Agricultural tenancy reform update

In an earlier edition of Rural News, we considered the proposals put forward in the Defra Consultation Paper on Agricultural tenancies. The most controversial of these proposals were:

  • for AHA tenancies to be assignable by a Tenant at a premium where no eligible successor remained;
  • the extension of the category of eligible relatives to include grandchildren (effectively adding yet another generation), nephews and nieces, cohabitees and their children;
  • the removal of restrictive user clauses in AHA tenancies (causing a danger of lapse into a business tenancy under the Landlord and Tenant Act 1954); and
  • a call for 100% APR relief be available only on lettings over 10 years.

When the Government published the long-awaited Bill earlier this year, practitioners were relieved to see the more controversial clauses not included: the Bill emerged from the Commons virtually unchanged. At the time of writing, the Bill has just finalised Report stage in the House of Lords. Lord Gardiner of Kimble stated that the Government had only brought forward provisions with broad industry support, which could be delivered immediately. He anticipated that, in future, there would be a separate, dedicated Agricultural Tenancies Bill, after further consultation with TRIG and the farming sector. He seemed to favour FBTs as more modern commercial agreements, more suited to diversification and environmental schemes rather than prolonging the AHA regime and encouraging innovative new entrants to the industry. He drew attention to the fact that TRIG was updating the guidance for Landlord and Tenants on diversification and environmental schemes, and commented that ELMS was being designed to be accessible to as many famers and land managers as possible. Overall, only one hour of a three-day debate was spent on tenancies. There was one vote on an amendment by Baroness Mackintosh to provide a mechanism for FBT tenants to object to their Landlords’ refusal to allow entry into financial schemes, but this was defeated.

What remains in the Bill?
Firstly, there are a number of changes to the Agricultural Holdings Act 1986. These cover detailed technical changes to the arbitration procedure for rent review, and the appointment of arbitrators including widening the categories of professionals who can act as arbitrators.

There are also provisions on disputes relating to a Landlord’s refusal of consent for variation of the terms of the tenancy, enabling the tenant to apply for financial assistance or comply with a statutory duty. These provide the right for a Tenant to request arbitration on this refusal.

The minimum age of a retiring tenant for succession is abolished, and are Case A Notices to Quit (Council Farms). The age at which a Landlord can issue a Notice to Quit is changed from 65 to pensionable age. There is a new definition of eligibility to include training at college counting towards the principal source of livelihood test, and a new definition of suitability referring to an applicant’s capacity to farm the holding to high standards of efficient production.

What will happen next?
We anticipate TRIG will continue to work on an industry consensus for further amendments to tenancy legislation, in a new Agricultural Tenancies Bill and Guidance Notes. In general, the Government appears supportive of longer-term lets to encourage investment and in providing a way for new entrants to become established. It is aware in designing ELMS that it has to be accessible to as many farmers as possible, and to encourage Landowner confidence in letting land. The TFA is likely to continue to press for longer fixed-term agreements, linked to availability of preferential IHT rates, the assignability of tenancies and the widening of the categories for eligible relatives on succession. Hopefully, there will also be a consultation on the definition of Agriculture.

The Agriculture Bill and the proposed new scheme of agricultural support raises some practical drafting issues, which we are raising with clients. Most tenancies have no provisions relating to agricultural support schemes or the standard BPS clauses with which we are familiar. Practitioners have, of late, tried to devise complex ‘successor legislation’ clauses to cover new schemes. Few that I have seen would cover the proposed ELMS concept, which will cover more than traditional agriculture and the concept of delinking. As practitioners we should seek, at every opportunity, to modernise definitions to provide for new environmental schemes generally, even though the detail may not yet be known.

The Bill provides for regulations to be introduced to make delinked payments and lump-sum payments. The annual payments will apply to all recipients of BPS at the time the measure is introduced; in most cases, therefore, we’ll see a payment linked to the land become effectively a pension in the hands of the Tenant on the relevant date. Most current tenancy agreements provide for entitlements to revert to the Landlord at the end of the term, either for £1 or at market value. Should we try to provide for the Tenant to transfer to the Landlord, so far as possible, any sums arising under a delinked payment scheme, failing which a provision for redrafting by an arbitrator and or compensation to the Landlord?

We are currently seeing a rush of S4(1)f and 4(1)g surrenders and regrants of agricultural tenancies. These are exceptions to the general rule that all post-September 1995 tenancies will be FBTs not AHA tenancies. Section 4(1)f covers implied surrenders and regrants on a variation of a tenancy to add more land, or increase the term and Section 4(1)g new tenancies granted to AHA tenants. They are “new” tenancies for the sake of IHT but retain 1986 Act protection. It’s important especially with S4(1)g agreements that they’re not just a tax mitigation exercise. This is the perfect time to have a genuine reason to update the tenancy terms slightly to refer to the new environmental schemes.

The definition of Agriculture, in our view, needs to be addressed by TRIG and the Government, to be fit for the new regime. For 1986 and 1995 Act tenancies, “Agriculture” includes horticulture, fruit growing, seed growing, dairy-farming and livestock breeding and keeping; the use of the land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of the land for woodlands where the use is ancillary to the farming of land for other agricultural purposes.

For tax, rating and planning purposes there are different definitions. Forestry, for example, is not agriculture for tenancy or tax law but it is for rating purposes. Issues will clearly arise with Forestry not falling within the definition of agriculture, particularly with the current emphasis on tree-planting. Rewilding, too, could cause issues where the land may not be being used in a business. Energy crops could be held to fall outside the tenancy law definition, as could some of the activities under the ELMS scheme. It’s important to remember that under an AHA tenancy, agricultural user covenants will be strictly construed, and that substantive diversification can result in conversion of the AHA tenancy to a business tenancy under the LTA 1954 Part II. FBTs permit greater diversification if use of the notice condition is satisfied. The test is still primarily agricultural, but the test has to be satisfied only at the commencement of the term.

Bearing in mind all these issues, there’s clearly a lot of work still to be done in developing a modern agricultural tenancy regime that is suited to the new agricultural support and land-management proposals. We look forward to providing effective guidance for our clients.