Free range

Reforms of agricultural tenancies legislation introduced last month are designed to make it easier for tenant farmers to develop their businesses by restructuring and diversifying. The Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 (SI no 2805) (RRO) came into force on 19 October 2006 and amends the Agricultural Holdings Act 1986 and the Agricultural Tenancies Act 1995.

Farm business tenancies

The Agricultural Tenancies Act 1995 disapplied the 1986 Act to tenancies beginning on or after 1 September 1995 and imposed virtually no security of tenure within a regime designed to reverse the decline in let land and meet the needs of tenants to increase income by diversification. The RRO promotes those objectives by providing greater freedom of contract in connection with restructuring holdings without losing 1986 Act security, rent review, agreed lifetime succession tenancies, and compensation.

Restructuring holdings

Radical alteration of the terms of the tenancy, the extension of the term or the 'addition' of land may all be desirable in pursuit of diversifying the business, but each would work a surrender and re-grant. Section 4(1)(f) is reformed to remove the requirement that such an effect should have been caused 'merely because' of 'a purported variation' in order to avoid the result being a farm business tenancy. While many re-grants will occur inadvertently in future, it is now possible to agree a variation with the intention of taking advantage of s 4(1)(f).

A new s 4(1)(g) permits the landlord to grant a new tenancy to the tenant, so surrendering the original, by a written contract of tenancy indicating that the 1986 Act is to apply.

In either case, it is essential that the original holding should comprise 'the whole or a substantial part of' the new holding. With the agreement limited to a radical alteration of the terms of the tenancy, there will be no difficulty, but where land is 'added', the potentially difficult question is whether the original holding comprised a substantial part of the new one. Except in the case of a re-grant following a deemed surrender under
s 4(1)(f), a new s 4(2C) provides that the question is to be determined 'by reference to either area or value'. Beyond that, no indication of the meaning of the word 'substantial' is given, no doubt because each case will turn on its own facts. It may be necessary for tenants to seek declaratory relief from the court to be sure that the proposed tenancy will fall within s 4(1)(f) or (g).

A new s 4(2B) prevents incremental agreements from avoiding the effect of the 'whole or a substantial' part rule. Multiple agreements are permitted, but if the result is that the original holding does not amount to a substantial part of the new holding, the 1986 Act does not apply to the new tenancy.

Rent review

One of the factors that discouraged tenants from exchanging security of tenure under the 1986 Act for a long-term farm business tenancy was rent. Schedule 2 to the 1986 Act provides for rents to be tied to the productive capacity of the land, whereas Part II of the 1995 Act envisages three-yearly reviews on an open market basis. In the past, it had been impossible to contract out of Part II except where the rent was to be varied by or to a specified amount or an objective formula was to be adopted, eg, by reference to the retail price index. Now the parties can contract out, provided only that their agreement does not preclude a rent reduction. Subject to that, it is now possible to create bespoke rent review machinery providing, for example, for five-yearly reviews of the rent for the farmhouse on an open market basis and for the rent of the land and buildings to be assessed according to the 1986 Act formula.

Succession

The definition of an agreed succession in s 4(2) is clarified. Under the previous law, it was generally considered necessary to obtain a direction when the existing tenant proposed to retire. Now the burden of obtaining the 'rubber stamp' of the Agricultural Land Tribunal will in many cases be removed. A tenancy granted after 18 October 2006, by a written contract indicating that Part IV of the 1986 Act is to apply, will be granted on an agreed succession within the meaning of s 4(1)(d) if:

• the previous tenancy was one to which Part IV of the 1986 Act applied (subs(2)(a) as originally enacted);
• the tenancy is granted to a person who would, if the previous tenant had died immediately before the grant, have been his close relative, ie, spouse or civil partner, sibling, child or treated child (subs (2)(b) as amended); and
• either, the tenancy is granted to a person who was or had become the sole applicant for a direction (subs (2)(c) & the first condition in subs (2A)); or
• the tenancy is the result of an agreement between the landlord and the previous tenant and is both granted and takes effect before the date of the giving of any retirement notice by the previous tenant or his death (subs (2)(c) & the second condition in subs (2A)).

In a case where grant and commencement cannot be on the same day, to avoid the risk posed by the tenant dying in the interval, a retirement notice should be served and an application made by the nominated successor before the tenancy is granted. If the tenant dies between giving the retirement notice and his successor applying, the notice is of no effect and any eligible person may apply. If there is a single applicant, the tenancy may be granted without obtaining a direction.

Compensation

Landlords had been inhibited from consenting to improvements, so that tenants were frustrated from investing in the business by the fact that compensation could only be assessed at the end of the tenancy and by reference to the increase in value of the holding. Landlords were, not unnaturally, reluctant to commit to paying open-ended compensation. Now the parties are able to agree in writing to limit compensation to the lesser of that increase in value and either an agreed amount or an amount equal to the cost to the tenant of making the improvement.

Agricultural holdings

Amendments to the Agricultural Holdings Act 1986 include provision for reform of rent review, expansion of the livelihood condition for succession, and modernisation of arbitration

Rent review

Section 12(2) is amended to remove the anomaly that an arbitrator had to determine the rent properly payable not at the effective date of the reviewed rent, but at the date of his appointment, which might be several months earlier or some weeks later. In rent arbitrations commencing with appointments made after 18 October 2006, the arbitrator must determine the reviewed rent by reference to conditions prevailing at the termination date, eg, 29 September 2007 for a demand given before 29 September 2006, regardless of the date of his appointment.

Schedule 2 is extended to provide that the grant of a new tenancy to which the 1986 Act applies by virtue of s 4(1)(g) of the 1995 Act, where the rent is altered solely on account of adjustment of the boundaries, does not re-set the three-year rent review clock. This is to avoid landlords being discouraged from agreeing to a restructuring by the prospect that a comprehensive rent review will be postponed for three years.

Livelihood condition

One of the government's objectives is 'to ensure that tenant farmers can diversify where this will improve the viability of their business without fear of jeopardising succession rights'.

An applicant for a direction following the death of the tenant or the service by him of a retirement notice has to satisfy the Tribunal that, for at least five of the seven years ended with the date of death or service of the retirement notice, he had derived his principal source of livelihood from his agricultural work on the holding or an agricultural unit of which it forms part. A future applicant will satisfy the livelihood condition if he has carried out agricultural work 'from' and/or 'other work on or from' the holding or the larger unit, provided that such work is 'of a description approved in writing by the landlord after the commencement of this subsection'. Thus at least five years will have to elapse before an application dependent upon the expanded condition may be made.

The objective is not to make life easier for applicants for succession. It is to enable the tenant to diversify into a non-agricultural business in which his close relative will work, without jeopardising the relative's succession prospects. What is envisaged is an agreement between landlord and tenant of a package of measures, including variation of user and alienation clauses, consent to improvements and provision for planning and other consents, within which the landlord will provide written approval of the close relative working in the diversified business.

A Code of Practice and a voluntary non-binding Adjudication Scheme operated by RICS have been put in place by DEFRA, designed to facilitate agreement upon the terms of a diversification project.

While some may be reluctant to co-operate, many landlords will regard the enhancement of future succession prospects as a small price to pay for the establishment of a diversified enterprise with the enhanced rent and capital value that may be expected to flow from it.

Arbitration

Schedule 11 is repealed and does not apply to arbitrations commenced by appointments made after 18 October 2006. The more user-friendly provisions of Part I of the Arbitration Act 1996 apply to the arbitration of matters in dispute, imposed by an amended s 84, by virtue of s 94 of the 1996 Act. Gone are the days of an inflexible 35 days for concurrent delivery of statements of case and extensions of the 56 days for delivery of the award having to be obtained from the president of the RICS.

Conclusion

Important Tenancy Reform Industry Group recommendations that have yet to be implemented include reform of inheritance tax to ease concerns about agricultural property relief being lost by the implementation of wide-ranging diversification proposals. But the changes made by the RRO should, certainly with the co-operation of their landlords, 'help tenant farmers to maximise the potential of their farming businesses, putting them in a better position to compete in the changing agricultural world', as the minister predicted when announcing the reforms.