Theoretical concepts such as land rent have little importance in and of themselves. Their real significance arises because of their value as tools of analysis that can be used in explanations of real-life conditions.
The concept of land rent is highly significant in this respect because of its application to different land economic problems. Four of the more important of these applications involve its relationship to contract rental arrangements, to property values to land resource and development decisions, and to the allocation of land resources between different types of use.
No rental arrangement is complete without some agreement concerning the amount of rent that will be paid for the use of property involved. The effect of land rent on the determination of contract rental rates is best observed in the workings of the rental bargaining process. Under ideal bargaining conditions, both the landlord and the tenant have accurate knowledge concerning the fair economic return that should be the use of land resources. The landlord under these circumstances finds it to his advantage to demand the full land rent plus any additional payment he can get. The tenant in turn insists that he should pay no more that the recognized land rent and naturally favors payments of less that this amount. Should the tenant agree to a higher payment rate than that necessary to provide the fair land rent, he would find it necessary to sacrifice part of the return that should go to his labor, management, and capital. On the other hand, should the land owner accept a lower rental payment, his willingness to share his land rent would redound to the benefit of the tenant.
The ideal pooling of perfect knowledge seldom exists in practice. Sometimes landlords and tenants do have fairly accurate ideas concerning the income-and rent-producing capacities of the properties with which they are concerned. Assuming fairly equal bargaining positions, the contract rents agreed upon under these conditions often approximate the amounts needed to cover land rent. However, frequent deviations occur from this model. Sometimes the tenant has only fragmentary knowledge concerning the rent-producing capacity of the land; sometimes neither party is apprised of the facts;  and sometimes system, special landlord-tenant regulations, or rent controls give landlords and tenants little opportunity to bargain as equals. Even when landlords and tenants enjoy equal knowledge and equal bargaining power, contract rental rates may differ from the theoretical land rent because of the failure of future production and income to match the conditions anticipated at the time of rental agreement.