Agricultural arbitration–Special case stated by arbitrator–Rental arbitration under section 8 of Agricultural Holdings Act 1948–Important points of law–Part of land comprised in holding used as a developed caravan site–How to value a holding where the caravans constitute a more lucrative enterprise than agriculture–Whether road works, drains, erection of toilet block and shop for the caravan site are tenant’s improvements within section 8(2)(a)–Whether, if so, ‘latent value’ released by works should be disregarded–Distinction between potential and realisation of potential–Problem of ‘relief from payment of rates’ in section 8(2)(b)–‘Appalling difficulties’ faced by arbitrators–Arbitrator must ensure that tenant gets the benefit of the relief and as a judicial person must decide the matter according to the evidence–Arbitrator must do his best to specify the quantum of rate relief if requested by a party–‘Relief’ means full relief–Judge’s practical advice to arbitrators in dealing with a ‘terrifying’ problem
This was a
special case stated by Thomas Elwyn Thomas FRICS, the arbitrator appointed by
the agreement of the parties to determine, in accordance with section 8 of the
Agricultural Holdings Act 1948, the rent properly payable in respect of the
agricultural holding known as East Trevose Farm, St Merryn, in the county of
Cornwall. The specific questions raised in the stated case for the opinion of
the court are set out in the course of the judge’s opinion.
Bruce
Mauleverer (instructed by Ralph & Co, of Truro) appeared on behalf of the
landlord; H A C Densham, solicitor, of Burges, Salmon & Co, of Bristol,
represented the tenant.
JUDGE GOODALL
said that the holding comprised in all some 300 acres, of which 202 or
thereabouts consisted of viable farmland, and 9 1/4 acres represented the
caravan site on which there was planning permission to station 190 caravans.
The holding also contained some acreage of cliff-land and waste and there was a
dwelling-house, cottage and yard. At the commencement of the tenancy there were
no caravans, but subsequently the site was established, at the expense of the
tenant, with roads, toilet facilities and a shop. It was common ground that at
the present time the revenue from the caravan site was substantially greater
than that from the agricultural activities. The questions set out in the
arbitrator’s very helpful special case fell into two parts, those relating to
problems arising from the caravan site and those concerned with the application
of section 8(2)(b) of the 1948 Act, which required the arbitrator not to take
into account the relief from the payment of rates.
Valuation of
holding containing caravan site
Logically the
first question which had to be answered was the one posed by the arbitrator in
the following terms:
Should I value
the holding as an agricultural holding, accepting the following extract from Muir
Watt on Agricultural Holdings (12th ed) p 23?
‘The rent to
be determined is the rent at which the holding might reasonably be expected to
be let in the open market as an agricultural holding, which means, inter
alia, as land used for agriculture as a trade or business, not as a purely
non-commercial hobby, nor for a profitable but non-agricultural purpose such as
a riding school, nor for mere amenity or sport. But the reflection in the rent
of an element of profitability from an incidental non-agricultural purpose (not
inconsistent with the terms of the tenancy), such as the letting of rooms with
board in the farmhouse to summer visitors, or sporting rights not reserved to
the landlord, is not excluded, provided that the holding remains in substance
an agricultural holding.’
All that the
above-quoted passage was saying was that a farm should not be valued on the
basis that it could be put to a more valuable use than its actual use–in other
words the
sic stantibus. The passage did not throw light on the present problem. Mr
Densham, on behalf of the tenant, citing Godfrey v Waite [1951]
EGD 9 and Howkins v Jardine [1951] 1 KB 614, submitted that in
order to determine whether a property was an agricultural holding one had to
look at the situation at the commencement of the tenancy and apply the
‘predominant user’ test. This test had to be applied to value, not to acreage,
and if it were to be applied at the date of the hearing the effect would be
that the farm would not be an agricultural holding. The solution suggested on
behalf of the tenant was that the arbitrator should value as if the predominant
user test was still satisfied and that no more than the agricultural rent
should be attributed to the caravan site. That argument could not be accepted.
Suppose it were the landlord who carried out all the work to provide a
lucrative caravan site on a farm. Could the tenant agree a larger rent and then
after three years turn round and say that the rent should not reflect the value
of the caravan enterprise? The task of
the arbitrator was to determine the rent properly payable. That could only
relate to the whole of the holding, caravan site and all. The answer to the
arbitrator’s question under this heading was that the holding should be valued
in its present state, ie as part farm and part caravan site.
Are the works
for the establishment of the caravan site improvements within section 8(2)(a)?
The next
question to be considered was the following:
Are the works
carried out by the applicant during the current tenancy in the establishment of
a caravan and camping site, namely, the laying out by the applicant of roads,
the provision of drains and the erection of a toilet block in the fulfilment of
a condition precedent to the establishment of such site, and the provision
subsequently of a shop thereon, tenant’s improvements, or are any such works
individually improvements which fall to be disregarded by me when awarding the
sum of rental to be charged for this agricultural holding within the meaning of
section 8(2)(a) of the 1948 Act?
It was said on
behalf of the landlord that improvements within the meaning of section 8(2)(a)
were confined to agricultural improvements, ie improvements which would improve
the farm as a farm and so improve its agricultural output. That argument would
create great injustice to the tenant. The broad principle underlying the
provisions as to the tenant’s improvements both under the 1948 Act and the
Landlord and Tenant Act 1954 was that a tenant who improved the property should
not pay an increased rent because of it. The word used in section 8(2)(a) was
‘improvements’ simpliciter and it would be wrong to cut it down. The
answer to the arbitrator’s question was, therefore, that all the work carried
out by the applicant during the current tenancy in the establishment of a
caravan and camping site, namely, the laying out by the applicant of roads and
the provision of drains, the erection of a toilet block and the provision of a
shop, and indeed any other improvements he might have carried out, fell to be
disregarded by the arbitrator when awarding the rental to be charged.
Should release
of latent value be disregarded?
The arbitrator
then asked:
If the works
listed above are tenant’s improvements which fall to be disregarded, does this
mean that I have to disregard merely the rental value attributable to such
improvements or should I also disregard the latent value released by the
carrying out of the said works and the consequent implementing of the planning
consent for change of use?
A
supplementary question was the following:
Was the
latent rental of the land which is used as the caravan and camping site
released by the original granting of the planning permission rather than by the
implementation of the permission by the carrying out of the works listed above?
It was
submitted on behalf of the tenant that the whole of the increase in the rental
value of the holding attributable to the caravan site was due to the tenant’s
improvements. It should therefore be disregarded. That argument was too facile.
The increase of rental value was due to a combination of three elements,
namely, the attractive situation of the farm on the holiday coast of Cornwall,
the existence of the planning permission, and the works carried out by the
tenant. The tenant’s submission that nothing should be awarded to the landlord
in respect of his ownership of this very valuable site must be rejected.
A very similar
question had been put to R E Megarry QC (as he then was) in 1959 when he
addressed the Third Conference of Agricultural Arbitrators. The question and
the answer which he gave were as follows:
‘The
rental value of a farm is often enhanced by an improvement beyond the annual
equivalent of the cost of the improvement, the enhancement being due to the
effect of the improvement in releasing ‘potential value’ which was in the farm.
If the improvement was effected at the tenant’s expense, is the arbitrator
entitled to include this potential value in the rent he fixes or should he
ignore it in the same way as he must ignore the cost of the improvement?’
You have, of
course, to consider the consequence of what has been done by the tenant. If he
has carried out an improvement you must consider not only what it has cost him
but also the consequences of putting in the improvement, which produces certain
results and makes for better farming. The Act might have said that you should
leave out of account the cost of the improvement but take into account the
enhancement of the potentialities of the farm, but that would be most unfair to
the tenant.
Section
8(2)(a)(i) of the Act of 1948 says–putting it shortly–that the arbitrator is
not to take into account ‘any increase in the rental value of the holding’
which is due to the tenant’s improvements; and ‘any increase in the rental
value of the holding’ means not only the actual cost of the improvement but its
consequences in increasing the value of the farm. They are all to be left out
of account, so that you must disregard them.
In assessing
the value of the farm, however, you will take into account this fact. If it is
a farm which, as it is run at the moment and disregarding the particular
improvement, has a low value, but by spending a relatively small amount on
improvements it can be made much more valuable, one of the things which you
will take into account is that if the farm were let to a new tenant he could,
by doing this improvement himself at a small capital outlay, vastly increase
his return from the farm. You will regard it as a farm capable of easy and
cheap improvement, and therefore a valuable farm. You have to leave out of
account the fact that the improvement has been done by the tenant already, but
take into account the possibility that a new tenant might himself carry out
that improvement and so get much better value out of the farm.
As one would
expect, the problem posed in the present case was correctly answered by Mr
Megarry, as he then was. The words ‘latent value released’ in the arbitrator’s
question cover two quite separate matters, namely, latent value or potential
and the release of that value or the realisation of the potential. The latter,
the release or the realisation, was due solely to the work of the tenant, but
the potential was not in any way due to the work of the tenant. Mr Megarry was
dealing with an agricultural improvement, but there seems no reason for
applying a different rule to non-agricultural improvements. The proper approach
in the present case was that the farm should be valued on the basis that the
caravan site had not been established, and that the farm was as it was at the
beginning of the tenancy so far as its physical state was concerned, but that
there was this potential for a caravan site and there was planning permission
to carry it out. It had been argued that as planning permission had been
granted many years ago it would have lapsed if the work had not been carried
out and, therefore, the arbitrator should value the holding as if there was no
planning permission. This argument was fallacious. The planning permission had
been acted upon and had been kept alive by the action of the tenant. It was
extant today. The fallacy lay in postulating a planning permission given in
1961 and then assuming that it had lapsed.
The answer to
the supplementary question quoted above should have become apparent from what
had already been
latent rental, the potential, was a matter which had to be taken into account.
Attention had already been drawn to a possible misconception as to the meaning
of ‘release of latent value.’
‘Relief from
payment of rates’: general effect
It was argued
that section 8(2)(b) of the 1948 Act would have no effect. That argument could
not be accepted. The Scottish Court of Session in Guthe v Broach
1956 SC 132 had decided that the provision did not mean that the arbitrator
should ignore rating relief–it meant that he should secure to the tenant the
benefit of that relief, however difficult it might be to do so. It had been
argued on behalf of the landlord that, in the absence of evidence of open
market lettings, arbitrators used as comparables the rents determined by other
arbitrators. If those other arbitrators had correctly applied section 8(2)(b),
there was a built-in compliance with the provision. It was suggested that an
arbitrator was bound to assume that his colleagues had obeyed the law in this
respect. This, however, could not be assumed. Indeed it seemed from Mr
Walmsley’s Agricultural Arbitrations that it was highly probable that
they had not. If they had not, and if the starting point was a true open market
rent, then a deduction fell to be made in applying section 8(2)(b).
Reliance on
professional experience rather than evidence?
The arbitrator
in his case stated asked the following question:
Am I entitled
to give effect to section 8(2)(b) in the manner in which I propose and to rely
upon my own professional expertise rather than determine the matter in
accordance with the evidence that would otherwise be proffered?
The answer was
that an arbitrator did not act as a valuer. He performed judicial functions. He
was bound to listen to the evidence which was offered. He could not refuse to
hear witnesses and decide the matter from his own professional experience.
Must the
arbitrator quantify rate relief?
The next
question was:
Am I entitled
to deal with the matter without defining in cash terms the quantum of rate
relief to be deducted from the rent which would otherwise be payable in the
absence of the provisions of section 8(2)(b)?
It was clear
that the arbitrator did not need to quantify the rate relief in cash terms
unless a party asked him to do so. If a party did ask him was he obliged to do
so? Paragraph 16(b) of Schedule 6 to the
1948 Act required the arbitrator, on the application of either party, to
specify the amount awarded in respect of any particular improvement or any
particular matter. Was the deduction for rate relief an ‘amount awarded’ to the
tenant? This was more difficult, but in
the end the conclusion was that it could properly be said to be such an amount.
If a party applied the arbitrator could not refuse to specify it.
Is it full
relief which arbitrator must not take into account?
The final
question asked by the arbitrator was:
Is the amount
of relief from payment of rates which I am obliged not to take into account by
the provisions of section 8(2)(b) the full relief afforded by all the Rating
Acts for which Part V of the Local Government Act 1929 was the authority (now
repealed but preserved by the General Rate Act 1967) or only the relief
afforded de novo by the 1929 Act?
The question
asked under this heading was whether the relief which the arbitrator had not to
take into account was only the relief given by the Local Government Act 1929
itself–ie the additional relief given by that Act and not the full
relief given by that Act together with the previous Acts which had partially
derated agricultural land. The Acts had now, of course, been repealed and
replaced by the General Rate Act 1967. There was no doubt, and both sides
agreed, that the rating relief which the arbitrator was directed not to take
into account was the full rating relief.
Comments on
arbitrators’ problem in applying section 8(2)(b)
At the close
of his judgment, Judge Goodall said that the application of section 8(2)(b)
could involve arbitrators in appallingly complicated calculations. The
unfortunate arbitrator in the Scottish case of Guthe v Broach,
mentioned earlier, embarked on the herculean task of, in effect, preparing a
new rate for the whole county of Dumfries. This would mean, in the case of Cornwall,
preparing complete valuations for the county and working out on the new total
of rateable values what rate in the pound would be required to produce the sum
required for the local authority’s budget. In addition, if the total rateable
value were increased it could well affect the rate support grant from central
government. It might be helpful to express a view on how the matter might be
approached in a practical way instead of attempting an impossible task. The
Layfield Committee recently suggested that agricultural land should be rerated
and the National Farmers’ Union got out figures showing the increased cost of
food which was likely to result. Such figures could be very useful. If it were
said that the rating of agricultural land would increase the cost of food by x
per cent, then one had a starting figure. This was only a suggestion, which was
no part of a judge’s function, but which was mentioned in case it might be
found of some assistance to arbitrators faced with this problem.
