultural sector. Rather than promoting the land market, therefore, ownership concentration can actually constrain the land market for land-poor farmers, resulting in increased landlessness and the declining availability of land for farming. When land concentration exists, land reform may be a more appropriate policy than improvements to leasing arrangements. When land concentration is not excessive, those without land can gain access to land through leasing. What constitutes excessive changes from one society to another according to the significance of land for the creation of wealth. In richer countries where people can obtain wealth from sources other than land, equitable distribution of the land tends not be of great political importance. In countries where most people are involved in agriculture (whether subsistence or commercial), however, the creation of more equitable land holdings is of vital importance.
7.10 Where land concentration is not excessive, land tenure reforms to improve leasing arrangements can be attractive to states wishing to develop their agricultural potential, particularly with a view to export markets. For example, prior to the 1995 tenure reform in England and Wales it was estimated that deregulation could lead to an additional 1 million hectares of agricultural land being made available for rent.
7.11 Where land allocations are made through the market, improvements may be implemented in a number of areas. At a simple level, better systems of information about rents and prices can improve the operation of the market, while credit availability is also important. Beyond these types of factors are cadastral issues, such as improving the certainty with which land holdings are identified, and legal issues, relating to the ease with which transactions can take place. In both cases, small and incremental improvements can have a positive impact on the relative efficiency of the market.
7.12 A key to these reforms is the development of better professional support for the operation of land markets. Work in eastern Europe has found that, compared to developed countries, there is a shortage of service professionals, such as land lawyers, valuers, architects, engineers and brokers. Although not directly involved in production, such professionals are a very necessary part of the new governance infrastructure, both administratively and in judgmental terms, relating to the value of different and often competing interests (see Box 7.3).
BOX 7.3: THE DEVELOPMENT OF NEW PROFESSIONAL SKILLS
What they [developing countries] have [often] not achieved is the importation of new skills, or rather new concepts, to deal with the needs of new owners for advice on the basic judgmental ingredients of market transactions - estimates of present and future value, advice on alternative courses of action, negotiating and dispute resolution skills and objective opinion on the strength or weakness of administrative decisions which appear to limit or even prevent the beneficial use of the property rights.
Arnison, C. (1999) Land tenure and land markets in the transitional economies of Eastern Europe: a review of progress to date. Paper presented to the RICS Research Conference: ROOTS 99. London: RICS Research Foundation.
7.13 It has long been recognized that fiscal policy plays a highly significant role in the operation of the agricultural sector, both leased and owner-farmed. Indeed, it is often an integral element of agricultural and rural policy, particularly insofar as grants, loans and tax advantages, or penalties, are applied in discriminatory ways. In Ireland, for example, farmers have only been subject to income tax since 1974, and then at rates far below non-farmers. Similarly, those leasing out land on long leases (over 18 years) in France can gain advantageous tax benefits, while there are tax concessions on the purchase of agricultural land in Italy.
7.14 In addition, it can sometimes be the case that working farmers (either tenants or owner-farmers) get preferential tax treatment, compared to landowners. An example of this is in the Netherlands, where differential water rates apply to owner-farmers and to farm tenants. It is also the case that the passing of farms from one generation to another in the Netherlands, supported by the Maatschaps partnership arrangements, allows the transfer of capital virtually tax-free (see Box 7.3).
BOX 7.3 MAATSCHAPS PARTNERSHIPS IN THE NETHERLANDS
A unique transition process between generations of tenants has been created in the Netherlands, termed Maatschaps. These are partnerships between parents and successors through which the organization and control of the farm business is passed between generations. Some 70% of farm entrances are based on these partnerships, allowing the family to exercise a high degree of control over the inheritance process. Farms in the Netherlands are highly capitalized, and the gradual nature of the handovers enables this capital to be passed over relatively free of charge, at low valuation and relatively free of taxation. This very much confirms the corporatist nature of farming in the Netherlands. Non-family entrants are therefore at a distinct disadvantage in the Netherlands. The State has elected not to interfere with the process and regards policies to assist young farmers entering farms as pointless. It does not traditionally assist young farmers although it does spend almost half of the agricultural budget on supporting agricultural training and education.
(from Brussaard, W. 1992. Agrarian land law in the Netherlands in Grossman, M.R. and Brussaard, W. (eds) Agrarian land law in the western world. Wallingford, Oxon: CAB International).
7.15 Elsewhere, high levels of inheritance tax have been blamed for damaging the fabric of rural areas. This is due to older farmers refusing to invest in their farms, in the knowledge that increased capital values will increase their heirs liability to inheritance taxation.
7.16 It is clear that in many regions, tenancy arrangements (particularly involving sharecropping) are largely tied to the only source of credit available to the tenant. This source is either the landowner or a local money-lender, both of whom may require unreasonably high levels of interest on borrowings. Access to independent credit is therefore highly important, both in allowing tenants to invest their money in farming, not loan charges, while also giving them a measure of independence when negotiating lease arrangements. Many tenure reform programs have therefore been driven by a need to attract external financial capital and credit into farming. There is a strong belief that this is very much dependent upon stable and robust tenancy regimes in which creditors have some guarantee that farmland is an acceptable and enduring form of collateral. This has certainly contributed to technical interventions, such as the codification of customary law in Botswana, since it was not previously possible to use customary land as collateral. For others, access to credit lies in land titling and registration, together with clarity of tenure relations and conflict resolution procedures. However, it should be recognized that attempts to develop external sources of financial capital and credit are unlikely to be popular with landowners, as one of their established sources of income declines.
7.17 Leasing policies are dependant upon those policies designed to bring available agricultural land into production, for example by reducing or eliminating the impact of non-agricultural speculation in land. Examples can be found of a number of measures designed to achieve this, relating to controlling the disposal of land, either by prohibitions on sales, limiting the sale price of agricultural land, or restricting its conversion to non-agricultural uses. There is also a need to address both macro and sectoral policies that currently favour industry and urban populations at the expense of farmers and the primary sector.
7.18 While, in very rural areas, the non-agricultural development pressure on land may be negligible, the situation changes considerably in highly populated areas. Recent work by FAO has highlighted the issues (and the possibilities) facing farming in the urban periphery, particularly in terms of the competition from other land uses. This is also the case on small island states, and in areas where there is competition from other land uses, such as tourism (Cyprus and the Caribbean, for example).
7.19 The extent to which this type of external force for change is resisted is a matter of policy. There are a number of approaches to maintaining land in farming, with the most direct being restrictions on changes of use. This can be achieved through blanket prohibitions on non-agricultural development (as has been the case in many FSU countries under the terms of restitution), through forms of planning and development control, or through voluntary systems.
7.20 As elaborated in Part 2, a lease (or analogous) agreement is the principal instrument for describing the arrangement between a landlord and a tenant, and the allocation between them of various rights and obligations with respect to the leased property. It is important to remember, however, that no matter how sophisticated and detailed the lease contract may be, it only partially defines the legal relationship between the parties themselves, and between those parties and the outside world.
7.21 In other words, a lease never exists in isolation - it exists within a specific legal environment. This environment is likely to have profound effects on the characteristics of the tenancy arrangement in ways that may not be apparent from the agreement itself. The same lease agreement, viewed within different national legal frameworks, may be dramatically different in terms of its validity and strength.
7.22 The ways in which laws and legal institutions can influence agricultural tenancies are many and varied, and only a few of them can be mentioned here. What we seek to underscore instead is that the analysis - and at times, reform - of the legal framework is an inescapable part of achieving best practice in a given context.
7.23 When analysing a legal framework, it is convenient to distinguish between the substantive and procedural rules that comprise the relevant body of law. Roughly speaking, substantive rules define the rights, responsibilities and opportunities of different actors. They spell out the consequences of violating the law and the remedies available when someone suffers damages because of a wrongful action. Procedural rules are those that govern the various institutional components of the legal system itself, the processes by which officials or other people can seek enforcement of laws or redress in the case of injury.
7.24 The sources of applicable substantive and procedural law will vary from jurisdiction to jurisdiction - these may take the form of legislation, administrative decrees, court judgements, religious texts, long-recognised customary norms or some combination of these. Laws with direct and indirect implications for the leasing relationship are also likely to be scattered amongst many different subject-matter categories, some of which may be more obvious than others. Clearly, property laws are of most direct relevance, particularly where specific laws have been enacted on tenancy issues. But laws covering a wide range of subjects, from general contract law and taxation to inheritance and land use will need to be taken into account.
7.25 Laws may affect a lease agreement by supplementing, negating or altering the terms of the agreement itself. Rent control laws, for example, may override the rental set forth in the lease. Land registration legislation may require that leases over a certain number of years be registered, and then impose certain requirements in terms of form and content that must be complied with in order to qualify for registration. Other statutes may prescribe certain steps - designed to protect tenants - that a landlord must take before reclaiming the property in the event of a default, and the ability of the parties to contract out of such procedures may be limited. When an agreement is silent on a particular point, the law may impute or provide the missing detail, sometimes without the parties realising it. For example, where a lease requires the landlords consent before an assignment can take place, the law in some jurisdictions may impose certain standards of reasonableness that, in effect, limit the landlords discretion to say no to a proposed assignment.
7.26 More fundamentally, laws may be relevant to the capacity of the parties to enter into a leasing relationship in the first place. The most dramatic instances of this occur in jurisdictions where the law forbids or significantly curtails the right to lease land altogether. As noted earlier in these Guidelines several jurisdictions essentially prohibit the leasing of agricultural land. In the case of Madhya Pradesh state in India, the Land Revenue Code states that, with certain limited exceptions, Bhumiswamis (the primary landholders) cannot lease out any of their land for a period exceeding one year during any consecutive three-year period. Where leasing does occur in violation of the Codes prohibitions, the law provides that tenants can acquire Bhumiswami status themselves, essentially ousting their landlord.
7.27 Capacity issues may take a number of other forms as well. A basic rule of property law, applicable in virtually all contexts, is that landholders cannot convey greater rights to land than those they possess in the first place. The strength of a lease and of the tenants rights under that lease, therefore, is dependent upon the strength of the landlords rights to the land in question. An important issue that flows from this is whether the legal framework provides an effective method by which the quantum of the landlords rights over the land can be reliably determined. The variety of ways in which different societies and legal systems have tried to ensure and enhance tenure security is beyond the scope of these Guidelines. What is important for current purposes is to underscore that where a landlords rights are uncertain or insecure, so are any rights that the landlord purports to convey by a lease.
7.28 A related point is that in some systems, the fact that one person is deemed to be the legal owner of the property does not necessarily exhaust the question of whether that person, acting alone, has the capacity to lease out the property. The owner may, for example, have obligations under customary law to seek concurrence of family members or traditional authorities, requisites that may not always be clear from the face of the document that asserts his or her ownership but that may nevertheless be applied by courts if the lease is subsequently challenged.
7.29 There are, of course, often substantial gaps between the formal content of laws, and the manner in which these rules are actually applied in practice. This is true to some extent in all countries of the world; it is particularly true where the rule of law is less deeply ingrained, where legal and administrative institutions are weak, where access to legal redress is effectively beyond the means of many people and where power relationships between parties to an agreement are highly unequal. These factors limit the extent to which best practice can be realised by technical improvements to leasing agreements or the legal framework of which they are a part.
7.30 Substantially strengthening the rule of law in a particular context may be a mammoth task, involving political, economic and social factors that cannot be addressed here. Nevertheless, there are incremental improvements that can be made by attention to simple principles of legal reform and legal drafting.
7.31 One such principle is that legislative provisions (and, by analogy, provisions within individual legal instruments like a lease) need to be based upon a realistic appraisal of what can actually be accomplished in a particular place and time. Laws that require abrupt reorientation of institutional or social behaviour in contexts where the incentives for such change are weak are likely to be ignored.
7.32 Classic examples of this phenomenon are legislative attempts to prohibit the practice of leasing agricultural land altogether, as mentioned above. There are, as we have seen, numerous policy reasons to question such an approach. Our point here, however, is a different one - aside from their unsound policy foundations, such laws simply do not work because leasing is an activity that is too important to too many people to be abandoned. The effect of such prohibitions is simply to push the practice underground, where it continues to flourish outside the pale of the law. This means both that the rule of law is further undermined, and that the State is in an even weaker position to help mediate a relationship it no longer recognises as existing.
7.33 Viewed more broadly, although governments may have legitimate interests in regulating the leasing relationship, identifying the optimal level of regulation is both difficult and important. Regulations that are burdensome and poorly calibrated with sensible policy objectives, procedures that are difficult to understand or costly and time-consuming to follow, and rules that are not grounded in reality invite non-compliance and corruption and increase transaction costs.
7.34 In any legal framework, respect for the rule of law and for contractual commitments will greatly depend on the extent to which there are reliable, fair and accessible mechanisms for resolving disputes and for providing remedies when promises are broken. A problem in many countries is that such mechanisms are weak or effectively non-existent. Many formal court systems are severely overburdened, with insufficient capacity in terms of personnel and expertise to handle the huge number of cases that come before them. And in some countries, it is precisely land-related disputes that make up the majority of the cases that come before courts and that are frequently the most difficult to resolve quickly - land cases can languish in courts for many years. For many ordinary people, courts are seen as expensive, time-consuming, unpredictable and sometimes even corrupt. The language of lawyers and judges appears alien and complex.
7.35 Such problems are systemic in nature, and well beyond the scope of these Guidelines to address. There are nevertheless steps that can be taken that may incrementally improve the capacity of both formal legal institutions and civil society institutions to deal with land-related disputes. As far as courts are concerned, governments need to consider whether there are specific technical shortcomings or educational gaps amongst judges that may account for difficulties in handling land-related matters. The creation of specialised tribunals, with special expertise in land matters and in applying alternative dispute resolution techniques is increasingly being explored.
7.36 Finally, there is a growing appreciation of the importance of recognising and strengthening non-state mechanisms for resolving disputes. In western countries, this may take the form of various arbitration or Alternative Dispute Resolution (ADR) mechanisms, as have been alluded to earlier in these Guidelines. In other contexts, this may involve building upon existing community-based models, some of which may have been operating for a long time in parallel with government court systems, some of which may be of more recent origin. Exploring and creatively building upon such civil society alternatives may prove the most promising route to reducing the burden on court systems and to ensuring accessible dispute resolution mechanisms that are synchronised with the norms, customs and language of the disputants.