Background
Since the Agricultural Tenancies Act 1995, there have been many changes in agricultural processes as well as a growing need for farmers to prioritise environmental as well as farming outputs as well as the introduction of the Common Agricultural Policy (CAP).
Farm diversification has been essential to secure the sustainability of the farm.
Since the outbreak of Foot and Mouth and the Policy Commission on the Future of Food and Farming, there has been more recognition or a healthy tenanted sector in achieving sustainable agricultural industry.
The representatives of the Tenancy Reform Industry Group came up with the following reforms. They were implemented by the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006.
- encourage diversification by tenant farmers
- maintain and improve viability of tenanted farmers
- allow restructuring of holdings without jeopardising valuable rights
- improve flexibility in the tenanted sector
- maintain a balance between landlord and tenant interests
The Order applies to:
- all new tenancies in England and Wales
- to variations and consents affecting existing tenancies made on or after 19 October 2006
- arbitrations arising on 1986 Act tenancies where the appointment of the arbitrator takes place on or after that date
- all amendments to the Agricultural Tenancies Act 1995 regarding notice to quit and the criteria which an arbitrator can take into account in a rent review for a Farm Business tenancy
Key Changes
Eligibility for statutory succession to a tenancy under Agricultural Holdings Act 1986
The 1986 Act set out certain test for eligibility for statutory succession to a tenancy, including what is known as the livelihood test.
This required the potential successor to have earned their principal source of livelihood from agricultural work on the holding for five of the previous seven years.
This was seen to inhibit both tenant and farmer diversification.
The RRO enables successors to a tenancy to earn income from diversified activities on the farm to fund activities off the farm, and for this income to count towards the livelihood test, as long as the landlord gives written agreement to this diversification after the Order has taken effect.
These changes do not affect a potential successor’s right to succeed to a tenancy where the principal source of income is from agricultural work on the holding.
Diversification projects might include introducing paint-balling activities, opening a farm-shop or a dog kennels business.
Arbitration procedures
There are new procedures for arbitration, replacing those made by the Arbitration Act 1986.
They are more flexible and enable parties to agree to resolve a dispute by a written representation procedure, thereby avoiding the costs and time of attending a court hearing.
The 1996 procedures apply to any arbitration where the arbitrator is appointed after 19th October 1996.
Three year rent review cycle
Prior to the RRO, if land was added to the holding, creating a new tenancy in law, the three year period would start again.
This deterred parties from restructuring holdings as it meant they would have to wait longer for the next review.
Now, where land is added to or removed from a holding, and there has been no change in rent, other than an increase or deduction to take account of the adjustment in the size of the holding, the next rent review must be at least three years from the beginning of the original tenancy or the previous rent review for the original tenancy.
Appointment of arbitrator
Arbitrators are now required to determine rent as from the date at which the new rent will be payable, not from the date of the rent for the holding.
Upper limit on end of tenancy compensation
Under the 1995 Act, a tenant is eligible for end of tenancy compensation only if the landlord gives written consent.
Compensation is paid at the value of the improvement to the holding when the tenancy ends.
Landlords do not know until the end of the tenancy, how much compensation they will have to pay, which means they are often reluctant to agree improvements.
The RRO allows landlords and tenants to agree an upper limit - a cap - on the amount of compensation to be paid. Unless they agree some other amount, this is equal to the cost to the tenant of making the improvement.
At the end of the tenancy, the landlord and tenant will need to assess the value of the improvement to the holding in the normal way. If the value of the improvement is lower than the amount of the agreed upper limit the landlord will pay the tenant the actual value.
If the value of the improvement is higher than the upper limit, the landlord will pay the tenant the amount of the upper limit.
The agreement to set an upper limit should be set in writing. If the parties do not wish to set an upper limit the existing default provisions apply.
Rent reviews
Under the 1995 Act, landlords and tenants can contract out of the open market provisions of the Act, giving them greater flexibility to agree terms which suit their own circumstances.
Under the RRO changes, where the parties contract out of the default rent review arrangements, they can have complete freedom to negotiate their own provisions on rent, subject to the conditions that these provisions must not preclude a reduction in rent.
There are no restrictions on the criteria that an arbitrator can take into account, other than any which would preclude a reduction in rent.
Where a landlord and tenant expressly agree not to include the default provisions of the Act or that a rent review should not be referred to an independent expert, they automatically contract out of the default rent review provisions and can say how the rent is to be reviewed.
Application of the 1986 Act
Most new tenancies that commenced after 1st September 1995 are Farm Business Tenancies (read our guide to Farm Business Tenancies). The 2006 Order adds a new circumstance in which the 1986 Act may apply to a tenancy. The 1986 Act will apply where there is a written contract of tenancy that states that it is to apply, and where the tenant previously held a 1986 Act tenancy of all or a 'substantial part' of the holding.
What constitutes a substantial part is determined by reference to either area or value.
The 1986 Act will continue to apply regardless of whether the parties knew their actions would have effect as a surrender and re-grant, or whether it was done unwittingly.
Notices to quit
Previously, a notice to quit for a Farm Business Tenancy had to be given at least 12 months but not less than 24 months in advance.
Landlords and tenants are now able to agree whatever maximum notice period they wish.
There is no change to the minimum notice period which is 12 months in advance.
Application of the Order - Q&A
If my landlord has already agreed to diversified activities being carried out on the holding, do I need to ask him to renew this consent to ensure that the income will count for the purposes of the livelihood test?
Yes. Ask your landlord to review consent and provide it in writing. To count for the livelihood test, the consent must have been given after 19th October 2006.
What happens if my landlord refuses to give consent so that diversification activities cannot count towards eligibility for succession to the tenancy?
It is the landlord’s prerogative to decide whether he will allow this.
However, this procedure is considered good practice under the Code of Good Practice For Agric-Environment Schemes and Diversification Projects Within Agricultural Tenancies. If he disagrees, you might be able to appeal.
What if, as a landlord, I am happy to agree that some of the diversified work carried out should be eligible, and some not?
You should describe in the written consent precisely which work you consent to. Work that is not described in the written consent will not be eligible for the purposes of succession.
What if my landlord does not wish to agree an upper limit for end of tenancy compensation?
If either party does not wish to set an upper limit, the default provision of the 1995 Act will apply, but there is no compulsion on the landlord to agree to the improvement.
Is there a timescale laid down for agreeing the amount of the upper limit for compensation?
No. In practice, the parties might agree to set an upper limit, and then decide on what it might be after the improvements have been made. Or the parties could agree the upper limit before work starts.
What should be included to determine the actual cost to the tenant for the purposes of calculating the upper limit?
This is not specified in the legislation, but could include the costs of:
- building materials
- contractors
- tenant’s own labour
- planning fees and meeting building regulations
- professional fees
- goodwill
The tenant should keep copies of invoices and should agree a time and rate for his own labour with the landlord, before he begins work.
Under the new arbitration procedures for 1986 tenancies, if I cannot agree with my landlord on the appointment of an arbitrator, can I still apply to the President of the Royal Institution of Chartered Surveyors to make an appointment?
Yes. There are no changes to this.
If I have agreed in the terms of the tenancy that rent reviews will be determined by an independent export, can my tenant still demand arbitration under the default provisions of the Act?
No. Neither party, once agreed, can go back on their agreement.
How will the arbitrator decide the rent if my tenancy agreement contains no such criteria?
If your agreement is silent, the rent will be determined based on open market rental value.