Agricultural tenants in financial difficulty

What can agricultural Landlords do if their tenants run into financial difficulty?

The answer to this question will depend upon the type of agricultural tenancy which the tenant holds.

Agricultural Holdings Act 1986

If the tenancy is governed by the Agricultural Holdings Act 1986, generally applicable to tenancies granted prior to September 1995 and to succession tenancies under the 1986 Act granted thereafter, the normal route for collecting arrears of rent or enforcing covenants such as repair, is for the Landlord to serve a Notice to Pay or Notice to Remedy in the prescribed form. Lack of compliance within the relevant period can then be grounds for service of an Incontestable Notice to Quit under case D of the 1986 Act. Case D of Schedule 3 of the Act provides that the case will be available if the Tenant has failed to comply with a notice in writing served on him by the Landlord which is either a Notice requiring arrears of rent to be paid within two months or a notice requiring that within a reasonable period a breach of the tenancy be remedied. The Notice to Pay must be in the prescribed form and give prominence to the warning of the consequences of non- compliance.

The Notice to Pay must be strictly complied with and all the rent paid before the expiration of two months. There is no power for a Tenant to dispute the validity of a Notice to Pay on receipt and no equivalent of the arbitration process available on a Notice to Remedy. A Tenant who did not pay would thus be running the risk of a Notice to Quit which he could not challenge until after the Notice to Quit itself had been served. If the tenant received the subsequent Notice to Quit, he then has one month to demand arbitration.

The process for service a Notice to Remedy is more complicated and there are greater opportunities for the Tenant to challenge at each stage. It can be a time consuming and costly process so advice should be taken at an early stage on the likelihood of success.

As well as Case D Notices to Quit for non-compliance, where a Tenant is insolvent a Landlord under a 1986 Act tenancy has the benefit of Case F of Schedule 3 which provides ‘at the date of the giving of the notice the tenant was a person who had become “Insolvent” is defined as being adjudged bankrupt or making an arrangement or composition with creditors or in the case of a body corporate a winding up order has been made or a resolution for a voluntary winding up. A Landlord in this situation is entitled to give less that the usual period of notice of a year expiring on the next term date. This means the period of time will depend on the term of tenancy. In the case of an annual tenancy the common law notice period will be 6 months.

Despite these statutory provisions in the 1986 Act there are also limited circumstances where a Landlord might be able to rely on the general law of Forfeiture. Provided the Landlord has not waived the breach (for example by accepting rent after learning the tenant was insolvent) he might wish to avail himself of this process if he wanted possession more quickly than the 6 month period referred to above or if the tenancy is a fixed term AHA tenancy (very rare) and the fixed term has not expired. Full advice should be sought where the holding includes a farmhouse or other dwelling as other legislation can apply.

Agriculture Act 1995

There is no equivalent in the Farm Business Tenancy legislation to the Notice to Pay or Remedy regime or the Case F ground for an incontestable Notice to Quit. Instead it will depend entirely on the drafting of the agreement in particular the wording of the forfeiture clause and the definition of insolvency. In long fixed term agreements, it is particularly important that these are drafted by a solicitor. A typical clause would provide for re-entry if the rent is unpaid for 21 days or there is a material breach of Tenant’s covenants or an act of insolvency. The latter should be widely defined and include the appointment of an administrator for a corporate tenant, a somewhat grey area under the 1986 Act definition. Forfeiture clauses should provide for the landlord to give sufficient prior notice of intention to exercise his right for the tenant to give notice of his intention to claim compensation on quitting. Arguably, at least six weeks’ notice should be given for the clause not to be held to be unenforceable. In addition s.146 of the Law of Property Act 1925 provides that for breaches other than non-payment of rent, notice in the statutory form must be served, s146(9) however provides that a s146 notice is not required where the forfeiture is the Tenants bankruptcy and the clause is contained in the certain types of lease, one of which is a lease of agricultural and pastoral land.

What are the alternatives

The processes outlined above are full of potential pitfalls and can be expensive and time consuming.  Rather that leave a situation too long it can usually be helpful to sit down and discuss other alternatives such as an early surrender. Possibly encouraged by the Lump Sum Exit scheme which has been attractive to a number of struggling tenant farmers, we are seeing an increasing number of surrenders, negotiated usually between professional advisers. These should be effected by Deed and appropriate clauses of mutual set off and mutual extinguishment of claims included. The tenant will need to be separately advised particularly as to the tax and SDLT consequences but there can be ways to structure statutory compensation to mitigate capital gains tax and indeed a Landlord will often agree to assist a Tenant with any tax chargeable in exchange for getting early vacant possession. If the leasehold title is registered at the Land Registry, for example of a fixed term FBT of over 7 years, this title will need to be closed and appropriate clauses put in the surrender Deed. 

Other alternatives which are becoming increasingly attractive include joint ventures such as share farming which can be of great interest to tenants who have very restrictive user clauses or bans on entering agri-environment schemes or carbon trading .

How Moore Barlow can help

Moore Barlow are recognised as one of the leading rural services teams in the south and we have a deep understanding of every aspect of rural life. Having advised many clients over generations, we are experienced in dealing with all issues that can arise.

Please contact contact the Rural Law team now to discuss the alternatives available.