Practice Note 8/1: Compensation to agricultural tenants on notice to quit
The Valuation Office Agency`s technical manual covering all aspects of compulsory purchase and compensation.
1. General
Under the provisions of the Agricultural Holdings Act 1986 (AHA 1986), the tenant is normally entitled to not less than 12 months’ notice to quit but there are certain exceptions, the main one being when the tenancy agreement provides for early resumption by the landlord because the land or part of it is required for some specified non-agricultural purposes.
Except where a notice to quit is given on specified grounds which exclude the tenant’s right of objection (see Schedule 3 Part 1 AHA 1986), the tenant may within one month object to the notice, and if an objection is made the notice will not be valid unless the landlord obtains the consent of the First Tier Tribunal (Property Chamber) (formerly the Agricultural Lands Tribunal). The points upon which the Tribunal must be satisfied are listed in Schedule 3 Part 1 AHA 1986.
For a tenancy under AHA 1986 it follows therefore that, provided the tenant farms within the rules of good husbandry and complies with the terms of his tenancy agreement, he may enjoy considerable security of tenure and is likely to be at risk of dispossession only if the holding or part of it is required for non-agricultural purposes.
At common law a notice to quit part of the holding is bad and the landlord can serve a valid notice to quit in respect of part of the holding only if it is in pursuance of specific provisions in the tenancy agreement for example an early resumption clause which usually relates to part as well as the whole of the holding or is in accordance with the provisions of section 31(1) and 31(2) AHA 1986 which permits a valid notice in respect of part of the holding for the adjustment of boundaries between agricultural units or for the use of the land for specified purposes including mineral workings or for the making of a reservoir or road.
Under the provisions of section 32 AHA 1986 a tenant may within a period of 28 days of receiving a valid notice to quit part of the holding, elect to treat the notice as a notice to quit the entire holding.
2. Entitlement to compensation
A tenant’s right to compensation from his landlord following a valid notice to quit may arise under his lease or tenancy agreement or the Agricultural Holdings Act 1986, the Agriculture (Miscellaneous Provisions) Act 1963, and Part II of the Agricultural (Miscellaneous Provisions) Act 1968. Under section 77 AHA 1986 entitlement to compensation based on custom was abolished except for certain specified improvements, in particular, improvements begun before 1 March 1948.
If a tenant, having no greater interest than as a tenant for a year, or from year to year, is served with a valid notice to quit the holding or part of it, he may in certain circumstances elect to have his compensation assessed under section 20 Compulsory Purchase Act 1965 (CPA 1965) as if the notice to quit had not been served and the acquiring authority had taken possession of the holding in pursuance of a notice of entry. The circumstances are set out in section 59 Land Compensation Act 1973 and are:
(a) the notice to quit is served after an authority with compulsory powers has served a notice to treat upon the landlord or has agreed to buy the landlord’s interest;
(b) the tenant’s right to object to the notice to quit was excluded on the grounds that the land is required for non-agricultural use for which planning permission has been granted or is not required or the Tribunal has consented to the operation of the notice on the grounds that the land is required for non-agricultural use;
(c) the tenant makes his election before giving up possession;
(d) possession of the land is given up by the tenant to the acquiring authority on or before the date on which the tenancy terminates in accordance with the notice to quit.
Where an acquiring authority takes possession of the land compulsorily before the expiration of the notice to quit, the tenant’s right to opt for compensation under section 20 CPA 1965 shall cease to apply or if an election has been made, it will cease to have effect.
By section 63(2) AHA 1986, a tenant who has sub-let will be liable to his sub-tenant for compensation in consequence of a notice to quit given by his landlord but will not be debarred from recovering such compensation against his landlord merely because he was not himself in occupation.
The compensation provisions of the AHA 1986 apply to notices to quit relating to part of a holding that are made valid either by virtue of section 31(1)(2) AHA 1986 or powers contained in the tenancy agreement.
3. Disturbance compensation (section 60 AHA 1986)
Under the provisions of section 60 AHA 1986, a tenant who quits his holding following service of a notice to quit is entitled to compensation for disturbance provided the notice to quit has not become valid because the tenant has committed one of the ‘deadly sins’ set out in Cases A-H of Schedule 3 to the AHA 1986.
Compensation for disturbance is intended to cover the loss or expenses that the tenant unavoidably incurs when he is required to quit a holding through no fault of his own. The losses or expenses that qualify for disturbance are set out in section 60 AHA 1986.
The tenant is entitled to receive the minimum payment of one year’s rent without proof of loss or expense and up to the maximum payment of two years’ rent subject to proof provided he has served the requisite notice upon the landlord (section 60(2)(a) AHA 1986) and gives him the opportunity to make such valuations as may be necessary (section 60(5) AHA 1986).
If a tenant serves a counter-notice to cause a notice to quit relating to part to operate as a notice to quit the whole holding he will not be entitled to compensation for disturbance in respect of the whole holding, where:
(a) the notice to quit relates to less than one-fourth part of the original holding, and
(b) the holding is proposed to be diminished is reasonably capable of being farmed as a separate holding (section 63(3)(b) AHA 1986).
4. Compensation for improvements and tenant right matters (section 64 and Schedules 7 and 8 and Part 1 Schedule 9 AHA 1986)
Provided that the statutory requirements, or as the case may be, the terms of the tenancy agreement, have been fulfilled, a tenant quitting his holding is entitled on the termination of the tenancy to compensation for improvements and tenant right matters.
Improvements begun before 1 March 1948 are known as ‘old improvements’ and are set out in Schedule 9 AHA 1986. ‘Old improvements’ specified in Part II Schedule 9 will qualify for compensation only if the landlord gave his consent before the improvement was carried out. ‘Old improvements’ by way of drainage (Paragraph 16 Part II Schedule 9 AHA 1986) will qualify for compensation if the tenant notified his landlord of the proposed improvement before it was carried out.
Under the AHA 1986, the amount of compensation payable for old improvements that qualify for compensation is an amount equal to the increase attributable to the improvement in the value of the agricultural holding as a holding having regard to the character and situation of the holding and the average requirements of tenants reasonably skilled in husbandry. Where the consent to the old improvement was given by the landlord upon terms as to compensation, the AHA 1948 does not apply and the amount of compensation payable should be assessed in accordance with the agreed terms. If the tenant so wishes he may claim compensation for ‘old improvements’ under custom or agreement, in lieu of compensation under the AHA 1948.
Improvements begun after 1 March 1948 are known as ‘new improvements’ and may be ‘long term’, ‘short term’ or ‘other matters’.
‘Long term’ new improvements are specified in Schedule 7 AHA 1986. To qualify for compensation new improvements specified in Part I Schedule 7 AHA 1986 must have been consented to by the landlord before the improvements were carried out. The new improvements specified in Part II Schedule 7 AHA 1986 will qualify for compensation if the landlord gave his consent, or failing consent by the landlord the improvement was approved by the Tribunal. Where the consent of the landlord was given upon terms as to compensation, the amount of the compensation payable to the tenant will be assessed in accordance with the terms agreed. Otherwise the compensation payable to the tenant under the AHA 1986 is defined in section 66.
‘Short term’ improvements are set out in Part I Schedule 8 AHA 1986. These improvements qualify for compensation whether or not the landlord gave consent. Other matters, for example growing crops, seeds and cultivations which may qualify for compensation are set out in Part II Schedule 8 AHA 1986.
If the tenancy agreement does not provide for the basis of compensation for other matters included in Part II Schedule 8 AHA 1986, the compensation payable to the tenant for short term improvements and other matters should be assessed in cases where the tenancy is terminated on or after 1 July 1978, in accordance with Agriculture (Calculation of Value for Compensation) Regulations 1978 (S1 809 No 1978), as subsequently amended by the Agriculture (Calculation of Value) (Amendment) Regulations 1980, 1981 and 1983 (SIs 751/1980, 822/1981 and 1475/1983).
However, these Regulations were revoked as from 1 October 2015 by virtue of the Agriculture (Calculation of Value) (Revocations) (England) Regulations 2015 (SI 2015 No 327) in respect of England only. Similar revocation provisions were under consultation for Wales in mid 2017.
The practical effect of this revocation is that the 1978-1983 SI tables of value no longer apply. From 1 October 2015 the respective valuers must assess and agree the value of the improvement to an incoming tenant in accordance with section 66 of the AHA 1986. The effective principle of tenant right valuation is that the outgoing tenant is paid for the value of the remaining benefit of his work. It is that work that is the basis for assessment and not any baseline or maintenance standard.
In the absence of the 1978-1983 tables of value, the assessment of the residual benefit of lime, fertiliser and manure is potentially complex, especially as many such inputs are expensive. The uptake of precision farming techniques using GPS technology is likely to increase but adds further complexity. Accordingly, valuers considering such claims should refer the case to the PS Professional Guidance team.
Grants are available to owners and occupiers of agricultural land on a wide range of items and general information on grants as well as other useful information is available in the John Nix Farm Management Pocketbook or the Agricultural Budgeting and Costing Book.
Where a grant has been or will be made to a tenant in respect of a new improvement, the grant should be taken into account (by way of reduction) in assessing the compensation payable to the tenant for the improvement.
The amounts of grants are varied from time to time and are also liable to withdrawal. In dealing with claims, enquiries should be made to ascertain what grants have been or are likely to be received by the claimant. In cases of difficulty or doubt the required information may be obtainable from DEFRA.
Landlords and tenants may enter into agreements providing for the payment of compensation for improvements and other matters not covered by Schedules 7, 8 and 9 AHA 1986. Such agreements must be in writing except where the tenant entered before 1 March 1948.
5. Other compensation provisions of AHA 1986
In addition to the improvements set out in paragraph 4 above, a tenant may have improved the holding by the continuous adoption of a particular system of farming. If this has resulted in an increase in the value of the holding the tenant is entitled to the amount of such increase as compensation provided certain conditions are fulfilled (see section 70 AHA 1986), and the system of farming adopted is more beneficial than the system required by the contract of tenancy, or more beneficial than the system normally practised on comparable agricultural holdings.
An agricultural tenant has the right under section 10 AHA 1986, in certain circumstances to remove before the expiration of notice for the termination of the tenancy, any buildings and fixtures erected by him (for which he is not entitled to compensation under the AHA 1986 or otherwise) provided at least one month’s notice is given by the tenant to the landlord of his intention to remove and the landlord does not serve a counter-notice on the tenant electing to purchase.
Just as a tenant has a statutory right to claim compensation from his landlord for improvements he has made to the holding, so a landlord has a statutory right to claim compensation from his tenant for dilapidations and deterioration of the holding for which the tenant is responsible. A landlord may claim compensation for specific dilapidations either under the AHA 1986 or under the terms of the tenancy agreement, but must claim wholly under one or the other. The compensation payable is the cost of making good the damage (section 71 AHA 1986).
The decrease in the value of the holding may also be claimed by the landlord as compensation if the decrease is due to dilapidations or the failure of the tenant to farm in accordance with good husbandry (section 72 AHA 1986). The landlord cannot claim compensation for a decrease in value attributable to dilapidation for which he has been compensated under section 71 AHA 1986.
6. Market gardens
The compensation provisions relating to market gardens are contained in sections 79, 80 and Schedule 10 AHA 1986. A market garden for the purpose of the AHA 1986 includes an agricultural holding in respect of which it is agreed in writing after 31 December 1995 that the holding shall be let or treated as a market garden. The items for which compensation may be payable are as specified in Schedule 10 AHA 1986.
Section 81 AHA 1986 enables the parties to contract out of the Act as regards compensation for market garden improvements so long as fair and reasonable compensation is secured to the tenant.
The tenant of a market garden has the right of removal of fixtures and buildings put up for the purposes of his trade or business as a market gardener in accordance with the provisions of section 10 AHA 1986. This right, however, cannot be exercised by the tenant after the expiration of two months from the termination of the tenancy (section 79 AHA 1986).
A market garden tenant may remove fruit trees and bushes not permanently set out before the termination of the tenancy. If he does not do so they become the property of the landlord and the tenant cannot claim compensation in respect thereof (section 79 AHA 1986).
A tenant of a market garden can claim compensation in respect of the whole or part of an improvement which he purchased as an incoming tenant although his landlord may not have consented in writing to the purchase (section 67 AHA 1986).
The provisions as to compensation known as the ‘Evesham custom’ set out in section 81(2) AHA 1986 are otherwise applicable if the landlord and tenant have so agreed in writing.
Where it has been agreed in writing that part of a holding shall be treated as a market garden, section 7 AHA 1986 shall apply as if that part were a separate holding.
7. Compensation payment to tenants on notice to quit - Part II Agriculture (Miscellaneous Provisions) Act 1968
Section 9 A(MP)A 1968 provides that where a tenant quits a holding in consequence of a notice to quit (or of a counter-notice given by a tenant under section 32 AHA 1948 following a notice to quit part) he is entitled to an additional payment to help with the reorganisation payment provided:
(a) he is entitled to disturbance compensation under section 60 AHA 1986 and
(b) the notice does not contain an explicit statement that it is given on certain specific grounds set out in section 10(1) A(MP)A 1968, or if it has been referred to the Tribunal, that the Tribunal is satisfied on the grounds set out in section 10(2) A(MP)A.
The amount of the additional payment will be four times the annual rent of the holding or part as the case may be. Any apportionment of the rent payable at the date of severance should be on the basis of the value attributable to the severed land and the retained land, respectively, as part of the whole. The rent apportioned to the retained land should have no regard to any depreciation suffered by reason of the severance or the use made of the severed part.
If the landlord and tenant cannot agree on the sum due to the tenant, either of them may demand a reference to arbitration under AHA 1986.
Where the landlord resumes possession of the holding or part of the holding through the operation of a clause in his tenancy agreement allowing possession of the land to be resumed for non-agricultural purposes at less than 12 months’ notice in circumstances in which section 60 AHA 1986 would apply, the tenant is entitled under the provisions of section 15 A(MP)A 1968 to be compensated for the loss of the additional benefit (if any) he would have received if he had been allowed to remain in possession until the usual period of notice had expired.
The ‘additional benefit’ should represent the amount, if any, by which the present value of the tenant’s financial gains, had he remained in possession until 12 months from the end of the year of tenancy current when the notice was given, exceeds the compensation he actually receives apart from section 15 A(MP)A 1968.
8. The Agricultural Tenancies Act 1995 - Compensation payment to tenants on notice to quit
Most agricultural tenancies that commenced on or after 1 September 1995 will be Farm Business Tenancies under The Agricultural Tenancies Act 1995 (ATA 1995). It must be recognised the treatment of improvements under the ATA 1995 is very different from that of the AHA 1986.
Under an FBT the tenant’s right to compensation for improvements at the end of the tenancy is wider and is not restricted just to agricultural improvements. The tenant will also be entitled to compensation for any increase in rental value attributable to planning permissions that the tenant has obtained that relate to the holding. The 1995 Act also gives the tenant the right to claim compensation for ‘intangible advantages’ other than planning consent that attached to the holding is a consequence of the tenant’s efforts. The 1995 Act also gives much greater freedom for the removal of fixtures provided by the tenant.
Only those tenant’s improvements defined in section 15 ATA 1995 will qualify for compensation at the end of an FBT. Tenant’s improvements are defined to mean:
(a) any physical improvement that is made on the holding by the tenant by their own effort or wholly or partly at their own expense or
(b) any intangible advance that is obtained for the holding by the tenant by their own effort or wholly or partly at their own expense and which becomes attached to the holding.
The tenant is entitled on quitting the holding to obtain from the landlord compensation in respect of any tenant’s improvement. The landlord must have given written consent to the making of provision of the improvement in order for compensation to be paid.
The quantum of compensation is fixed as the amount equal to the increase attributable to the improvement in value of the holding at termination as land comprised in the tenancy ie any increase in value attributable to the improvement or advantage provided by the tenant. Thus it follows that compensation will only be payable if the improvement adds to the rental value of holding.
Where the landlord and tenant have agreed in writing, since 19 October 2006, to limit the compensation payable for an improvement, then the compensation payable will be the lesser of the amount by which the rental value of the holding has increased and the ‘compensation limit’. The compensation limit will either be fixed by the parties’ written agreement or where they cannot agree, a sum equal to the cost to the tenant of making the improvement.
Valuers requiring assistance with such claims should refer the case to the PS Professional Guidance team.