Let-ting agriculture have its day

Duncan Sigournay considers the implications of the recent report by the Tenancy Reform Industry Group

Agricultural lawyers will have been aware that the Tenancy Reform Industry Group (TRIG) was re-established last November by the Department for Environment Food and Rural Affairs in the wake of the 'Report of the Policy Commission on the Future of Farming and Food' and the University of Plymouth study - 'An Economic Evaluation of the Agricultural Tenancies Act 1995'.

The group was set the task of considering possible areas of reform to the agricultural tenanted sector.

The TRIG comprised all sectors of the farming industry (the Country Land and Business Association, the Tenant Farmers Association, the Farmers Union of Wales and the National Farmers Union) as well as professional organisations (the Royal Institution of Chartered Surveyors, the Central Association of Agricultural Valuers and the Agricultural Law Association) and local government representatives.

On 3 June 2003, TRIG delivered its final report to Lord Whitty and Alun Michael MP.

The final report is divided into four main areas - legislative reform, proposals for a code of good practice, fiscal reform, and structural Issues.

For the purposes of this summary, only the legislative and code of good practice elements will be considered in detail.

However, the fiscal reforms proposed aim to remove the artificial obstacles to the growth of and flexibility in the let sector as well as diversification on let farms.

The TRIG also considered several structural issues including - tenant retirement, new entrants, county farms and the Common Agricultural Policy review.

Legislative reforms

Regarding the Agricultural Tenancies Act 1995, the University of Plymouth report highlighted concerns regarding rent formulae, compensation, the 'business' and 'agricultural' conditions as well as section 4 (concerning post-31 August 1995 agreements retaining Agricultural Holdings Act 1986 (AHA 1986) protection.

The TRIG said the current restriction on rent formulae which require or permit the exercise of judgement or discretion was unnecessary and should be removed.

The current prohibition on upwards only rent reviews should be retained.

The current predicament faced by landlords granting consent to tenants for improvements is that the actual amount of compensation is not quantified until the determination of the tenancy.

Therefore, the TRIG agreed that the parties should be entitled to agree in writing a compensation cap at the amount of the tenant's investment in making the improvement.

Business and agriculture

Despite the University of Plymouth recommending relaxing both the 'business' and 'agricultural' conditions, the TRIG concluded that there was little to be gained by changing the status quo.

Indeed, the 'conditions' provided ample scope for farm business tenancies (FBTs) to be used even for holdings that involved substantial non-agricultural activities or, indeed, agri-environmental schemes.

The TRIG said that to weaken the 'conditions' would ultimately lead to a greater blurring of the distinction between FBTs and business tenancies under the Landlord and Tenant Act 1954.

Section 4(1)(f) - above all others in the 1995 Act - has caused the greatest amount of misunderstanding among practitioners.

Accordingly, the TRIG concluded that the section should be clarified for the sake of certainty.

The TRIG also considered whether it should be possible for parties to an existing AHA 1986 tenancy to add extra land to holdings, beyond the scope of the existing section 4(1)(f), and still retain the protection afforded by the 1986 Act, including succession rights where applicable.

At present, such additions not caught by 4(1)(f) have to be made by way of a FBT.

The transactional costs involved often far outweigh any benefit to either party.

The TRIG stopped short of enabling general 'contracting-back' into the 1986 Act, instead preferring specific and qualified circumstances in which parties could extend the provisions of the 1986 Act to land not previously under its provisions.

On notice periods, the TRIG concluded that the 24-month upper limit should be removed.

The view was that this would enable so-called 'rolling' tenancies to be operated.

Livelihood test

In view of the increasing importance of diversification within the rural economy, the TRIG considered that it would be illogical to make recommendations which sought to encourage and/or facilitate diversification and at the same time preserve the current succession 'livelihood' test which would lead to many diversified businesses losing succession opportunities.

Accordingly, the TRIG concluded that the 'livelihood' test for succession should be altered to enable income from non-agricultural work carried out on the holding to be included within agricultural income, provided the landlord had given consent for such diversification.

On dispute resolution procedures, the TRIG concluded that the parties would be better served by replacing the existing arbitration provisions with the more modern and flexible Arbitration Act 1996.

Code of good practice

The code of good practice dealt with diversification within agricultural tenancies.

From the outset of the TRIG, it was clear that ministers were concerned about the issue of diversification on tenanted land and in particular the perception that landlords may be deliberately thwarting tenants' reasonable applications for consents to diversify.

Although no substantive evidence to support such claims was produced, it was clear that finding a solution to this issue would be a major objective for the TRIG.

Unfortunately, the matter was clouded by events north of the border and in particular the recently enacted Agricultural Holdings (Scotland) Act.

A major aspect of the Act was the right of appeal (to the Land Court) afforded to tenants against any refusal by a landlord to grant consent for non-agricultural activity on the holding.

However, concerns were raised as to the actual nature of the perceived 'problem' as well as the likely impact on the lettings sector of such a legislative solution.

The TRIG also considered whether the matter could be dealt with by way of a change in definition of 'agriculture' so as to enable greater diversification under the terms of tenancy agreements.

However, problems with the retrospectivity of such a proposal and the interaction with user covenants led the TRIG to conclude that such a proposal would not produce the desired effect.

The TRIG concluded that the issue could be dealt with by a non-legislative solution, namely, a code of good practice linked to an ombudsman scheme to adjudicate over disputes.

The code envisaged would comprise a detailed set of instructions to be adhered to by the parties when consent is sought for diversification.

The code would encourage tenants to research better their proposals and for landlords, in turn, to give serious consideration to such proposals.

Clearly, if disputes arise either party may wish to refer the matter to the ombudsman for adjudication.

The ombudsman's decision would be non-binding.

Time will tell which, if any, of the proposals make it beyond ministers' desks.

However, the TRIG has shown that such cross-industry and inter-professional discussions can produce well thought out and considered recommendations.

- The TRIG report is accessible at: www.defra.gov.uk.

Duncan Sigournay is senior legal adviser at the Country Land and Business Association and was the lead lawyer in the CLA's TRIG negotiating team