Agricultural holdings — Compensation to outgoing tenant for loss of milk quota — Calculation of tenant’s fraction — Whether actual rent or open market rental value to be used in the denominator of fraction
The respondent
tenants occupied an agricultural holding between 1972 and February 2 1991, when
a notice to quit served by them on the appellant landlord expired. In 1975 the
tenants erected a milking bale on the holding. During 1983, the relevant period
for the purposes of Schedule 1 to the Agriculture Act 1986, the rent payable
under the tenancy was unusually low at £400 pa. In giving an opinion on a
special case made by the arbitrator in proceedings to determine the
compensation payable by the landlord to the outgoing tenants in relation to the
tenant’s fraction of the value of the registered milk quota, the county court
judge determined that the rental value of the tenants’ dairy improvements and
fixed equipment which should fall to be disregarded pursuant to para 7 of
Schedule 1 to the Agriculture Act 1986 can be ascertained as a figure on its
own. The landlord appealed, contending that for the purposes of applying the
tenant’s fraction under para 7 of Schedule 1 the actual open market rental
value of the holding in the relevant period in 1983 must be considered.
with the numerator of the tenant’s fraction, namely the annual value of the
tenant’s dairy improvements. The denominator is the sum of this figure and the
actual rent paid. The annual value of the tenants’ dairy improvements have to
be assessed having regard to the requirements for assessing rents under section
12 of the Agricultural Holdings Act 1986. However, the arbitrator does not have
to identify the actual rental value of the unimproved land, still less does he
have to take account of or consider the actual rent payable under the tenancy.
He could assess the rental value of the improved land and then identify that
part of the rental value attributable to the tenant’s improvements he was bound
to disregard.
The following
cases are referred to in this report.
Grange
(SJ) Ltd v Customs and Excise Commissioners [1979]
1 WLR 239; [1979] 2 All ER 91, CA
Grounds v Attorney-General of the Duchy of Lancaster [1989] 1 EGLR 6;
[1989] 21 EG 73, CA
Porter v Honey [1988] 1 WLR 1420; [1988] 3 All ER 1045, HL(E)
University
College, Oxford (Master & Fellows) v Durdy [1982]
Ch 413; [1982] 3 WLR 94; [1982] 1 All ER 1108, CA
This was an
appeal from the decision of Judge Bell who on June 10 1993, in Carlisle County
Court, gave an opinion on a special case of the arbitrator in an arbitration in
which the respondents, John and Frank Fearon, claim compensation from the
appellant, Hannah Margaret Creear.
Paul Morgan QC
(instructed by Burges Salmon, of Bristol) appeared for the appellant; Anthony
De Freitas (instructed by Cartmell Shepherd, of Carlisle) represented the
respondents.
Giving the
first judgment at the invitation of Kennedy LJ, MILLETT LJ said: This
appeal raises a short question of the construction of para 7 of Schedule 1 to
the Agriculture Act 1986, which is concerned with the ascertainment of ‘the
tenant’s fraction’ for the purpose of calculating the compensation payable to
the outgoing tenant of an agricultural holding for the surrender of the milk
quota to which he was entitled and which then enures for the benefit of the
landlord.
It is
convenient to set out straight away the provisions of para 7(1):
For the
purposes of this Schedule ‘the tenant’s fraction’ means the fraction of which —
(a) the numerator is the annual rental value at
the end of the relevant period of the tenant’s dairy improvements and fixed
equipment; and
(b) the denominator is the sum of that value and
such part of the rent payable by the tenant in respect of the relevant period
as is attributable to the land used in that period for the feeding,
accommodation or milking of dairy cows kept on the land.
(2) For the purposes of sub-paragraph (1)(a)
above the rental value of the tenant’s dairy improvements and fixed equipment
shall be taken to be the amount which would fall to be disregarded under
paragraph 2(1) of Schedule 2 to the Agricultural Holdings Act 1986 on a
reference made in respect of the land in question under section 12 of that Act
(arbitration of rent), so far as that amount is attributable to tenant’s
improvements to, or tenant’s fixed equipment on, land used for the feeding,
accommodation or milking of dairy cows kept on the land in question.
For
completeness, it is desirable to refer to the provisions of Schedule 2 to the
Agricultural Holdings Act 1986, which sets out the provisions for the
arbitration of rent pursuant to section 12 of that Act. Section 12 provides:
(1) Subject to the provisions of Schedule 2 to
this Act, the landlord or tenant of an agricultural holding may by notice in
writing served on the other demand that the rent to be payable in respect of
the holding as from the next termination date shall be referred to arbitration
under this Act.
(2) On a reference under this section the
arbitrator shall determine what rent should be properly payable in respect of
the holding at the date of the
following the date of the demand for arbitration, increase or reduce the rent
previously payable or direct that it shall continue unchanged.
Schedule 2
deals with the amount of rent and provides by para 1(1):
For the
purposes of section 12 of this Act, the rent properly payable in respect of a
holding shall be the rent at which the holding might reasonably be expected to
be let by a prudent and willing landlord to a prudent and willing tenant,
taking into account . . . all relevant factors, including . . . the productive
capacity of the holding and its related earning capacity
Para 2
provides so far as material:
(1) On reference under section 12 of this Act,
the arbitrator shall disregard any increase in the rental value of the holding
which is due to —
(a) tenant’s improvements or fixed equipment other
than improvements executed or equipment provided under an obligation imposed on
the tenant by the terms of his contract of tenancy, and
(b) landlord’s improvements, in so far as the
landlord has received or will receive grants out of money provided by
Parliament or local government funds in respect of the execution of those
improvements,
and a number of
other definitions.
The facts of
this case are set out at some length in a special case for the opinion of the
county court to which I will refer briefly. The case concerns Lane Head Farm,
Seascale, Cumbria, which is an agricultural area of land with house and
buildings consisting of approximately 101 acres. It was occupied by the
respondents as tenants between 1972 and February 2 1991. In 1975 the tenants
carried out an improvement to the farm by the erection of a milking bale. The
‘relevant period’ for the purposes of Schedule 1 to the Agricultural Act 1986
was the calendar year 1983. During that year the rent payable under the tenancy
was £400 pa. It is common ground between the parties that this rent was a
concessionary rent, or at any rate was ‘unusually low’, and it is that feature
which gives rise to the problem in the present case.
On January 11
1990 the tenants served notice to quit the farm and they vacated on February 2
1991. There followed an arbitration to determine the amount of compensation
payable by the appellant landlord to the respondent tenants in respect of the
milk quota.
As a result of
legal argument before him, the arbitrator stated a case for the opinion of the
county court. He set out two questions of which only one is material to the
present appeal. That was as follows:
Whether for
the purposes of determination of the numerator of the tenant’s fraction in
accordance with the Agricultural Act 1986, Schedule 1, Part II, paragraph 7(1)(a)
and paragraph 7(2) the actual rent passing at the end of the relevant period
falls to be considered, or whether the rent that would have been properly
payable on an arbitration of rent under the Agricultural Holdings Act 1986,
section 12 and Schedule 2 or (if neither) the basis on which such determination
should be made.
The opinion of
the county court was given by Judge Bell, sitting in Carlisle County Court, on
June 10 1993 in a form of declaration for which neither party, strictly
speaking, appears to have contended. The learned county court judge determined
that:
The rental
value of the tenant’s dairy improvements and fixed equipment which should fall
to be disregarded under paragraph 2(1) of Schedule 2 of the Agricultural
Holdings Act 1986 pursuant to paragraph 7(2) of Schedule 1 to the Agriculture
Act 1986 can be ascertained as a figure on its own.
From that
determination the landlord has appealed and seeks a declaration as follows:
(A) That for the purposes of determination of the
numerator of the tenant’s fraction in accordance with the Agriculture Act 1986
Schedule 1, Part II, paragraph 7(1)(a) and paragraph 7(2) the actual
rent passing at the end of the relevant period falls to be considered and taken
into account;
(B) That the effect of (A) above is that the
actual rent passing at the end of the relevant period in respect of the holding
shall be taken to be the rental value of the holding (disregarding the rental
value of the tenant’s dairy improvements and fixed equipment) at the end of the
relevant period determined in accordance with Schedule 2 to the Agricultural
Holdings Act 1986.
For reasons
which will appear, I doubt very much that a declaration in those terms would
assist the appellant landlord. The respondent tenants have served a
respondents’ notice seeking a variation of the determination of the county
court judge in order to make it quite clear how the calculation is to be made.
They seek a declaration that:
(a) For the purposes of determination of the
numerator of the tenant’s fraction in accordance with the Agriculture Act 1986,
Schedule 1, Part II, paragraph 7(1)(a) and 7(2) the actual rent passing
at the end of the relevant period does not fall to be considered and;
(b) For the purposes of determination of the
numerator of the tenant’s fraction in accordance with the Agriculture Act 1986,
Schedule 1, Part II, paragraph 7(1)(a) and paragraph 7(2) the rental
value of the tenant’s dairy improvements and fixed equipment which would fall
to be disregarded under paragraph 2(1) of Schedule 2 of the Agriculture
Holdings Act 1986 pursuant to paragraph 7(2) of Schedule 1 to the Agriculture
Act 1986 can be ascertained as a figure on its own and, in any event, can or
should be ascertained without reference to the actual rent passing at the end
of the relevant period.
Before
considering the language of para 7 of Schedule 1 to the Agriculture Act 1986 in
any detail, it is useful to describe the purpose of that paragraph, and I
gratefully adopt the explanation of Glidewell LJ in Grounds v Attorney-General
of the Duchy of Lancaster [1989] 1 EGLR 6 and p7 as follows:
. . .
Schedule 1. That provides that a tenant who has a registered milk quota,
registered as his in relation to a holding, who quits the land forming the
holding is entitled to compensation from his landlord. However, it is apparent
that the production of milk is dependent upon a number of factors for some of
which the landlord is responsible and for some of which the tenant is responsible.
Obviously a major part of the factors which go to produce a good yield include
the quality of the land itself, the nature of the original buildings, and
matters of that sort. But part is due to the tenant’s dairy improvements and to
the fixed equipment which he has brought into the carrying on of his business,
and the Schedule therefore provides that the tenant is entitled to compensation
calculated initially in relation to what is called the ‘tenant’s fraction’. The
tenant’s fraction, according to para 7 of Schedule 1, is calculated as being,
broadly speaking, that proportion of the total of the factors which go into
milk production which the tenant’s dairy improvements and fixed equipment
contribute.
One would
expect Parliament to require the contribution which the tenant’s improvements
have made to the various factors which go into milk production to be
ascertained by assessing the rental value of the land at the end of the
relevant period, both with and without the tenant’s improvements, thereby ascertaining
the increase in the rental value of the land which is attributable to the
tenant’s improvements (by improvements I confine that word, of course, to those
which are relevant to milk production), and then to take that as a fraction of
the rental value of the land with the tenant’s improvements at the end of the
relevant period. That, however, is plainly not what Parliament has enacted.
Para 7(1)(a),
which is the part of the paragraph the construction of which is in question, is
concerned with the numerator and, as might be expected, that is the rental
value of the tenant’s improvements at the end of the relevant period. However,
it is difficult, and may in some cases be impossible, to ascertain the rental
value of the tenant’s improvements at the end of the relevant period in
isolation, since they were not and could not sensibly be let on their own.
Accordingly, para 7(2) defines the rental value of the tenant’s dairy
improvements and fixed equipment as the amount which would fall to be
disregarded under para 2(1) of Schedule 2 to the Agricultural Holdings Act 1986
on an arbitration for rent.
Para 7(1)(b)
is concerned with the denominator. The construction of that paragraph is not in
doubt and is not in question before us. The denominator consists of the sum of
the value which has been taken as the numerator,
and such part
of the rent payable by the tenants in respect of the relevant period as is attributable
to the land used in that period for the feeding, accommodation or milking of
dairy cows kept on the land.
It will be
observed that the latter amount is not, as one might have expected, the rental
value of the land at the end of the relevant period without the improvements.
If that had been Parliament’s intention, it is unlikely that it would have
enacted such a complicated calculation taking the numerator first and adding
the rental value of the land at the end of the relevant period without the improvements,
because the two together would simply amount to the rental value of the land at
the end of the relevant period with the improvements. But Parliament has
deliberately avoided taking the rental value of the land, with or without the
improvements, in order to define the denominator. Instead, it consists of the
sum of the rental value at the end of the relevant period of the tenant’s dairy
improvements and fixed equipment together with not the rental value of the land
without those improvements but the rent payable by the tenant, that is to say,
the actual rent payable under the tenancy agreement. Where, as in the present
case, the rent is concessionary or unusually low, the effect of reducing the
denominator by taking the actual rent instead of the rental value, is
artificially to increase the tenant’s fraction and therefore the compensation
payable to the tenant in respect of his milk quota on quitting the holding.
Conversely, if the rent payable under the tenancy agreement was above the
market rent, the effect of the definition of para (b) is artificially to
reduce the tenant’s fraction and the amount of the compensation he will
receive. The advantage that the tenant obtained by a low rent, or the
disadvantage which he suffered by a high rent, is thus reflected in the amount
of compensation, so that the tenant receives a double benefit or detriment.
The appellant
landlord argues that this is so anomalous and capricious that it is a result
which Parliament cannot possibly have intended, and the court ought, if
possible, to construe the paragraph in such a way that a different result is
reached.
It is not,
however, argued that para 7(b) should be given any different
construction from that which I have attributed to it. In particular, it is not
argued that the rent payable in respect of the relevant period in para 7(1)(b)
means anything other than the actual rent payable at the time under the tenancy
agreement. That concession was, I think, inevitable because it is not possible
to read those words as meaning the hypothetical rent, which would have been
payable under the tenancy agreement if a reference had been made under section
12 of the Agricultural Holdings Act 1986 and the rental value had been
determined in the course of the relevant period. No doubt the rent payable by
the tenant in respect of the relevant period means the rent lawfully payable by
the tenant in respect of the relevant period, but examination of the
Agricultural Holdings Act 1986 makes it plain that the rent payable by the
tenant under the tenancy agreement is lawfully payable unless and until an
actual determination by an arbitrator on a reference made to him results in a
different rent.
Instead, the
appellant landlord has argued that Parliament must have assumed that the rent
payable under the tenancy agreement in respect of the relevant period was
the open market rent; and that is the explanation for the substitution of the
words ‘rent payable by the tenant’ for what one would have expected, that is to
say, rental value in 7(1)(b); and that this assumption must therefore
also be made by the arbitrator when assessing the rental value of the tenant’s
dairy improvements and fixed equipment for the purpose of determining the
numerator.
Accordingly,
the argument runs, since that process must include assessing the rental value
of the land with and without the tenant’s improvements, the arbitrator must
substitute for the rental value the figure arrived at by taking the actual
rent. In short, he should begin by taking the actual rent payable under the
tenancy agreement and treat that as the rental value of the land without the
improvements in question. He should then assess the true rental value of the
land, both with and without the improvements, thereby ascertaining the
increased rental value due to the improvements. Finally, he should scale down
the increased rental value due to the improvements by the proportion which the
rent payable in respect of the relevant period bears to the rental value of the
unimproved land at the end of that period. That is the process which was
outlined in the appellant landlord’s skeleton argument and in the course of
argument before us but, as I see it, it does not in fact accord with the
declaration which the notice of appeal seeks, since the last step, namely the
scaling down of the difference between the true rental value of the land with
or without the improvements, would not be covered by the declaration sought and
the result of substituting the actual rent payable for the unimproved land
would, it seems to me, greatly increase the difference between the two figures.
It is hardly
necessary to state that para 7 does not require anything as complicated or
elaborate as that which I have just described. In my judgment, the language of
para 7 is plain and unambiguous and the arbitrator’s task is straightforward.
So far as para 7(1)(a) is concerned, the numerator is the annual rental
value at the end of the relevant period of the tenant’s dairy improvements and
fixed equipment. That has to be assessed because, as I have already pointed
out, these were not, in fact, let on their own.
Accordingly,
para 7(2) defines the annual rental value of the tenant’s improvements as the
amount which would fall to be disregarded under para (2)(1) of Schedule 2 to
the Agricultural Holdings Act 1986. As I have already pointed out, the
arbitrator is directed to disregard any increase in the rental value of the
holding which is due to tenant’s improvements or fixed equipment.
It is useful
to consider the process which that paragraph requires, bearing in mind that, on
a reference under section 12 of the Agricultural Holdings Act 1986, the
arbitrator is required to assess the rent at which the holding might reasonably
be expected to be let by a prudent and willing landlord to a prudent and willing
tenant and I take this to be the annual rental value of the land.
How is he to
assess that? It is possible that in some
cases he might be able to assess the rental value of the land without the
improvements simply by disregarding the improvements and asking himself what
would the land be let for without those improvements, a one-stage process in
which, of course, the rental value of the land with the improvements would not
be assessed at all. Still less would the arbitrator pay any attention to the
actual rent payable under the tenancy agreement.
Alternatively,
the arbitrator might well go through a three-stage process in which, first of
all, he assessed the rental value of the land with the improvements. Then he
would assess how much of the increase in the rental value was due to factors
which he was bound to disregard. He would finally deduct the second figure from
the first and that would give him the rental value of the land in its
unimproved condition, that, of course, being the object of the exercise. Once
again, however, in no part of the exercise would he have to consider or take
account of the actual rent payable under the tenancy.
Under para
7(2) of Schedule 1 to the Agricultural Holdings Act 1986 the exercise is
similar, but its purpose is quite different. The exercise is no longer
undertaken in order to ascertain the rental value of the land in its unimproved
condition, but to ascertain the rental value of the tenant’s improvements; that
is to say, the amount which would be disregarded at the second step in the
exercise I have described. Accordingly, the exercise can end at the second
stage. It is true that as a result of the two stages the arbitrator would be in
a position to ascertain the rental value of the land at the end of the relevant
period without the improvements simply by a mathematical exercise, but that
would be a by-product and not the aim and object of the exercise which he had
undertaken.
Accordingly,
for the purpose of para 7(2) of ascertaining the rental value of the tenant’s
improvements so as to identify the numerator of the tenant’s fraction, it is
clear that the arbitrator does not have to identify the actual rental value of
the unimproved land, still less does he have to take account of or consider the
actual rent payable under the tenancy.
In my
judgment, the language of the paragraph is plain and unambiguous. The numerator
is the annual rental value of the tenant’s
the first part of the denominator. The second part of the denominator is
strikingly different. It is not the annual rental value of the land in its
unimproved condition at the end of the relevant period, but the actual rent
payable by the tenant, not at the end of the relevant period, but in respect of
the relevant period. These are two striking differences which, in my judgment,
must have been deliberately made by Parliament.
I am not
myself satisfied that this represents a capricious or anomalous construction.
It appears to me to be the deliberate policy of the legislature. In legislation
as closely articulated as this, the policy of the legislature must be
discovered (if at all) from the actual words of the statute, but to my mind it
is at least possible that Parliament deliberately intended that the landlord’s
contribution, unlike the tenant’s, should be taken at the value which the
parties had themselves placed upon it.
Accordingly,
for my part, I would dismiss the appeal and vary the determination of the
county court judge by substituting the declaration sought in the respondents’
notice by the respondent tenants.
Agreeing, KENNEDY
LJ said: The provisions with which we are concerned are clearly intended to
provide a method of calculating what compensation a tenant should receive for
the milk quota which he has surrendered with the land. It is a valuable item
and, if he has been in some measure responsible for its value, that should be
recognised; hence the concept of the tenant’s fraction.
It is defined
in para 7(1) and (2) of Schedule 1 to the Agriculture Act 1986, the terms of
which I need not repeat. Para 7(2) brings in para (2)(1) of Schedule 2 to the
Agricultural Holdings Act 1986 and the formula takes a little time to
disentangle, but when it has been disentangled, as Mr Paul Morgan QC really
concedes, its meaning does seem to be that which commended itself to the county
court judge.
It is, of
course, para 7(1)(a) with which we are concerned, the numerator. It is
the annual rental value at the end of the relevant period, which, it is agreed,
means in this case December 31 1983, of the tenant’s dairy improvements and
fixed equipment. To establish the rental value of the tenant’s dairy
improvements and fixed equipment para 7(2) requires that you look at what would
be disregarded under para 2(1) of Schedule 2 to the Agricultural Holdings Act
1986 on a reference made in respect of the land in question under section 12 of
that Act. That paragraph requires that there be disregarded any increase in the
rental value of the holding which is due to improvements and fixed equipment,
which, and I summarise, the tenant has provided voluntarily and paid for.
Reverting to
para 7(2) of Schedule 1 to the 1986 Agriculture Act, the increase thus
ascertained is to be disregarded only so far as it is attributable to tenant’s
improvements to or tenant’s fixed equipment on land used for the feeding,
accommodation and milking of dairy cows kept on the land in question.
Mr Morgan’s
difficulty is not with the wording of the Schedule; he knows what it says, but
submits that it cannot mean what it says. If it does, then a tenant who has
been lucky enough to be paying a low rent would also get a high tenant’s
fraction because para 7(1)(b) provides that
the
denominator is the sum of that value and such part of the rent payable by the
tenant in respect of the relevant period as is attributable to the land used in
that period for the feeding, accommodation or milking of dairy cows kept on the
land.
Here again the
relevant period is 1983.
The cause of
the problem, if it be a problem, is that in para 7(1)(b) the focus has
shifted from rental value to rent payable, and rent payable clearly means what
it says. Mr Morgan invites us to overcome this problem by making an assumption
when reading para 7(1)(a), namely that the rent passing is to be taken
as the rental value of unimproved land. I see no reason to make that
assumption. I do not believe that it would be more likely to achieve the
Parliamentary purpose, not least because the Parliamentary purpose in precise
financial terms is, to my mind, not clear.
The position
is, therefore, different from the situation which confronted the court in the
authorities to which we were referred yesterday, namely: SJ Grange Ltd v
Customs and Excise Commissioners [1979] 2 All ER 91, Porter v Honey
[1988] 1 WLR 1420 and Master & Fellows of University College, Oxford
v Durdy [1982] Ch 413. In each of those cases the Parliamentary
purpose was clear and by reading a few words into the statute it was possible
to give what was in the statute the meaning which Parliament clearly intended.
That is not the situation here, and so, like Millett J, I would dismiss this
appeal.
Appeal
dismissed.
