Increased Flexibility of Agricultural Tenancies
Agricultural tenancies have been an essential part of rural life for centuries. These tenancies have been regulated by the Agricultural Holdings Act 1986 (1986 Act), and more latterly, the Agricultural Tenancies Act 1995 (1995 Act). The changes made in 1995 were aimed at halting the long-term decline of the tenanted sector and were largely successful, with the sector remaining largely stable over the past ten years. However, with increasing challenges being faced by the farming sector, diversification has become an essential factor in the longer-term security of tenanted farms.
Following the outbreak of Foot and Mouth Disease in 2001, the government set up the Tenancy Reform Industry Group (TRIG) comprising representatives across the industry. They put forward a number of recommendations for modernising agricultural tenancy legislation, which the Government accepted. The Regulatory Reform (Agricultural Tenancies) (England and Wales) Order 2006 (RRO) came into effect in October 2006.
Since 1 September 1995, all tenancies of agricultural land have been governed by the 1995 Act. However, there remain a very considerable number of tenancies granted before September 1995 which are regulated by the 1986 Act. The intention of the 1995 Act was to loosen the statutory regulations by conferring freedom of contract upon parties to agricultural tenancies. It largely succeeded in doing this except in relation to rent reviews, where there was a statutory open market formula. Many tenants who have the benefit of 1986 Act tenancies do not wish to lose the protection of that Act because of the succession rights within it and the fact that rent reviews are based on productive capacity. The RRO extends the principle of freedom of contract in respect of agricultural holdings, the Government believes that such freedom will encourage rationalisation and diversification for the benefit of both landlord and tenant. Particular matters that have been addressed are:-
Surrender and re-grant
- Where parties wish to vary 1986 tenancies i.e. by changing the terms, adding or subtracting land, there
was a risk that there would be a deemed surrender and re-grant resulting in the tenancy being subject to the 1995 Act, with the consequence that many 1986 Act tenants have been reluctant to vary their tenancies. The RRO states that provided the whole or a substantial part of a new holding is comprised within the new arrangement, the variation will not be considered to be a surrender and re-grant and therefore provisions of the 1986 Act will continue.
Succession provisions
- One of the key benefits of the 1986 Act for tenants’ families are the succession provisions. Upon the death
or retirement of the tenant, certain specified relations are entitled to take on the tenancy provided that they have derived a principal source of livelihood for at least five out of the proceeding seven years from agricultural work carried out on the holding. In the past this has deterred tenant farmers from diversifying into sectors that might be considered non-agricultural, as to do so would risk losing the succession entitlement. The RRO has sought to encourage diversification by making the principle livelihood test relate to agricultural work and/or “other work on or from” the holding. It will be necessary for the landlord to consent to the diversification, but the perceived wisdom is that it is in both the landlord and tenants’ interests to diversify an enterprise with consequent enhanced income and capital returns.
Rent reviews
- One of the reasons why 1986 Act tenants may have been discouraged from changing to tenancies regulated by the 1995 Act was the rent review provisions. 1986 Act tenancies are subject to three year rent reviews assessed on the basis of the productive capacity of the holding whereas the 1995 Act provides for a notional freedom to fix any rent review formula but provides that either party at a rent review can insist on a statutory open market formula applying. The RRO now provides that the parties can contract out of this open market provision provided only that the agreement does not preclude a rent reduction. Accordingly it would be possible for a farm business tenancy to have a rent review provision tied to the 1986 Act formula without an open market review being imposed.
There are a number of other provisions under the RRO such as changes to arbitrations under the 1986 Act and the removal of anomalies in the rent review provisions and freedom of the parties to agree in advance compensation for improvements. A useful guide can be found on DEFRA’s website
Time will tell whether all these reforms achieve their objective of making it easier for tenant farmers to develop their businesses by restructuring and diversification.
For further advice on the RRO contact Andrew Wiltshire, 01722 427555 or by email: aw@wilsonslaw.com
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