This article explains what a farm business tenancy is and the key feature that differentiate it from other types of leases.
What is a farm business tenancy?
The words 'tenancy' and 'lease' mean exactly the same thing.
Parliament generally uses 'tenancy' when referring to residential leases and 'lease' when referring to business leases.
To confuse us all, when an agricultural letting qualifies under the Agricultural Tenancies Act 1995 (ATA 1995), the lease is referred to as a 'farm business tenancy' (sometimes shortened to 'farm tenancy' or 'FBT'). It is nonetheless a type of business lease.
Other relevant law includes the Agricultural Tenancies Order 2006.
Qualifying conditions
A tenancy of agricultural land will be classed as a farm business tenancy if:
- it was granted on or after 1st September 1995; and
- all or part of the land is used for trade or business and this state of affairs continues at all times during the tenancy; and
- either the character of the tenancy (at the relevant time and not necessarily at the beginning or end) is primarily or wholly agricultural; or the landlord and the tenant have exchanged notices in the prescribed statutory form prior to the start, confirming that it is to be, and will remain a farm business tenancy.
Agricultural business
The 1995 Act defines agriculture as including 'horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes'.
Livestock includes 'any creature kept for the production of food, wool, skins or fur or for the purpose of its use in the farming of land'.
Using a farm business tenancy agreement when the use is not agricultural business
A lease can remain within the provisions of the ATA 1995 even if the tenant plans to change the use to non-agricultural business after the lease is granted, provided that the correct notices were exchanged before it started. This allows tenants to diversify away from farming.
The Act does not make clear how far diversification may go. In many cases it will be a matter of opinion as to whether the land continues to be farmed. However, it has become clear that peripheral or additional business operations will not prevent a tenancy from being a FBT.
Examples might be: the operation of a farm shop, or a 26 day caravan site, or use of part of the land for grazing horses.
Note though, that any business (or other) activity than farming is likely to require the consent of the landlord in any event. If the tenant does intend to diversify, then the landlord's permission will have to be sought.
What happens if the tenancy drops out of the qualification criteria?
If the tenancy at some points no longer qualifies under the definition of an FBT, then there is no serious problem for either party.
The tenancy becomes regulated by the Landlord and Tenant Act 1954 (LTA 1954), just like all other business leases. The main possible areas of difficulty will be those that the agreement has not covered because it was never intended to be a lease under the 1954 Act.
For example, problems might arise in connection with: rent reviews; notices to quit; or occupation of the buildings.
Features of farm business tenancy
The differences between a FBT and other types of leases (such as those governed by the LTA 1954) are in the terms of the agreement and notice to quit, rent and review, and compensation for improvements made by the tenant.
Term of agreement and notice to quit
There are special rules for fixed tenancies of less than two years. Where the term is less than two years, the tenancy expires automatically at the end of the term. No notice to quit is required to be given by the landlord or the tenant.
Where the term is for two years or more, written notice must be given at least one year in advance. If no notice is given, then at the end of the fixed term, the tenancy becomes a periodic one under the same terms until ended by the giving of a notice. The periodic tenancy must also be ended by giving notice of at least one year.
During a tenancy, notice can be given by the landlord or the tenant. Whichever gives it, it must be of at least one year. Under the ATA 1995, the maximum notice period was 24 months in advance. However, under the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006, landlords and tenants can agree in the agreement can agree on whatever maximum notice period they wish.
The parties may decide to include break clauses in their agreement giving either or both of them the option to 'break' after a specified time. If they decide to do so, then at least 12 months' notice must be given before the break clause can be operated. Alternatively, the parties may negotiate a surrender of the tenancy by mutual agreement, but there are no statutory provisions to deal with this.
There is nothing to prevent a landlord from obtaining possession for breach of a term of the lease, such as failure to pay the rent.
Example
Leon (a landlord) agrees to let his agricultural land to Freddy (a farmer) for a fixed term of 4 years.
They agree that the maximum notice period to be given is 24 months.
Six months before the tenancy ends, Leon sends Freddy a notice to quit in 20 months time.
The fixed term ends and becomes a periodic tenancy.
One month later Freddy decides he would like to end the tenancy earlier. He gives Leon the minimum notice of 12 months.
The tenancy ends after 61 months, one month before Leon wanted it to finish.
Rent and review
The landlord and tenant can agree the rent at the outset of the tenancy as with any other lease.
The need for rent reviews arises as a result of the term of the lease being overtaken by increasing market rents. For longer term leases, it is likely that the landlord will require reviews. The parties may contract out of the provisions of the ATA 1995 with respect to rent reviews.
There are conditions: they cannot agree to exclude the possibility of future rent reductions. If they do not do so then either landlord or tenant will be able to demand a rent review every three years, as under the Agricultural Holdings Act 1986.
Even if the parties do not make specific arrangements to contract out of the Act's provisions on rent reviews, they will still be able to choose for themselves how often rent reviews are to take place. The Act simply states no less than three years.
Because the Act gives considerable flexibility over rent reviews, the Net Lawman agreements provide simply for compliance with the provisions of the Act, which call for arbitration in the absence of agreement. The arbitrator must set the rent on the basis of the open market value.
Compensation for tenant's improvements
The Act entitles a tenant to compensation when they quit the property for physical improvements made to a holding and for intangible advantages which increase the value of the holding, provided they are left behind by the departing tenant.
Intangible advantages include, for example, planning permission, which was not taken advantage of before the tenancy ended, or milk quota acquired during the course of a tenancy.
However, in all cases no compensation will be payable unless the landlord has given consent to the improvement.
Where parties cannot reach agreement over this, or a tenant is unhappy about conditions attached to consent, the Act gives the tenant the right to demand arbitration provided that the tenant has not already begun the improvement. An arbitrator can also be used to decide any question of value. Any financial contribution from the landlord or from any Government grant scheme should be taken into account and deducted.
Routine improvements - that is, physical improvements which are made in the normal course of farming the holding - can be carried out before seeking consent, and without losing the right to seek arbitration if consent is later withheld. These would include most of the items formerly known as tenant-right matters.
Compensation is to be paid at the current value of the improvement to the holding when the tenant quits the property. In other words, the tenant has the benefit of the increase in capital value over time. The parties cannot make any valid agreement to the contrary. Accordingly, the landlord should consider his future obligation, before giving any permission. He may prefer to undertake the work himself, so that he has the benefit of its future value and the issue of compensation does not arise.
If the parties enter a further farm business tenancy, compensation may be 'rolled over' by agreement.
Disputes procedure
Either side may alone apply the arbitration provisions of the Act on virtually any dispute under the agreement. Arbitration is time consuming and expensive, but unfortunately an application to court is likely to be referred to arbitration as a matter of routine.
Net Lawman advises that the most efficient way to comply with the Act is to agree the identity of an arbitrator in advance. At least there will then be no delay in choosing that person. Mediation may take place by agreement, but either party may still insist on arbitration. Note that the arbitrator must be qualified so that he is able to give a decision which is binding at law.
Further information and documents
Net Lawman offers two farm business tenancy agreements. Which to use depends on the term of the tenancy.