Farm Business Tenancies: Beyond the short term

The Agricultural Tenancies Act 1995 (‘1995 Act’) has now been in operation for over 20 years. It was a turning point for the sector and encompassed deregulation of the legislative framework and an endorsement of contractual freedom on most issues.

Twenty two years on and guided by DEFRA’s focus on productivity, TRIG was asked to consider whether there are any constraints or disincentives within the 1995 Act which prevent the effective working of the agricultural tenanted sector?

Questions for TRIG

The first question is whether there are any areas where farm business tenancies are not working well in practice?

The FBT Working Group wanted to focus on:

  • The measures that act as a disincentive for landlords to let holdings on longer term tenancies.
  • Any terms of the 1995 Act which constrain the ability of a landlord and tenant to reach the commercial bargains they wish to, when farms or estates are reorganised.
  • An education and awareness campaign in the industry to encourage better use of the flexibilities and opportunities that exist to create longer term or bespoke farm business tenancies, which better reflect a long term view and the commercial ambitions of the parties.

The Working Group discussed whether there were any provisions of the 1995 Act which provide a disincentive for landlords to invest in holdings let under farm business tenancies. It was felt that there was insufficient evidence to support that.

Similarly a discussion took place concerning the suggestion of introducing a statutory right for a tenant to renew an existing farm business tenancy. The Working Group were unanimously opposed to that.

Looking at the concepts in more detail leads to an interesting discussion.

Longer letting

The Working Group considered how the framework of the 1995 Act might assist in providing an incentive for landlords to let holdings on longer terms.

Recent CAAV surveys show that the average term, on the grant of a new tenancy, is less than four years. An average term for equipped holdings is just over ten years. In the view of some commentators, those figures are an indication that the pendulum has swung too far in the wrong direction, given that the 1986 Act granted tenancies for lifetime. The 1995 Act by contrast provides for no minimum term.

As a consequence, the short term lettings prevent both landlords and tenants from taking a long term view in terms of production, diversification and environmental schemes. There was some evidence of tenants on shorter tenancies being unable to obtain bank funding and a recognition that a commercial business may have a myriad of different agreements, against which banks have to decide whether to lend.

TRIG considered how changes to the 1995 Act might assist with these issues. The Working Group recognised a perceived difficulty for a landlord in terminating an FBT for non-payment of rent or other breach.

The concept that has been recommended to DEFRA is a farm business tenancy of a minimum ten year term.

There is no ability for the landlord to serve a break notice. However, a small number of circumstances would give the landlord the ability to bring the tenancy to an end. These are:

(a)          non-payment of rent

(b)          a breach of a term of the tenancy

(c)           the death of the tenant

(d)          the removal of land for non-agricultural use.

It was felt that this recommendation balanced certainty for the tenant, in that he can remain in occupation for a longer term, but a more effective remedy for the landlord, in the event that the tenant is in breach. At the moment a landlord has to rely on cumbersome and unwieldy forfeiture provisions, which seldom produce a swift remedy for a landlord.

The concept of TRIG’s recommendation is that in the event of non-payment of rent by a tenant, a landlord is able to serve a notice giving the tenant two months to pay. The tenant would be able to serve a counter notice within one month of that, but the landlord would be able to serve a notice to quit, which would take effect three months after service and any issues would be referred to arbitration.

Similarly for categories (b)-(d) above the landlord would serve a notice, with the tenant having the ability to  serve a counter notice and a notice to quit served by the landlord three months after that.

Looking at these provisions some may say that these reflect a framework which already exists under the 1986 Act and there are strongly held views within the industry as to whether those are effective. The key issue is whether landlords would feel sufficiently protected to grant longer term farm business tenancies and whether tenants would feel sufficient security of tenure to invest. The objective is to ensure that tenants can remain in occupation, even if planning permission is being considered, rather than entering into short tenancy agreements which increase management time and uncertainties for the parties.

However, if a tenant enters into a farm business tenancy, which allows the landlord to take back part or the whole on giving three months notice, it is difficult to see how a tenant would consider that his security had increased. For there to be a true balance, a tenant would be looking for some restriction on the amount of land that could be taken back and over what period.

Contractual freedom

TRIG has recommended that new statutory provisions be implemented to allow a landlord and a tenant holding under the 1986 Act freedom to make changes to the holding and for it still to remain within the 1986 Act. These concerns were addressed by the TRIG reforms in 2006, but it was felt they didn’t go far enough.

Those TRIG reforms allowed changes to the tenancy, but the old holding had to comprise a substantial part of the new holding. Removing the requirement for a “substantial part” would allow greater freedom to change the shape of holdings without falling outside of the 1986 Act.

Education  and awareness

TRIG endorsed the Working Group’s recommendation that amongst professionals, and the industry generally, there needs to be greater awareness of the flexibility and opportunities that the 1995 Act already offers to parties. The 1995 Act endorses contractual freedom, but there remains an unwillingness to consider, for example, the opportunities for stepping outside the standard templates.

Few consider the options for rent other than the statutory rent review mechanism. Given the changes which will come with BREXIT, there should be greater awareness amongst professionals of the opportunities to review rent by reference, for example, to formula, wheat prices, or directions to an expert.

It was considered that there is a degree of industry inertia and a preference to use standardised template agreements, rather than clients taking a more commercial and longer term view. Whilst there are costs to be considered in the short term, it was felt that such costs will pay dividends, if the agreement endorses the flexibility that is required by the parties.

Growth of the tenanted sector in the short term and an increase in the acreage let on FBTs will come from retiring owner occupiers. The 1995 Act has a role to play in ensuring that alongside considerations about tax, levels of rent and subsidy payments, there is a fair structure in place to balance the interests of both landlords and tenants, to allow a longer term view to be taken on both sides.

For more information please contact Vivienne Williams, Partner in the Agriculture team.