by Jeremy Moody, Chris Findley and Julian Hosking
The law governing agricultural tenancies is now in need of major reform and review. The declining size of the tenanted sector has stimulated the debate about security of tenure, but it has become clear that many more features of the system must be updated to accommodate the economic, social and environmental pressures on the rural economy. Simply amending security of tenure would be an inadequate response. The Tenant Farmers’ Association is now promoting the principles of the rural business lease to take the tenanted sector into the next century.
The decline in the tenanted sector is common knowledge, but its course through the century suggests that it is due to wider and more deeply rooted issues than legal security alone. None the less, legal factors play a part in causing landowners, who do not wish to farm, to use surrogate forms of tenancy which do not carry security: other landowners fear such arrangements to be too awkward or precarious. Share farming and cropping arrangements may have their place, but only as a specific solution to a small minority of cases, not as the predominant system for letting land. Can a tool be found that could both attract many of these landowners and provide an equitable structure for a long-term industry under foreseeable pressures?
The second problem is that agricultural tenancy law was written for a different age against a background of a decayed agriculture in an impoverished countryside, before being given a sense of direction in the second world war. The 1947 legislation, whose tenancy aspects were consolidated with earlier law in the Agricultural Holdings Act 1948, had the themes of stability and efficiency. Agriculture expanded triumphantly with investment and technical expertise.
We are now in a different age: farming has to compete with the rest of the economy for its resources; public policy is moving against increased production; 42% of English farms now have some diversification; ESAs, the Countryside Premium and NSAs are but the first major environmental measures with which farmng will have to cope; economic liberalisation will put the primary producer of internationally traded standard foods in a weak position. These issues come together in a need for more flexibility as individuals find remedies for the basic problem (for both landlord and tenant) of profit generation per acre. There must be an alternative to ever more acres to sustain a contemporary living standard. Livestock farms will face growing pressure from farm-waste regulation, while there seems to be no upturn for cereals.
Agricultural tenancy law did not contemplate diversification. It must do so now. Doing so will benefit those tenants who can see and master opportunities using the skills and resources available. At the moment, Case B discourages many tenants from maximising the potential of their holding by adding value to their products or developing other businesses.
The interests of the wider community will benefit from a more flexible system able to do more to sustain the rural economy and rural society. A reformed system should also offer a means to handle the land management issues which are likely to arise as conservation issues impinge further on rural land use.
The TFA lease
The principles of the TFA’s rural business lease are:
- security of tenure based on a renewable lease for a fixed term: this allows the landlord the flexibility of tenancies shorter than the present lifetime and protects the tenant’s negotiating position by giving him the right — similar to that of the business tenant under the Landlord and Tenant Act 1954 — to apply for a new tenancy at the end of the fixed term. This will ensure that he is not over a barrel when considering his home and business;
- the term itself as a fixed term being secure from the present framework of incontestable notices to quit, continuing after death and able to be assigned and mortgaged;
- statutory provision for flexibility of use, promoting a wider business approach; and
- full and fair compensation for value left behind by the tenant at the end of the lease so that the framework of shorter-term tenancies does not of itself deter investment, rather seeing an equitable recognition of the value involved.
Following publication of the principles of the rural business lease in early May, the TFA has been sufficiently heartened by the reaction in informal discussions to publish a consultative paper outlining possible mechanisms to implement and illustrate these proposals. These are summarised (not exhaustively) in the following text. In many respects they draw heavily on the successful model of the legislation governing business tenancies, but continuing with the essential features relevant to agriculture as a business where, for practical or structural reasons, a pure business tenancy approach is not appropriate. The TFA proposes that this code would operate alongside a continuing Agricultural Holdings Act 1986, which the TFA would wish to see amended to allow a retirement tenancy option. Landowners would have the freedom to choose between the two systems. The TFA is happy to consider constructive comments from any individual or industry organisation.
The rural business lease proposal is intended to be available to embrace future lettings of all types of rural land and property used predominantly — even if sublet — for commercial, business or trading purposes, with or without ancillary dwellings. In addition to entirely agricultural holdings, it should be able to accommodate diversification, forestry, leisure uses, commercial properties on farms, the low-value uses which may be involved in the land management for conservation and environmental purposes, and other business uses.
The lease should be in writing and state that it is governed by rural business lease law. Any oral agreements will thus be regarded as covered by other existing law.
One of the major purposes of the proposal is to give the tenant a more positive interest in the income-earning possibilities of the holding — an interest limited by the present law. It is proposed that there should be a statutory provision allowing the tenant flexibility of business use of the holding subject to any change not affecting the status of the rural business lease and subject to landlord’s consent, which is not to be unreasonably withheld or conditioned. An additional test could protect the value of the landlord’s reversion and other interests.
The minimum length of the initial term of the lease would be presumed by law. The section 25 procedure of the 1954 Act would operate, but with a notice to quit of not less than 12 months to reflect the annual cycle of most agricultural enterprises. The tenant would be able to seek renewal of the lease for subsequent terms (not necessarily of the same length) under a section 26-type procedure. The landlord would have grounds upon which to challenge the renewal. These would probably be based on those in section 30 of the 1954 Act, but would need to cater for the general circumstances of the types of land and property involved. The grounds would cover:
- the extent to which the tenant had honoured the lease;
- suitable alternative property being available;
- important and reasonable interests of the landlord.
- The business approach of the proposal would see leases continuing after the tenant’s death and assignable (with some safeguards for the landlord).
Length of term
The length of the presumed minimum term and the nature of the grounds for challenging renewal are obviously inter-related issues. It is felt that the term should not be less than 15 years to allow someone to establish their sole business on such a lease and be able to show a return on capital, skill and effort. Equally, the grounds available to the landlord have to be such as to attract a reasonable landlord to let.
Renewal
One example of using the best of the 1954 Act but tempering it by reference to agricultural conditions is the careful consideration needed of grounds (f) and (g) in section 30 of the 1954 Act covering the landlord’s own plans for the property. The present form of ground (f) may be difficult to apply, and its underlying purpose may perhaps be best taken forward by allowing a challenge (for all or only part of the holding) on the basis of a fixed intention and ability to redevelop without relying on any consent or planning permission obtained by or on behalf of the tenant. The wording of ground (g) will need careful thought to prevent its abuse by surrogate forms of tenancy defeating the underlying purpose of the ground — there are similar tests to this in some other EC member states, and analogous problems under the Rent Acts are handled by the courts. Both grounds would be covered by the five-year time-bar and carry compensation for disturbance calculated under compulsory purchase law.
The renewal mechanism is central to the scheme. It would not be right to follow the 1969 amendment allowing contracting out of the 1954 Act’s right to renew. As Derek Wood QC has noted, the 1954 Act procedure is flawed by requiring no scrutiny of the merits of the case — an important need given the particular features of the agricultural market. Present practice gives little confidence that it would not be used as a loophole rather than a safety valve.
It may well be appropriate to consider whether the initial term could be varied by application to cater for landlords with good reasons for a shorter time horizon — a range of grounds are already set out in the rules for ministry licences. If this approach is followed, the shorter term would carry the right to renew which the landlord would be able to defeat if the ground on which the shorter term had been approved had matured.
The normal business tenancy rules for re-entry and forfeiture would apply, since the move to a fixed-term lease from an annual agricultural tenancy removes the need for the incontestable notice to quit procedure.
Compensation
Compensation for improvements would follow section 1 of the Landlord and Tenant Act 1927 rather than the Agricultural Holdings Act approach, but with additional provisions for other irremovable value left on the holding (such as growing crops, UMVs and RMVs). The issue of quota would have to be tackled. Agricultural fixtures would need legal protection, having none under the common law. Comparable provisions would cover dilapidations limited to the diminution in the value of the reversion as a mirror image of the 1927 Act formula. The more tortured provisions of the 1986 Act (game damage, for example) could be replaced by a general provision for compensation for actions that disrupt the tenant’s quiet enjoyment and tenant-like use of the holding, especially where the loss is connected with landlord’s reservations such as game, minerals or timber.
The major issues, including lease renewal, would be referable to a review body for which the courts or the ALT are probably the most suitable options, rather than setting up a specifically agricultural court.
Rent
Rent arrangements will have to be considered, and it may well be right to retain the present formula. However, experience since the 1984 reforms casts doubt on the effectiveness of detailed legal rent “formulae” which may, by drawing attention to historic evidence, actually act as a brake on necessary change such as is required urgently on cereals farms. If a less detailed approach is followed, it should disregard tenant’s improvements, any tenant’s goodwill, and, because of this country’s limited agricultural land area, any appreciable element of scarcity, when assessing what would be reasonably agreed in the circumstances of the property and the lease. Any reference to economics should simply cover profitability in the hands of a competent tenant within the permissions currently benefiting the holding.
It is suggested that the structure of the legislation should involve a clear statement of the framework of the rural business lease in the body of the statute, but with those items which either are presumed to apply to all leases or would fill the gaps in the leases being set out in amendable schedules.
One of the present difficulties of agricultural law is that of getting primary legislation to remedy accumulating problems.
The rural business lease would be a positive reform and modernisation of the law governing farm tenancies, offering a framework to encourage landowners to let land that they do not wish to farm themselves while protecting the important interests of tenants, the whole designed to handle the current and foreseeable pressures on farm businesses. Properly drafted, it should have the benefit of simplifying agricultural law by removing many of the wide and detailed range of procedures, forms and time-limits. By offering a servicable framework, it would be a genuine and robust alternative to the present fictions used as avoidance measures.
