Guide to the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006

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1 Guide to the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 Tenancy Reform Industry Group Agricultural Law Association Association of Chief Estates Surveyors and Property Managers in Local Government The Central Association of Agricultural Valuers Country Land and Business Association Farmers Union of Wales Local Government Association National Farmers Union National Federation of Young Farmers Clubs Royal Institution of Chartered Surveyors Tenant Farmers Association

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3 Guide to the Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 The Regulatory Reform (Agricultural Tenancies) (England and Wales) Order came into operation on 19 October It amends the Agricultural Holdings Act 1986 and Agricultural Tenancies Act This booklet has been prepared jointly by the Tenancy Reform Industry Group and Defra, and is intended to give a general guide to the main changes to the 1986 and 1995 Acts. It is not a substitute for professional advice given in the light of individual circumstances. If you are considering entering a new tenancy agreement or farm business tenancy, or making any changes to an existing agreement, you are strongly advised to seek professional advice. 1 Statutory Instrument 2006 No. 2805: The Regulatory Reform (Agricultural Tenancies) (England and Wales) Order

4 Introduction Agricultural tenancies have been an essential part of rural life for centuries. The introduction of the Agricultural Tenancies Act 1995 halted the long-term decline of the tenanted sector in England and Wales, and it has remained stable at roughly one third of agricultural land for the last ten years. However, since the 1995 Act, there have been considerable changes in agriculture, for example, the increasing pressure on commodity prices, the reforms of the Common Agricultural Policy and the growing need for farmers to prioritise environmental as well as farming outputs. These changes are set to continue. As a result, many farmers can no longer rely on traditional agricultural activities to ensure profitability. Farm diversification is often essential to secure the sustainability and prosperity of a farm. The provisions of agricultural tenancy legislation and fiscal rules have placed barriers in the way of tenant farmers seeking to take advantage of opportunities for diversification and to participate in agri-environment schemes. Farmers were particularly hard hit by the outbreak of Foot and Mouth Disease in In the wake of the outbreak, the Prime Minister set up the Policy Commission on the Future of Food and Farming. The Policy Commission s report recognized the importance of a healthy tenanted sector in achieving a sustainable agricultural industry, and made recommendations specific to the tenanted sector. The Tenancy Reform Industry Group (TRIG) 2 comprising representatives from across the industry, which had previously advised on the 2 2 Country Land and Business Association (CLA), National Farmers Union (NFU), Tenant Farmers Association (TFA), Central Association of Agricultural Valuers (CAAV), Royal Institution of Chartered Surveyors (RICS), Agricultural Law Association (ALA), National Federation of Young Farmers Clubs (NFYFC), Farmers Union of Wales (FUW), Association of Chief Estate Surveyors and Property Managers in Local Government (ACES), Local Government Association (LGA).

5 Introduction Agricultural Tenancies Act 1995, was reconstituted and asked by Government to consider those recommendations of the Policy Commission specific to tenant farming, in conjunction with a report by the University of Plymouth on the economic viability of the 1995 Act, and to come up with proposals for tenancy reform. TRIG put forward a number of recommendations for modernising agricultural tenancy legislation. The Government accepted these recommendations and has implemented them by means of a Regulatory Reform Order (RRO). The reforms introduced by the RRO are intended to: Encourage diversification by tenant farmers Maintain and improve viability of tenanted farms Allow restructuring of holdings without jeopardising valuable rights Improve flexibility in the tenanted sector Maintain a balance between landlord and tenant interests Subject to the two exceptions given below, the new legislation applies in England and Wales to new tenancies or to variations and consents affecting existing tenancies made on or after 19 October 2006, and to arbitrations arising on 1986 Act tenancies where the appointment of the arbitrator takes place on or after that date. The two exceptions are the amendments to the Agricultural Tenancies Act 1995 regarding notice to quit and the criteria which an arbitrator can take into account in a rent review for a Farm Business Tenancy. In these two instances, the new legislation applies automatically. 3

6 Summary of the key changes The Agricultural Holdings Act 1986 Eligibility for statutory succession to a tenancy the livelihood test The 1986 Act sets out certain tests for eligibility for statutory succession to a tenancy, including what is known as the livelihood test. Previously, this required a potential successor to have earned their principal source of livelihood from agricultural work on the holding for 5 out of the last 7 years. Potential successors to a tenancy could jeopardise their right to succession, by drawing significant income from non-agricultural activities on the farm. This has had the effect of inhibiting tenant farmer diversification, since it is often the younger members of a farming family, and therefore potential successors to the tenancy, who take the lead in setting up diversified businesses. The changes to the legislation introduced by the RRO will enable a successor to a tenancy to earn income from diversified activities on the farm or from activities off the farm, and for this income to count towards the livelihood test, where the landlord gives written agreement to this diversification after the Order has taken effect. To have effect, the landlord s agreement must be given in writing and it must have been given on or after 19 October 2006, the date the changes to the legislation came into force. These changes do not affect a potential successor s right to succeed to a tenancy where the principal source of income is from agricultural work on the holding. 4

7 Summary of the key changes TRIG and Defra recommend that landlords consider tenants proposals for diversification in the light of the factors set out in the voluntary Code of good practice for agri-environment schemes and diversification projects within agricultural tenancies 3. Examples of proposals for diversified activities might include an on-farm shop or dog-boarding business, off-farm fencing or agricultural contracting business. Ministers have made it clear that they will keep under review the amendment to the livelihood test and the operation of the Code of Practice and that, if evidence shows that a voluntary approach is not working and there are continuing barriers to tenant participation in diversification projects and agri-environment projects, they will consider further legislation on the matter. Arbitration procedures The 1986 Act sets out detailed procedures for resolving issues by arbitration. These procedures were inflexible and time-consuming, and were often resolved by reference to a hearing, which can be costly for the parties involved. The RRO repeals the 1986 Act arbitration procedures and replaces them with the procedures in the Arbitration Act The 1996 Act procedures will already be familiar to a number of landlords and tenants, as these are the procedures used for resolving disputes under the Agricultural Tenancies Act The 1996 Act procedures give greater flexibility, and, for example, will enable parties to agree to resolve a dispute by a written representation procedure, thereby avoiding the costs of a hearing

8 Summary of the key changes The 1996 Act procedures will apply to any arbitration where the arbitrator is appointed after the RRO has come into effect (i.e. 19 October 2006). Where a 1986 Act arbitration was in process at the time the RRO came into effect, the procedures set out in the 1986 Act will continue to apply. Rent Reviews Three year rent review cycle For tenancies under the Agricultural Holdings Act 1986, at least three years must elapse from the beginning of the tenancy or the previous rent change, for either the landlord or the tenant to have the right to a rent review. Prior to the RRO, if land was added to the holding, creating a new tenancy in law, the three year period would start again. This often deterred parties from restructuring holdings as it meant they would have to wait longer for the next rent review. The changes to the legislation mean that where land is added to or removed from a holding, and there has been no change in rent, other than an increase or reduction to take account of the adjustment in the size of the holding, the next rent review must be at least three years from the beginning of the original tenancy or the previous rent review for the original tenancy. Appointment of arbitrator When carrying out a rent review arbitrators were required to determine the rent for the holding as of the date of their appointment, no matter when the new rent would take effect. Under the changes to the 1986 Act made by the RRO, arbitrators will now be required to determine rent as from the date at which the new rent will be payable. 6

9 Summary of the key changes The Agricultural Tenancies Act 1995 End of Tenancy Compensation Under the Agricultural Tenancies Act 1995 a tenant is eligible for end of tenancy compensation only if the landlord gives written consent to the improvement, unless the improvement is a routine improvement as defined in the Act. Compensation is paid at the value (including the value of any planning consent or goodwill) of the improvement to the holding when the tenancy ends. This means that landlords do not know until the end of the tenancy how much compensation they will have to pay, which often discourages landlords from agreeing to improvements. The changes introduced by the RRO allow landlords and tenants to agree an upper limit, a cap, on the amount of compensation to be paid which, unless they agree some other amount, is equal to the actual cost to the tenant of making the improvement. The legislation does not specify the kinds of costs which can be included in the actual cost, but these could include, for example, costs of materials and labour (whether the tenant s own labour or contractors). At the end of the tenancy, the landlord and tenant will need to assess the value of the improvement to the holding in the normal way. If the value of the improvement is lower than the amount of the agreed upper limit, the landlord will pay the tenant the actual value, but if the value of the improvement is higher than the upper limit, the landlord will pay the tenant the amount of the upper limit. The agreement to set an upper limit must be made in writing between the landlord and tenant. Where there is a dispute about the actual cost, either party can ask an arbitrator to decide the matter. If parties do not wish to set an upper limit on compensation, the existing default provisions apply. 7

10 Summary of the key changes Rent Reviews The Agricultural Tenancies Act 1995 introduced provisions on rent reviews which enable landlords and tenants to contract out of the open market provisions of the Act, thereby giving parties greater flexibility to agree terms which suited their own circumstances. However, the Act still imposed certain restrictions on how rent could be assessed and also the criteria that an arbitrator was required to take into account when determining rent. The changes to the legislation mean that where parties contract out of the default rent review arrangements, they can have complete freedom to negotiate their own provisions on rent, subject to the condition that these provisions must not preclude a reduction in rent. Similarly, there are no restrictions on the criteria that an arbitrator can take into account, other than any which would preclude a reduction in rent. Under the new arrangements, where a landlord and tenant expressly agree that the default provisions of the Act do not apply or that a rent review should be referred to an independent expert, then they automatically contract out of the default rent review provisions and should say how the rent is to be reviewed. This only applies in relation to provisions in tenancy agreements made on or after 19 October If parties do not wish to make their own specific arrangements on rent, then the existing default provisions apply. These provide that parties can choose how often a rent review should take place, but if they do not do so, either the landlord or tenant will be able to demand a rent review every three years. 8

11 Summary of the key changes Application of the 1986 Act Following the introduction of the Agricultural Tenancies Act 1995, most new agricultural tenancies which have commenced after 1 September 1995 are Farm Business Tenancies. However, in some circumstances the Agricultural Holdings Act 1986 continues to apply. The changes to the legislation add a new circumstance in which the 1986 Act may apply to a tenancy. The 1986 Act will apply where there is a written contract of tenancy which states that it is to apply and the tenant previously held a 1986 Act tenancy of all or a substantial part of the holding. What is a substantial part is determined by reference to either area or value. The changes also clarify the position on the application of the 1986 Act where there has been a surrender and re-grant of a tenancy. The changes make it clear that the 1986 Act will continue to apply regardless of whether the parties knew their actions would have effect as a surrender and re-grant, or whether it was done unwittingly. Similarly, there has been clarification to the provision on where a 1986 tenancy applies in the case of an agreed retirement succession. This will give greater certainty to parties and prevent the need for an unnecessary application to the Agricultural Land Tribunal where a landlord and tenant agree on the nominated successor. These changes only apply in relation to tenancies granted on or after 19 October

12 Summary of the key changes Notices to Quit 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. The changes introduced by the RRO mean that landlords and tenants are able to agree whatever notice period they wish, although a notice to quit must still be given at least 12 months in advance. For example, a landlord and tenant could agree to set a 5 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 remains at 12 months. 10

13 Some questions and answers about the changes Livelihood Test If my landlord has already agreed to diversified activities being carried out on the holding, do I need to ask him to renew this consent to ensure that the income will count for the purposes of the livelihood test? Yes. You must ask your landlord to renew consent and it must be given in writing. A consent given by a landlord before 19 October 2006 will not be able to be taken into account by the Agricultural Land Tribunal for the purposes of eligibility for succession to a tenancy. What happens if my landlord refuses to give consent that diversified activities should count towards eligibility for succession to the tenancy? That is for the landlord to decide and there is no provision for appeal against the decision if the landlord refuses to give consent. However, you may wish to ask the landlord to consider using the procedure set out in the voluntary Code of good practice for agri-environment schemes and diversification projects within agricultural tenancies. It remains the case that, provided a potential successor satisfies the traditional livelihood test, i.e. that the principal source of income is earned from agricultural work carried out on the holding, then they can still be eligible for succession to the tenancy, assuming all other criteria are met. 11

14 Some questions and answers about the changes What if, as a landlord, I am happy to agree that some of the diversified work carried on and from the holding should be eligible to count towards the livelihood test, but there is other work, that I do not agree should count? You need to describe in the written consent precisely to which work you consent. Work which is not included in the description, will not be eligible for the purposes of succession. In certain circumstances, it may be appropriate for the land or buildings that are to be used for a diversified activity to be surrendered from the tenancy and let on a new business tenancy under the Landlord and Tenant Act End of tenancy compensation What if my landlord/tenant does not wish to agree to set an upper limit for end of tenancy compensation for a Farm Business Tenancy? If either party does not wish to agree an upper limit to compensation, then the default provisions of the 1995 Act will apply, but there is no compulsion on the landlord to agree to the improvement. Is there a timescale laid down for agreeing the amount of the upper limit for compensation? There is nothing laid down as to when a landlord and tenant need to determine an upper limit. In practice, a landlord and tenant might agree in principle to agree to set an upper limit, and then determine the amount of the limit once the tenant has completed the improvement. However, a landlord and tenant could agree the amount of the upper limit before the improvement has been carried out, if they so wished. Parties may think it appropriate 12

15 Some questions and answers about the changes to agree the basis on which the limit is to be assessed, although only an agreement on the amount of the upper limit is binding under the legislation. If a landlord and tenant agree to set an upper limit, but cannot agree the amount, then it is set at the actual cost to the tenant of making the improvement, and, in this case, will have to be determined once the improvement has been completed. What should be included to determine the actual cost to the tenant for the purposes of calculating the upper limit? This is not specified in the legislation, but it would normally include such costs as: Cost of building materials Cost of contractors Cost of tenant s own labour Cost of planning fees and Building Regulations Cost of professional fees Cost of goodwill The tenant should keep copies of invoices for building materials and for the supply of labour. He should also agree with his landlord an agreed time and rate for his own labour. Where the matter is referred to arbitration, the arbitrator will determine what the actual cost should cover. If parties have previously already agreed the basis on which the actual cost should be assessed, it is at the discretion of the arbitrator whether to take this into account; there is no requirement for the arbitrator to do so. 13

16 Summary of the key changes Arbitration procedures Under the new arbitration procedures for 1986 Act tenancies, if I cannot agree with my landlord on the appointment of an arbitrator, can I still apply to the President of the Royal Institution of Chartered Surveyors to make an appointment? Yes, where a landlord and tenant cannot agree within the due times on the appointment of an arbitrator, either party can apply to the President of the Royal Institution of Chartered Surveyors to make an appointment? There is no change in the fee for this, which is currently set at Rent reviews If I have agreed in the terms of a Farm Business Tenancy that rent reviews will be determined by an independent expert, can my tenant still demand an arbitration under the default provisions of the Act? No. Where parties have agreed, on or after 19 October 2006, in the terms of their Farm Business Tenancy that rent reviews will be determined by an independent expert, they cannot go back on that agreement and then request that the matter should be referred to arbitration. If my tenancy agreement sets out criteria by which the rent should be reviewed, would an arbitrator be able to take this into account if I was unable to agree the rent with my landlord? An arbitrator must determine the rent on the basis of the criteria set out in the tenancy agreement, except that he must ignore any that preclude a reduction in rent. 14

17 Summary of the key changes How will the arbitrator decide the rent if my tenancy agreement contains no such criteria? If the tenancy agreement is silent, an arbitrator must determine the rent on the basis of open market rental value. Application of the 1986 Act Is there any limit to the number of times that I could restructure a holding held under a 1986 Act tenancy without losing the status of the tenancy? There is no limit on the number of times that you can restructure, provided that the 1986 Act will only apply to a holding where the original holding on the date of entry into force of the RRO still comprised the whole or a substantial part of the current holding. Notices to quit Can I agree any length of notice to quit for a Farm Business Tenancy? Yes, but it must be more than 12 months. Does the amendment on notice to quit prevent the use of break clauses in a tenancy? No, it doesn t, but it does mean that a notice to quit can be served more than 24 months in advance of a break clause. 15

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20 Department for Environment, Food and Rural Affairs Nobel House 17 Smith Square London SW1P 3JR Telephone Website: Crown copyright 2006 Copyright in the typographical arrangement and design rests with the Crown. This publication (excluding the logo) may be reproduced free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright with the title and source of the publication specified. Further copies of this publication are available from: Defra Publications Admail 6000 London SW1A 2XX Tel: This document is also available on the Defra website. Published by the Department for Environment, Food and Rural Affairs. Printed in the UK, November 2006, on material containing 80% post-consumer waste and 20% Elemental Chlorine Free pulp. Product code PB12259 PB12259 Nobel House 17 Smith Square London SW1P 3JR