Mortgage — Possession — Tenancy — Agricultural holding mortgaged to bank — Mortgagors granting agricultural tenancy to company — Mortgagors defaulting — Bank entitled to possession — Whether tenancy a transaction at an undervalue — Effect of statutory rent review under Agricultural Tenancies Act 1995 — Whether bank entitled to set aside tenancy under section 423 of Insolvency Act 1986 — Whether bank entitled to possession as against agricultural tenant
In 1990, the first and second defendant mortgagors purchased a farm with the benefit of a loan from the claimant bank. The bank took a legal charge on the farm to secure the loan. In October 2000, the mortgagors granted the third defendant, a company in their control, a tenancy of the farm for a term of 20 years. The tenancy was binding on the bank, since the mortgage had been entered into at a time when it was not possible to exclude the mortgagor’s statutory power to lease mortgaged land. The rent consisted of two elements: a basic rent of £8,000 payable for five years, rising to £19,731 pa for the rest of the term, and a further rent equating to the open market value of £14,400 pa, to be reviewed on the same basis as prescribed under section 13 of the Agricultural Tenancies Act 1995. At the same time, the mortgagors and the tenant company entered into a supplemental agreement that provided for a review of the rent to a full value should a court decide that the tenancy was at an undervalue for the purposes of section 423 of the Insolvency Act 1986. In December 2000, the mortgagors failed to pay a sum of £439,221 that had been demanded by the bank. The bank commenced proceedings for possession. It contended that the tenancy agreement should be set aside as a transaction at an undervalue within the meaning of section 423 of the 1986 Act, and that it was entitled to possession as against the company. The major issue between the parties was whether, as a result of section 13 of the Agricultural Tenancies Act 1995, the obligation on the company to pay the fixed, or basic, rent would survive following the statutory rent review. If, as the bank contended, it would not, it was agreed that the consideration provided by the company on the grant of the tenancy would be significantly less than that provided by the mortgagors. A minor issue between the parties concerned the supplemental agreement, which the bank contended was wholly ineffective.
Held: The claims were allowed. The basic rent payable under the tenancy was “rent” because it satisfied both the statutory definition in section 205(1)(xxiii) of the Law of Property Act 1925 and the assertion that it “issued out of the land” as considered by Nourse LJ in Escalus Properties Ltd v Robinson [1995] 2 EGLR 23. The commercial reality was that the aggregate of the moneys payable by the company under the tenancy agreement were recompense for the totality of what the company had obtained. Under the statutory formula in section 13 of the 1995 Act, an arbitrator has a duty to increase the rent previously payable, or to direct that it remains unchanged; it would not be possible to leave the company with the continuing obligation to pay the basic rent in addition to the reviewed rent. Even if the supplemental agreement were to take effect as intended by the defendants, the court would exercise its discretion to set aside the tenancy agreement under section 423 of the 1986 Act.
The following cases are referred to in this report.
Agricultural Mortgage Corporation plc v Woodward (1994) 70 P&CR 53; [1995] 1 EGLR 1; [1995] 04 EG 155
Barclays Bank plc v Eustice [1995] 1 WLR 1238; [1995] 4 All ER 511
British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR 398; [1986] 1 All ER 978; (1986) 52 P&CR 111; [1986] 1 EGLR 120; 277 EG 980
Buffalo Enterprises Inc v Golden Wonder Ltd [1991] 1 EGLR 141; [1991] 24 EG 171
Escalus Properties Ltd v Robinson [1996] QB 231; [1995] 3 WLR 524; [1995] 4 All ER 852; [1995] 2 EGLR 23; [1995] 31 EG 71, CA
Evans (Leeds) (FR) Ltd v English Electric Co Ltd (1978) 36 P&CR 185; [1978] 1 EGLR 93; (1977) 245 EG 657
Guys ‘n’ Dolls Ltd v Sade Brothers Catering Ltd [1984] 1 EGLR 103; (1983) 269 EG 129, CA
National Westminster Bank plc v Jones [2001] EWCA Civ 1541; [2002] 1 P&CR D12, CA; [2001] 1 BCLC 98; [2000] BPIR 1092, Ch
This was the hearing of claims by the claimant, Barclays Bank plc, for the payment of sums owing under a legal charge, possession of land, and an order under section 423 of the Insolvency Act 1986, against the defendants, Harold Geoffrey Bean, Joyce Ann Bean and HG Bean Farming Ltd.
Martin Rodger (instructed by DLA, of Leeds) appeared for the claimant; Anthony Tanney (instructed by Burges Salmon, of Bristol) represented the defendants.
Giving judgment, Judge Langan said:
[1] The first defendant (Mr Harold Bean) and the second defendant (Mrs Joyce Bean) are a married couple. In 1990, they purchased a farm known as Salton Lodge Farm, Salton, Kirkbymoorside, North Yorkshire (the farm), which comprises a farmhouse, other buildings and around 53ha of land. The farm, apart from the house (which is the subject of a separate mortgage), is subject to a legal charge that had been granted by Mr and Mrs Bean to the claimant (the bank) on 31 October 1990 (the legal charge). The legal charge is in the familiar “all moneys” form used between banker and customer. On 15 December 2000, the bank demanded repayment of the sum of £439,221 then owed by Mr and Mrs Bean. The demand was not complied with. On 14 March 2003, the bank commenced this action.
[2] The claims made by the bank are for payment of sums owing under the legal charge, possession of the farm, and an order under section 423 of the Insolvency Act 1906 setting aside a transaction to which I shall refer in a few moments. When the trial started, on 19 April 2004, these claims, and the answers to them, raised two separate groups of issues.
[3] The first group of issues had to do with what was said by Mr and Mrs Bean to have been a breach of contract on the part of the |page:72| bank. Mr and Mrs Bean are dairy farmers. They said that, when they were contemplating the purchase of the farm, the bank, through one of its managers, promised Mr Bean that the bank would lend them sufficient money to purchase some 720,000 litres of milk quota and that the bank had reneged on this promise. Whether any such promise had been made, whether the bank was in breach of contract, and what loss (if any) flowed from any such breach, were the principal issues within this first group.
[4] At the conclusion of the evidence, on 21 April 2004, it was clear that the material before the court could not possibly justify a finding of fact that the bank had made a binding promise of the kind that would found a claim for breach of contract. Accordingly, counsel for the defendants did not press his clients’ case further on the first group of issues. The result is that the bank is entitled to an order for possession of the farm and to a money judgment against Mr and Mrs Bean in the sum of £571,723.27, which is the amount admittedly owing by them to the bank as of 14 March 2003. There remain outstanding the following matters. First, the time for giving possession: this can be debated (if not agreed) when this judgment is handed down. Second, the amount of interest that has accrued on Mr and Mrs Bean’s accounts since 14 March 2003: this (if not agreed) will be the subject of an enquiry.
[5] I turn now to the second group of issues. The outcome of these will determine whether, under the judgment for possession, the bank will recover physical possession of the farm or will merely be entitled to receipt of the rents under a subsisting tenancy.
[6] The third defendant (the company) was established or acquired by Mr and Mrs Bean in or around the year 2000. By an agreement dated 31 October 2000 (the tenancy agreement), Mr and Mrs Bean let the farm to the company for a term of 20 years from 1 November 2000. The tenancy agreement is binding on the bank. This means that, unless the tenancy agreement were to be set aside by the court or were to be the subject of a voluntary surrender by the company, any sale of the farm by the bank would be subject to the tenancy of the company rather than with vacant possession. The second group of issues is focused on the bank’s claim to have the tenancy agreement set aside under section 423 of the Insolvency Act 1986. The key question is whether the tenancy agreement is a transaction at an undervalue within section 423(1). It is frankly accepted by Mr and Mrs Bean that their purpose in entering into the tenancy agreement was to put the unencumbered freehold interest in the farm beyond the reach of the bank.
[7] The bank has been represented by Mr Martin Rodger. The defendants have been represented by Mr Anthony Tanney. I am grateful to them for their careful written and oral submissions on the difficult questions that arise on the second group of issues.
[8] I will begin my consideration of the second group of issues by saying a little (and very little will suffice) about the background against which they arise. I will then set out the main provisions of the documents that contain the terms of the tenancy. Next, I will deal with section 423 of the Insolvency Act 1986, and with the case law on that section that is relevant to what I have to decide. After that, I will set out some provisions of Part II of the Agricultural Tenancies Act 1995. Only after this regrettably, but necessarily, lengthy approach to the issues at the heart of the case will it be possible to define in a comprehensible way what those issues are. Last, I will consider the arguments that have been advanced by counsel and will reach a decision on them.
Background
[9] Over the past few years, lawyers advising farmers of land that has been mortgaged to financial institutions have devised schemes that are designed, notwithstanding default under the mortgage, to keep the farming business within the family. Where, as in this case, a mortgage of agricultural land was made after 1 March 1948 but before 1 September 1995, it was not possible to exclude by agreement the statutory power of the mortgagor to lease the mortgaged land: see section 99(13A) of the Law of Property Act 1925, inserted by section 31 of the Agricultural Tenancies Act. Typically, the scheme designed to defeat the mortgagee’s ability to obtain possession of the unencumbered freehold took the form of a tenancy granted to the mortgagor’s wife or son or to a family company. Provided that the tenancy conformed to the statutory requirements, in particular that it should be for a term of no more than 50 years and at the best rent that could reasonably be obtained – see section 99(1), (3) and (6) of the Law of Property Act 1925 – it would be binding on the mortgagee.
[10] The response of the lending institutions was to argue that, notwithstanding the fact that a tenancy was granted for the market rent, it could be set aside pursuant to section 423 of the Insolvency Act 1986 as a transaction at an undervalue. Put very shortly, the argument has been that the rent payable by the tenant did not amount to full consideration for what he had obtained under the tenancy. How, and why, this argument has succeeded will be seen later in this judgment: see [23] and [24]. The scheme that I have to consider in this case is a refinement of predecessor schemes that, it is hoped by those advising the defendants, will take it out of section 423.
[11] As I said at the beginning of this judgment, the legal charge was executed on 31 October 1990. The statutory power of leasing was purportedly excluded unless exercised with the consent of the bank, but, by reason of the date of the legal charge, the attempted exclusion was ineffective: clause 4 of the legal charge: see [9]. Over the years, the relationship between the bank and Mr Bean deteriorated. From Mr Bean’s point of view, the critical point seems to have been reached when he received a letter of 18 September 2000 from the bank. In this letter, the bank announced its intention to reduce Mr Bean’s overdraft limit by £1,000 per week until he produced a detailed plan for dealing with his financial situation. Mr Bean then consulted his legal advisers and, on their advice, the tenancy agreement was prepared and signed.
Tenancy documents
[12] The tenancy agreement is dated 31 October 2000, and was made between Mr and Mrs Bean, as landlord, and the company, as tenant. The tenancy agreement was based on the RICS farm business tenancy agreement, which is produced by the RICS, but omits the provision against assignment or underletting that is contained in that standard form.
[13] The particulars with which the tenancy agreement commences read in part as follows:
|
Column 1 |
Column 2 |
|
The Term |
20 years |
|
The First Day of the Term |
1 November 2000 |
|
The Last Day of the Term |
1 November 2020 |
|
The Rent |
A base rent of £8,000 per year for the first 5 years ears of the term, increasing to £19,731 per year for the remainder of the term plus |
|
A further rent equating to open market value of £14,400 per year to be reviewed on the rent review dates |
|
|
The Rent Days |
1 May and 1 November |
|
The First Rent Day |
1 May 2001… |
|
The Rent Review Dates |
1 November 2005 |
|
1 November 2010 |
|
|
1 November 2015 |
[14] I can pass rapidly over the rest of the tenancy agreement. As has been observed in the course of submissions, there is an obligation on the company to pay the rent by equal instalments on the rent days, starting with the first rent day (clause 3.1), but there is no reddendum: see clause 2.1. There are contractual rent review provisions: see clause 3.11 and schedule 3. Shortly stated, these envisage rent reviews that (unless the parties agree on the new rent) are to be carried out by an export or arbitrator on the same valuation basis as is prescribed under section 13 of the Agricultural Tenancies Act 1995.
[15] The tenancy agreement does not stand alone, but has been followed by three further contractual documents.
[16] The first of these agreements (the supplemental agreement) was executed by Mr and Mrs Bean and for the company on the same day as the tenancy agreement. The object is to provide for the survival of the tenancy in the event that the grant of the tenancy were to fall foul |page:73| of the insolvency legislation. The substantive part of the supplemental agreement begins:
The Landlord and Tenant hereby agree to supplement the terms of the Tenancy Agreement as follows:
1 It is the intention of the Landlord and the Tenant that the consideration payable by the Tenant to the Landlord under the Tenancy Agreement (“the Consideration”) is agreed at a level so that it is not a transaction at an undervalue for the purposes of section 423 of the Insolvency Act 1986 and accordingly is a transaction at fall value (“full value”)
2 Notwithstanding the fact that the Landlord and Tenant agree that the Consideration is full value, if it is determined by the Court that the Consideration is not full value, then the Landlord and Tenant further agree:
(i) an independent expert shall be appointed in accordance with the terms of the Tenancy Agreement
(ii) the independent expert shall determine the level of the base rent and the further rent to ensure that the consideration is full value (“the Revised Consideration”) in accordance with the provisions of this Agreement
The supplemental agreement goes on to make provision for payment of the revised consideration after it has been determined (clause 2(iii) and (iv)) and for the valuation basis upon which the expert is to act: see clause 3. This is a matter of some complexity, with which I will deal towards the end of this judgment: see [47].
[17] The next document is a deed of rectification (the rectification agreement), which was executed by Mr and Mrs Bean and on behalf of the company on 22 January 2003. The rectification agreement sprang out of a controversy that had surfaced on the pleadings in this action. The controversy related to the way in which a rent review would be carried out pursuant to schedule 3 to the tenancy agreement. The bank’s case was that, as a matter of construction, the expert or arbitrator would have to take into account, as one of the terms of the tenancy, the obligation of the tenant to pay an increased base rent of £19,731 pa. The consequence of this would be that the rent to be fixed on a review would be the open market rental value of the farm minus £19,731. So, after a review, the tenant would pay the increased base rent and this depreciated further rent, and the two would together be equal to the open market rental value of the farm. The defendants’ case was that, likewise as a matter of interpretation of the tenancy agreement, the further rent would have to be determined on the basis of a letting that did not oblige the tenant to pay the base rent. The consequence of this would be that the rent payable after a review would be the further rent equivalent to the open market value of the promises and, in addition to that further rent, the base rent of £19,731.
[18] The object of the rectification agreement was, in so far as might be necessary, to settle this controversy in a manner consistent with the defendants’ case. The substantive part of the rectification agreement is in the following terms:
1.1 The Landlord and the Tenant agree that it was always their intention that the rent payable under the Tenancy Agreement and which is subject to review pursuant to Schedule 3 of the Tenancy Agreement is the Further Rent only with the Base Rent being an additional payment to be made by the Tenant to the Landlord in each year of the Term… the Base Rent not being the subject of review under Schedule 3 of the Tenancy Agreement but payable by the Tenant in the same way and by similar instalments as defined in Clause 3 of the Tenancy Agreement
1.2 For the avoidance of doubt the Landlord and the Tenant agree and (if necessary) the Tenancy Agreement is hereby rectified and shall take effect and be read and construed as if:
(a) the Rent is defined as meaning the Further Rent only and the Further Rent shall be deemed to be the rent payable in respect of the Tenancy Agreement for the purpose of the Agricultural Tenancies Act 1995
(b) the Further Rent only shall be capable of review pursuant to Schedule 3 of the Tenancy Agreement
(c) the Base Rent shall be (and the parties hereto have always intended it to be) consideration payable by the Tenant to the Landlord for the purposes of ensuring that the Tenancy was and is not a transaction created at an undervalue for the purposes of the Insolvency Act 1986
(d) the Base Rent is an additional sum payable by the Tenant to the Landlord for each year of the Term in the manner described for payment of the rent under clause 3 of the Tenancy Agreement
[19] The last document is a memorandum of agreement dated 17 November 2003 and made between the same parties as all the earlier agreements. The memorandum is a curious document, of which neither the object nor the effect has been explored before me. Recital (C) states that:
The Landlord and Tenant have not carried out a rent review pursuant to Schedule 3 of the Tenancy Agreement but have recalculated the amount payable as Rent from 1 November 2002 by reference to the provisions of the Insolvency Act 1986
The operative part of the memorandum refixes the rent with effect from 1 November 2002. The base rent is to be £5,000 pa for the next five years, increasing to £18,162 for the remainder of the term; the further rent is to be £11,200 pa, which is to be reviewed on the rent review dates under the tenancy agreement. As to the recital, no rent review is actually due to take place under the tenancy agreement until 2005. As to the recital and the operative part, it is difficult to see how a reduction in the rent passing could take outside the Insolvency Act a transaction that would or might otherwise have been caught by it. These are unanswered problems that, perhaps fortunately, I do not have to address.
Section 423 of Insolvency Act 1986
[20] So far as it is material to these proceedings, section 423 of the Insolvency Act 1986 is in these terms:
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if –
…
(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for –
(a) restoring the position to what it would have been if the transaction had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose –
(a) of putting assets beyond the reach of a person who is making, or may at some time make a claim against him…
[21] The following matters are agreed. The jurisdiction to make an order setting aside a transaction is a discretionary one. The tenancy agreement was entered into by Mr and Mrs Bean with the deliberate intention of prejudicing the interest of the bank under the legal charge. Therefore, the section 423(3)(a) condition has been satisfied and, subject to the argument that arises on section 423(1), the section 423(2) jurisdiction is exercisable. The issue on section 423(1) is whether, in relation to the tenancy agreement, the consideration obtained by Mr and Mrs Bean was worth significantly less that the consideration that they provided to the company.
[22] The effect of section 423(1) on transactions similar to, and, in one instance, much the same as, that comprised in the tenancy agreement has been considered by the Court of Appeal on at least three occasions. Each case had to do with the grant of a tenancy of a mortgaged farm. A short consideration of two of these cases will help to place in context the scheme with which I am concerned. The third case, not considered here, is Barclays Bank plc v Eustice [1995] 1 WLR 1238.
[23] In Agricultural Mortgage Corporation plc v Woodward [1995] 1 EGLR 1, the mortgagor granted his wife a tenancy of the mortgaged land, which included the family home. The term began on 16 April 1992 and was to continue until 29 September 1992, and thereafter from year to year until determined by 12 months’ notice to quit. The yearly rent was £37,250, and the case was argued on the footing that this was a full market rent, being the best that could reasonably be obtained. The Court of Appeal held that, notwithstanding the level of rent agreed, the transaction was one at a significant undervalue. The reasoning was that, by the grant of the tenancy, the wife had received a threefold bundle of advantages over and above the occupation of the land for which she was paying rent. These advantages were: the safeguarding of the family |page:74| home; the acquisition by her of the farming business free from its previous creditors; and the benefit of the surrender value of the tenancy, which placed her in a “ransom position” in any future dealings with the mortgagee. The tenancy agreement was therefore set aside.
[24] In National Westminster Bank plc v Jones [2001] EWCA Civ 1541; [2002] 1 BCLC 55, in [24] to [29], affirming the decision of Neuberger J, reported in [2001] 1 BCLC 98, in [69] to [100], the mortgagors granted a tenancy of the mortgaged farm to a company that had been formed by themselves and of which they were the beneficial owners and sole directors. The tenancy was for a term of 20 years, and (as in this case) two rents were reserved. The first was a “base rent” of £1,000 pa for the first five years, rising to £4,276 pa for the remaining 15 years. The second was a further, or ordinary, rent of £17,420 pa to be reviewed to the market rental value of the farm at five-year intervals. The judge made the following findings. The value of the land with vacant possession when the tenancy was granted was £401,000. The value of the land subject to the tenancy was £285,000. Therefore, by the grant of the tenancy the mortgagors had reduced the value of the freehold by £116,000 or, putting the matter slightly differently, they had created a marriage value of £116,000. This should, as a matter of good sense, be split equally between landlord and tenant, thereby giving the company a surrender or ransom value of £58,000. The market rent of the land was £16,920 pa. The company should be regarded as having agreed to pay, as consideration for the surrender value, £1,520 pa for the first five years (£1,000 + (£17,420 – £16,920) = £1,520 [sic]), and £4,276 pa thereafter, that is, the increased base rent; the further rent would be equivalent to the market rent at each review date. The obligation to pay these sums had a value that was significantly less than £58,000. Accordingly, the transaction was caught by section 423 and would be set aside. This decision was affirmed by the Court of Appeal.
[25] Looking ahead a little, the present case involves what might be called a variation on the theme of National Westminster. It will at once be obvious that what is common to both cases is the concept of having two kinds of rent. The differences are these. First, the figures in this case are such that valuation evidence is, by the agreement of both sides, unnecessary. Second, the bank’s attack on the scheme in this case depends upon a matter that was not under consideration in National Westminster. This is the impact upon the agreement made between landlord and tenant of the provisions regarding rent review, which are contained in Part II of the Agricultural Tenancies Act 1995. To these provisions I now turn.
Part II of the Agricultural Tenancies Act 1995
[26] Part II of the Agricultural Tenancies Act 1995 deals with rent reviews under farm business tenancies and applies, notwithstanding any agreement to the contrary, subject to certain exceptions. These are where the tenancy agreement expressly excludes any rent review or provides for variation of the rent by or to a specified amount or by reference to a specified formula: see section 9 of the Agricultural Tenancies Act 1995.
[27] Where Part II does apply, then, by section 10(1):
The landlord or tenant under a farm business tenancy… may by notice in writing given to the other (in this Part of the Act referred to as a “statutory review notice”) require that the rent to be payable in respect of the holding as from the review date shall be referred to arbitration in accordance with this Act.
Section 10 goes on to identify the review date. It is sufficient, for present purposes, to refer to two points. First, the review date must always be at least 12 but less than 24 months after the day upon which the statutory review notice is given. Second, where the parties have agreed in writing that a review date for the purposes of Part II is to be a specified date, the review date must be that so agreed: ibid section 10(3) and (5). It was assumed in argument that the tenancy agreement so provides, but the point may not be as clear as it was assumed.
[28] Section 12 of the Act provides for the appointment of an arbitrator to carry out the rent review.
[29] Section 13 deals with the amount of the new rent:
(1) On any reference made in pursuance of a statutory review notice, the arbitrator shall determine the rent properly payable in respect of the holding at the review date and accordingly shall, with effect from that date, increase or reduce the rent previously payable or direct that it shall continue unchanged.
(2) For the purposes of subsection (1) above, the rent properly payable in respect of a holding is the rent at which the holding might reasonably be expected to be let on the open market by a willing landlord to a willing tenant, taking into account (subject to subsections (3) and (4) below) all relevant factors, including (in every case) the terms of the tenancy (including those which are relevant for the purposes of section 10(4) to (6) of this Act, but not those relating to the criteria by reference to which any new rent is to be determined).
Subsections (3) and (4) of section 13 deal with “disregards”. The arbitrator must take no account of an increase in rental value that is due to tenant’s improvements (with certain exceptions), or of any effect upon the rent of the fact that the tenant is in occupation. Further, the arbitrator is not to fix the rent at a lower amount by reason of any dilapidations caused or permitted by the tenant. The reference to section 10(4) to (6) brings expressly within the purview of the arbitrator as relevant the intervals (contractual or statutory) between review dates. Conversely, by the concluding words of section 13(2), he is not to treat as relevant any provisions in the tenancy agreement that relate to the basis upon which the new rent is to be fixed.
Defining the issues
[30] There are between the bank and the defendants what I will refer to as “the major issue” and “the minor issue”.
[31] The major issue has to do with the approach that would be adopted by an arbitrator on a statutory rent review. It is accepted that the effect of the rectification agreement is that, on a contractual rent review, the approach for which the defendants contend would have to be adopted. The question, put very shortly, is whether the obligation of the tenant to pay the fixed, or base, rent would survive after a statutory rent review. The contention of the bank is that this obligation would not survive, although the defendants say that it would. On the bank’s case, the rent determined on arbitration would be significantly lower than that which would be determined if the defendants were right. The parties have agreed that, if the bank is right on the matter of rent, the consideration provided by the company on the grant of the tenancy agreement would be significantly less than that provided by Mr and Mrs Bean. The result would be that the transaction will have been one at an undervalue within section 423(1) of the Insolvency Act 1986. The parties have similarly agreed that, if the defendants turn out to be correct as to the rent payable after a statutory review, undervalue will not have been established. This agreement has obviated any need for expert evidence.
[32] The minor issue involves two questions that are logically separate, but which have been rolled into one by Mr Tanney in his closing submissions. These questions relate to the effect of the supplemental agreement (Mr Rodger says that it is wholly ineffective), and to the exercise by the court of its discretion to make an order setting aside the tenancy agreement. These points have been only faintly advanced by Mr Tanney, and it will be possible to deal with them quite shortly towards the end of this judgment.
Major issue
[33] Mr Rodger says that the arbitrator, acting under Part II of the Agricultural Tenancies Act 1995, would be bound to fix no more than a market rent, and that he could do so by adopting one of two approaches. Before I examine these approaches, I must make a few general observations.
[34] Both counsel agree that the purpose of a contractual rent review is that the landlord should obtain the market rental that the premises would command in the open market on the review date, so reflecting the changes in the value of money and real increases in the value of the property during the term: see British Gas Corporation v Universities |page:75| Superannuation Scheme Ltd [1986] 1 WLR 398*, at pp401G-402C. Both counsel similarly agree that this is also the general purpose of a statutory rent review under the 1995 Act. Mr Tanney then brings into play two decisions in which the courts, when dealing with contractual rent reviews, have given effect to provision made by the parties for rents that exceed market value. In Guys ‘n’ Dolls Ltd v Sade Brothers Catering Ltd [1984] 1 EGLR 103, the reviewed rent was to be £7,500 above the market value of the premises. In Buffalo Enterprises Inc v Golden Wonder Ltd [1991] 1 EGLR 141, there was a fixed additional rent of £9,000, which, on a review of the ordinary yearly rent, was to be increased proportionately to the increase in that ordinary rent. The Court of Appeal in the first case, and Hoffmann J in the second, reached decisions that had the effect that, on a rent review, the obligation to pay the additional fixed sum (in Guys ‘n’ Dolls) or proportionate increase (in Buffalo Enterprises) would be disregarded on a rent review. Mr Tanney relies upon these decisions as exemplifying a practical approach, which should be applied by analogy to the present case. I disagree. In the cases cited, the court was endeavouring, by a process of construction of the contractual documents, to discern the intention of the parties. The forensic exercise in the present case is quite different. The process involved is that of statutory interpretation. Each of the parties to the tenancy agreement is entitled to have the rent reviewed by reference to the criteria identified in the statute, and those criteria are in essence those that lead to the fixing of a market rent. As Mr Rodger said, in my judgment correctly, Guys ‘n’ Dolls and Buffalo Enterprises are exceptions to, not illustrations of, the general principle to which I alluded at the beginning of this paragraph.
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* Editor’s note: Also reported at [1986] 1 EGLR 120
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[35] First approach
Mr Rodger begins by focusing upon the words of section 10(1) of the Agricultural Tenancies Act 1995. The parties have the right to refer to arbitration “the rent to be payable in respect of the holding”. To perform his task the arbitrator must, in the circumstances of the present case, fix a single figure that will replace both the base rent and the further rent that was previously payable.
[36] Mr Tanney’s response is that the base rent is not properly characterised as rent at all, or, if it is, it is not “payable in respect of the holding”. It may be that what are advanced as two points can, without any diminution in their force, be reduced to a single proposition, namely that the so-called base rent is merely a sum payable in respect of surrender value. Therefore, it cannot be subject to the statutory review, and remains payable after the review.
[37] “Rent” is not a term defined in the Agricultural Tenancies Act 1995. Mr Tanney relies for definitions upon section 205(1)(xxiii) of the Law of Property Act 1925 and upon the judgment of Nourse LJ in Escalus Properties Ltd v Robinson [1996] QB 231*, at p243H. The statutory definition is:
“Rent” includes a rent service or a rentcharge, or other rent, toll, duty, royalty, or annual or periodical payment in money or money’s worth, reserved or issuing out of or charged upon land, but does not include mortgage interest.
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* Editor’s note: Also reported at [1995] 2 EGLR 23
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Nourse LJ said:
Seeing that the current statutory provisions [relating to relief from forfeiture] derive from others enacted in the 18th and 19th centuries, I regard it as axiomatic that they refer to rent in its correct sense being (1) a periodical sum, (2) paid in return for the occupation of land, (3) issuing out of the land (4) for non-payment of which distress is leviable.
Mr Tanney submits that the base rent falls within neither of these definitions. That the base is paid, not for the use and occupation of the land but in respect of the surrender value, is apparent from the terms of clause 1.2(a) and (c) of the rectification agreement: see [18]. Finally, the focus in section 13(2) of the Agricultural Tenancies Act 1995 on a willing landlord, who is neither reluctant to let nor under pressure to do so – see FR Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36 P&CR 185† at p189 – assumes that the tenant is not in a situation in which he can bargain for a share of any surrender value: the consequence, it is said, is that the base rent, which does have to do with surrender value, is not rent payable for the holding.
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† Editor’s note: Also reported at [1978] 1 EGLR 93
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[38] I am unable to accept these submissions. If one asks “what is regarded as rent nowadays?”, the answer is very simply “a payment that the tenant is bound by his contract to make to his landlord for the use of the land”: see Woodfall on Landlord and Tenant, para 7.001, citing Holdsworth’s History of English Law, vol VII, at p262. In fact, it seems to me that the base rent in this case does satisfy both the definition in the Law of Property Act 1925 and that propounded by Nourse LJ. It is “issuing” or “issues out of the land”, in the sense (and no other has been suggested) that it is payable in return for the occupation of the land and not for some other, purely personal, advantage. Further, I do not think that it is permissible to divide the aggregate sum that the company agreed to pay into different elements and to say that one of these (the base rent) has nothing whatever to do with the current use of the land. The commercial reality of the situation in this case is that the aggregate of the moneys payable under the tenancy agreement (base rent and further rent) are recompense for the totality of what the company obtained. Last, I would not accept that surrender value can never be a consideration that is material to the terms upon which a willing landlord is prepared to let his property.
[39] Another, and I think a more powerful, objection to Mr Tanney’s submissions was advanced by Mr Rodger. Each party to a farm business tenancy, he said, has the right to have an arbitrator determine the rent properly payable in accordance with the formula in section 13(2) of the Agricultural Tenancies Act 1995. Once the figure has been determined, the arbitrator is under a duty to increase or decrease the rent previously payable or to direct that it will stay unchanged. Within that statutory framework, it is simply not permissible for the arbitrator to leave the tenant under a continuing obligation to pay an additional periodic sum as rent. To do so would be to allow the agreement of the parties to displace the statutory formula, contrary to section 9.
[40] Mr Tanney made two further points.
[41] First, the absence from the tenancy agreement of a reddendum was relied upon as a signpost against the characterisation of the base rent as rent. As a matter of law, a reddendum is unnecessary, and a reservation of rent may be implied from a covenant to pay rent: see Hill & Redman on Landlord and Tenant, at para [3024].
[42] Second, Mr Tanney said that the consequence of the bank’s construction would be that, if agricultural rents were static over the period from the grant of the tenancy agreement to the first review date, the rent payable during the first review period would be less than that originally agreed, This, it is said, would be wholly at odds with the purpose of a rent review. His submission, in my judgment, overlooks the fact that the rent review in question is a statutory one that is conducted under provisions that expressly contemplate the possibility that the result of the review may be a reduction in the rent.
[43] Accordingly, I am in agreement with Mr Rodger’s first approach to the major issue.
[44] Second approach
Mr Rodger’s alternative approach is to say that the obligation to pay base rent continues after a rent review but that, since that obligation is one of “the terms of the tenancy” to which the arbitrator must have regard under section 13(2), the reviewed rent will inevitably be reduced by an amount equivalent to the continuing base rent.
[45] This approach has an appealing simplicity, and Mr Tanney’s answer to it did appear to me to have an air of something close to desperation. Thus he attempted to narrow the statutory category “the terms of the tenancy” to “other relevant terms” (for which there is no warrant in section 13(2)) or “the sort of terms that you would find in a lease by a willing lessor” (which is surely far too vague in the context). It was, however, Mr Rodger in reply who dealt what seemed to be a fatal blow to his own submission. The second approach was, he said, “not so attractive as the first” because it leaves open the possibility of the fixing of “a negative rent” if the base rent were, at the review date, higher than the open market value. |page:76|
[46] This point made by Mr Rodger against himself does, in my judgment, carry weight. His conclusion on the major issue is correct, but it is properly to be reached by way of the first approach.
Minor issue
[47] The effect of the supplemental agreement is that, upon the court determining that the tenancy agreement is a transaction at an undervalue within section 423 of the Insolvency Act 1986, a revised consideration has to be determined. This will continue to consist of further or market rent and base rent. The base rent is, by clause 3 of the supplemental agreement, to be fixed by first determining the marriage value of the holding, then determining what proportion of the marriage value constitutes surrender value, and then treating that surrender value as a loan made by “the Landlord” to “the Tenant”. The loan is to be repayable with interest over the term of the tenancy agreement. “The Landlord” and “the Tenant” are defined respectively as Mr and Mrs Bean and the company, without reference (as there is in the tenancy agreement) to their successors in title.
[48] Mr Tanney argued that that the repayment of the loan is not an obligation under the tenancy agreement, but is one personal to the parties to the supplemental agreement. Therefore, the obligation to repay the loan is not to be taken into account by the arbitrator when be arrives at a rent under section 13(2) of the Agricultural Tenancies Act 1995. Here, one comes to the way in which points relating to the supplemental agreement and to the exercise of discretion were elided. After the bank has obtained possession, it and Mr and Mrs Bean will together be receiving the equivalent of more than a market rent, that is, further rent and loan instalments. So a proper return now being received from the farm, the court should, in its discretion, decline to set aside the tenancy agreement.
[49] I am unable to accept this submission. Even if the supplemental agreement were to take effect in the way that has been suggested (and Mr Rodger made powerful written submissions to the contrary), it would, in my judgment, be wholly wrong to saddle the bank with the company as tenant. The bank has no desire to be landlord of the farm. The company is the alter ego of persons who are heavily indebted to the bank and who would presumably continue to operate the farming business for the foreseeable future. Last, the bank would (because of the free assignability of the tenancy agreement) have no control over, or even say in, the identity of future tenants. The inevitable result of this case is that the tenancy agreement should be set aside.
Conclusion
[50] Provided that the parties lodge in advance a draft order that is agreed as giving effect to this judgment and that deals with costs, there will be no need for attendance at the formal handing down of this judgment. Shortly thereafter, a corrected version will be sent to counsel. I will be prepared to deal on paper with any application for permission to appeal.
Claims allowed.
