Further Essays in Economics
Leon Maclaren



THE word "rent" is reserved in ordinary use for what in these essays has been called the landlord's claim. For the most part we have assumed that this claim is a full one: that is that in every case the landlord has been exacting the most he can obtain from the tenant in occupation of the land. This is not, of course, always so. Plainly where the tenant owns the land which he occupies, there is no landlord's claim at all because there is no landlord to make it. Again, in those cases where the tenant does hold his land under a lease, the amount of the landlord's claim is fixed by agreement and may vary from a nominal amount (a "peppercorn rent") to the most the landlord can obtain (a "rack rent"). The nature of this claim, the effect of its existence and of variations in its amount, now falls to be considered.

The root of the difference between the primary share of a tenant in occupation of land and the secondary claim of a landlord is this: the tenant enjoys the use of the land and the landlord does not; the tenant's enjoyment flows to him through the use he makes of the land, while the landlord merely claims against the tenant. For example, a lodging-house keeper is not in this sense a landlord viz a' viz his guests. The lodging-house keeper is himself tenant in occupation of land and he carries on the business of a lodging-house there. He retains control of his land and the claims on wealth which come to him come in the course of his business and are rent and wages. His relationship with his guests is like that of producer and customer. But a landlord parts entirely with occupation and use of the land let to his tenant. He does not earn wealth in productive business conducted upon it, for he conducts none there. His claim is upon his tenant, is secondary, and may be drawn from rent or wages or from a secondary claim, according to the source of the tenant's income.

Between these two extremes there are many stages combining something of both. Thus, the tenant of a house may let off floors unfurnished and without services other than the maintenance of the building and the supply of heat and light; or the house may be a block of flats and offices, no services given, and the full responsibility of maintenance put upon the occupiers. In such cases, the relationship may be partly one of landlord and tenant and partly one of producer and customer.

Different principles apply to the landlord and tenant relationship from those which apply to the producer and customer relationship, and these different relationships need to be kept distinct. For this reason the words "landlord's claim" are used here to mean the secondary claim arising solely from the letting or sale of land and not from the production of wealth or the performance of services.

The variations in landlords' claims upon tenants using sites productively may be illustrated by considering four sites of equal productivity: (1) where the tenant owns the land and has incurred no interest charge in order to acquire it; (2) where he holds the land on an old lease and the payment made to the landlord is much less than would be payable under a new lease; (3) where money has been recently borrowed to buy the landlord out; and (4) where the land is held under a new lease and the landlord has exercised his full claim. If we take the distribution of wealth as it has been illustrated before on a site producing 150, on the assumption that land is all enclosed and the site is operated by an entrepreneur who has borrowed funds to equip the labourers, the result will be as in Fig.2 below.


In all these cases the sites are equally productive and equally well worked. In the first case, where the freehold is held by the tenant, his profit is 52. In the second case, where the tenant holds under an old lease and the landlord's claim is only 18, his profit is 34. In each of the last two cases, where money to buy out the landowner has been raised by a loan, and where the landlord obtains his full claim under a lease, the tenant's profit is 15.

It will be seen, therefore, that the profit earned by an undertaking bears no necessary relationship to its efficiency. Indeed, a long-established undertaking, which either owns its site or else holds it under an old lease with the landlord's claim fixed at a low figure by to-day's standards, may be substantially less efficient than a new undertaking which has just acquired its site by lease or purchase: and yet the former may obtain a much greater profit. This difference in profit will be due to what is usually called the financial structure of the undertaking. Efficiency will, of course, directly affect the amount of rent produced by any undertaking. But the production of more rent does not necessarily mean a greater profit for the proprietors: for the amount left to them depends also on the secondary claims they have to meet out of the rent before they can count their profit. The landlord's claim will be one of these secondary claims.

When any estate in land is bought or sold, the price will normally be based upon the amount which the vendor might reasonably expect to obtain under a lease at a "rack rent." This is illustrated by the third and fourth examples given above. In the third case it was assumed that money was raised to purchase the full estate in fee simple in the land, with the result that the tenant has to meet the money-lender's claim for interest instead of the landlord's claim. Now the tenant would not expect to pay so much that the interest on the loan would exceed what he would have to pay if he took a lease instead of purchasing outright. On the other hand the vendor for his part would expect the money received by him upon the sale to be sufficient, if lent at the current market rate of interest, to yield him as much as he would have obtained from letting the land. In other words the landlord's claim is always equal, more or less, to the interest on the purchase-money.

Naturally any expectation that the rent which can be produced upon the site may in the near future rise or fall will affect the figure finally agreed. Indeed, it is the ordinary operation of the land speculator to hold his land out of use until someone will pay him a sum for it based not on its present productivity, but on what he anticipates it will yield at some future date.

It is true that the amount of the landlord's claim is fixed by an agreement and may vary between a nominal amount and the most the tenant is willing to pay, and will be affected by the relationship between the parties, their bargaining powers and knowledge of affairs. Yet, so strong is the tendency for landlord's claims to rise to the last penny which tenants can afford to pay, that the man who lets his land go for a smaller sum is generally regarded as either charitable or foolish.

This upward pressure of the landlord's claim may be exercised in several ways. Obviously, upon the expiry of a lease the landlord is able to demand for its renewal the largest sum the tenant will pay. During the course of a tenancy, however, this upward pressure may be exerted by the tenant either turning landlord and sub-letting or by his selling out to a newcomer. At the centres of population where rents rise rapidly and consequently landlords are able to levy an ever increasing toll upon rent, it is not uncommon to find that leases have been sub-let or else sold and re-sold several times, each time for an increased payment. The difference between the amount reserved by the headlease and the amount actually paid by the tenant in occupation is frequently substantial. Where, as will not be unusual, the incoming tenant buys the lease and raises the greater part of the price by way of loan, the secondary claim to which he subjects himself will be interest instead of landlord's claim, and it will have the same effect upon the amount of rent left to him as if he had taken a sub-lease. Again, though businesses may be conducted under the same business name, they are not necessarily continuously owned by the same people. Proprietors will form partnerships or partnerships will sell out to limited companies, or one company to another. On every such transfer the outgoing tenant will expect to receive the market price of the estate in land which he is transferring, and the incoming tenant will have to pay. In all such cases the tenant in occupation of the land will feel the same pressure of a secondary claim on his rent whether he makes the payment to a landlord under a sub-lease or purchases the estate of the outgoing tenant. The payment, whether it be to a landlord, to a vendor, or to a money-lender, will have been made in order to gain access to the land, and as we have seen, what the tenant will be ready to pay will be determined by the amount of rent which it is anticipated may be produced on the site, less the secondary claims which the tenant has to meet out of this rent and, where the site is being taken up by an entrepreneur, less also the least he is willing to accept as profit.

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