If you rent agricultural land or property, you are likely to have an agricultural tenancy. These account for approximately one third of all agricultural land.
This guide explains two types of agricultural tenancy - those agreed before 1 September 1995 - known as 1986 Act tenancies - and those agreed after 1 September 1995 - known as Farm Business Tenancies.
It also outlines specific provisions relating to rent reviews, statutory succession to tenancies and provides advice to tenant farmers on their rights and legal requirements and explains how to terminate a tenancy agreement.
You are advised to seek independent advice before entering into a tenancy agreement or specific tenancy arrangement.
Farm Business Tenancies
Agricultural tenancies agreed since 1 September 1995 under the Agricultural Tenancies Act 1995, are known as Farm Business Tenancies. To be a Farm Business Tenancy, at least part of the tenanted land must be farmed throughout the life of the tenancy, and the tenancy must also meet one of two conditions:
- If the tenancy is primarily agricultural to start with, the landlord and tenant can exchange notices before the tenancy begins confirming they intend it to remain a Farm Business Tenancy throughout. This will allow tenants to diversify away from agriculture - only where the terms of the tenancy agreement allow this
- If the landlord and tenant don’t exchange notices before the tenancy begins, the tenancy must be primarily agricultural to be considered a Farm Business Tenancy
For a Farm Business Tenancy, landlords and tenants have the right to negotiate their own provisions on rent levels and decide whether or not they want to have rent reviews. If they do not make specific arrangements - which effectively contract out of the Act’s provisions on rent reviews - they will still be able to choose how often a rent review should take place. If they do not do so, either the landlord or tenant will be able to demand a rent review every three years. The only condition imposed on rent reviews is that it must not preclude a reduction in rent.
Compensation for tenant’s improvements
A tenant is entitled to compensation at the end of a tenancy for physical improvements they have made to a holding - provided the landlord has given consent to the improvement.
A tenant can also obtain compensation for intangible advantages, such as getting planning permission or milk quota which increase the value of the holding, provided they leave them behind when they vacate the property.
Landlords and tenants can now agree an upper limit - or cap - on the amount of compensation, usually to reflect how much it will cost the tenant to make the improvements.
Tenants and landlords have the right to use an arbitrator in a dispute over tenancy agreements, although they may also want to consider other forms of mediation.
Rent reviews under agricultural tenancies
There are different rent review provisions for 1986 Act Tenancies and Farm Business Tenancies.
1986 Act Tenancies
For tenancies under the Agricultural Holdings Act (AHA) 1986, at least three years must pass from the start of the tenancy - or the previous rent change - before either the landlord or tenant has the right to a rent review.
Where land is added to, or removed from, a holding and there has been no change in rent - other than an increase or reduction due to the adjustment in the size of the holding - the next rent review for an AHA tenancy must be at least three years from when the original tenancy began or from the date of the previous rent review for the original tenancy.
Farm Business Tenancies
The Agricultural Tenancies Act 1995 allows landlords and tenants to opt out of the default rent review arrangements. They can negotiate their own rent review arrangements, providing this does not rule out a rent reduction. Parties can also ask that a rent review should be referred to an independent expert, but cannot demand arbitration under the default provisions of the Act if they have already agreed to use an independent expert.
If the parties do not wish to make their own arrangements on rent, then the existing default provisions will apply, and either the landlord or tenant will be able to ask for a rent review every three years.
If the issue of rent reviews goes to an arbitrator, there are no restrictions on the criteria that an arbitrator can take into account, other than any which would preclude a reduction in rent.
End of tenancy compensation for Farm Business Tenancies
Tenants are entitled to compensation at the end of a tenancy for physical improvements they made to a holding with the consent of the landlord, and for intangible advantages which increase its value, provided they are left behind when the tenant leaves.
Intangible advantages could include planning permission which was not taken advantage of before the tenancy ended, or milk quota acquired during the course of the tenancy.
Changes introduced by the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 allow landlords and tenants to agree an upper limit - or cap - on compensation amounts. Usually, this is equal to the actual cost to the tenant of making the improvement unless otherwise agreed. The costs or values that might typically be included are:
- materials and labour - the tenant’s own labour or contractors
- planning and professional fees
- building regulations
Setting the compensation amount
The landlord and tenant must agree the upper limit in writing, though there is no particular time limit on this. For example, a landlord and tenant might arrange in principle to agree to set an upper limit, and then decide on the actual amount once the tenant has completed the improvement. Alternatively, they may wish to agree the amount of the upper limit before the improvement is carried out.
Where there is a dispute about the actual cost of compensation, either party can ask an arbitrator to decide the matter.
At the end of the tenancy, the landlord and tenant will need to assess the value of any improvement to the holding in the normal way. If that value is lower than the amount of the upper limit that was agreed, the landlord will pay the tenant the actual value. But if the value of the improvement is higher than the upper limit, the landlord should pay the tenant the amount of the upper limit.
If either party doesn’t agree to set an upper limit on compensation, the existing default provisions of the 1995 Act will apply.
Notices to quit for Farm Business Tenancies
Previously, a notice to quit for a Farm Business Tenancy had to be given at least 12 months - but less than 24 months - in advance. However, following the changes introduced by the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006, landlords and tenants can now agree on whatever maximum notice period they wish. For example, they could agree to set a five-year notice period, or they could agree that a notice to quit must still be given less than 24 months in advance. There has been no change to the minimum notice period, which is still 12 months.
You can still use a special break clause in a fixed-term tenancy, but it will require either at least 12-months’ notice in advance or a mutually agreed surrender of tenancy. It means that a notice to quit can be served more than 24 months in advance of a break clause.
1986 Act agricultural tenancies
Agricultural tenancies agreed before 1 September 1995 are known as 1986 Act tenancies, or are sometimes referred to as Full Agricultural Tenancies. Generally, tenancies granted under the 1986 Act have lifetime security of tenure.
Succession rights for 1986 Act tenants
1986 Act tenancies granted before 12 July 1984 carry statutory succession rights, on death or retirement, provided the potential successor meets certain eligibility criteria.
A close relative of a deceased tenant may apply for succession to the tenancy within three months of the tenant’s death. The application will suspend any notice to quit given by the landlord on the tenant’s death. Two tenancies by succession can be granted, so it is possible for the tenant’s family to work the holding for three generations.
A 1986 Act tenant can also name a successor to take over the holding when they retire. The conditions for succession are similar to those that apply on succession on death.
The livelihood test on 1986 Act tenants’ income
Previously, a potential successor to a tenancy had to have earned their principal source of livelihood from agricultural work on the holding for five out of the last seven years. It could risk their right to succession if they received income from non-agricultural activities on the farm.
However, changes to the legislation mean that income, which a successor to a tenancy earns from diversified activities on the farm, or from activities off the farm, may now count towards ‘the livelihood test’, where the landlord has given consent to this after 19 October 2006.
The changes to the legislation do not affect a potential successor’s right to succeed to a tenancy if their principal source of income is from agricultural work on the holding.
Compensation on termination of tenancy
The tenant is entitled to compensation for the following.
Major long-term improvements, including:
- making or planting water meadows
- planting orchards
- erecting or altering buildings
- constructing silos, roads or bridges
- repairs to fixed equipment
Short-term improvements, including:
- protecting fruit trees against animals
- clay burning
- liming and chalking of land
‘Tenant right’, including:
- the value of growing crops
- the costs of husbandry, such as sowing seeds and cultivations
- compensation for disturbance where a landlord terminates the tenancy with a notice to quit
Any special system of farming that was adopted which benefited the holding than that required under the tenancy or otherwise normally practised on such a holding.
The amount of compensation is measured by the increase in value to the holding made by the improvements.
The landlord may also claim compensation for disrepair - usually the cost of repairing any damage.
Many landlords and tenants will already be familiar with the arbitration procedures under the Arbitration Act 1996, as these are used for settling Farm Business Tenancies.
The Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 (“the Order”), introduced changes in arbitration procedures to help both tenant and landlord by giving them greater flexibility.
For example, the two parties can agree to sort out a dispute using a written representation procedure, avoiding the time and costs of a hearing.
The 1996 Act procedures apply to any arbitration where the arbitrator was appointed after the Order came into effect on 19 October 2006.
Where arbitration under the 1986 Act was in process at the time the Order came into effect, the procedures set out in the 1986 Act will still apply. Under the new arbitration procedures for 1986 Act tenancies, where a landlord and tenant cannot agree on the appointment of an arbitrator, either party can apply to the President of the Royal Institution of Chartered Surveyors to make an appointment. A fee is payable.
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