Avoiding agricultural pitfalls

One of the biggest obstacles between the landowner and their payday is getting the developer comfortable that it can start building as soon as possible, which bears squarely on the landowner’s ability to deliver vacant possession. Easy enough when the landowner is farming in hand, but across the country many thousands of very valuable (and developable) acres are owned by individuals, institutions or family trusts and let to tenants, sometimes under very old tenancies. Many of those landlord and tenant relationships are long-standing, and sometimes less than cordial. Here, we look at the property law and practical points that arise from an exercise to prepare land for development, beginning with ending tenancies.  Post-1995 tenancies With certain very limited exceptions, any farm tenancy granted after 1 September 1995 is a farm business tenancy governed by the Agricultural Tenancies Act 1995 (the 1995 Act). Apart from removing most of the rent control provisions, the main effect of the 1995 Act was to remove the potential lifetime security of tenure provisions that applied automatically to farming tenancies made before this date. As such, nearly all tenancies granted after 1 September 1995 will end either: on the final day of the term written in the tenancy (if the tenancy is for two years or less); or at the end of 12 months’ notice expiring on a term date (usually Michaelmas or Lady Day).  The 12-month point is important to the extent that if a landlord misses the “term date” then the notice period could effectively be extended by up to 364 days in the worst case, if the landlord serves notice immediately after the term date. Agricultural Holdings Act 1986 (the 1986 Act) tenancies However, two years is nothing compared with a lifetime, if the tenancy was granted between 12 July 1984 and 1 September 1995, or up to three lifetimes if the tenancy was granted before 12 July 1984. Nearly all tenants are only too aware of their rights, and many are frequently obdurate in their approach to surrender discussions – they know that they hold most of the cards. A case in point A few years ago, I was instructed to advise (post-completion) on a deal where a developer was using some farmland for the construction of a hotel. The buyer was represented by a team of corporate real estate lawyers, as was the seller: both firms involved also had strong rural property teams, but they were not involved in the transaction. The deal completed and the seller pocketed the sale proceeds: so far, so uneventful, until the tenant introduced himself to the workmen when they came on site to start groundworks. He produced an agricultural tenancy dating from the 1960s, to which he was the first successor (bearing in mind that tenancies granted before 12 July 1984 enjoy two potential successions).  The good news was that the tenancy did not cover the area on which the buyer was planning to build the accommodation; the less good news was that it did cover the corner of a field where (in accordance with the planning permission) the developer was gearing up to install an industrial-scale sewage treatment plant to cater for the fact that the nearest public sewer was nearly two miles away.  The surprising news was that the seller’s solicitors’ rural team had granted the first succession tenancy to the 1960s lease as recently as 2011, but this had somehow eluded the pre-contract due diligence process. The tenant stood on his rights and opened with a request for a surrender premium roughly equivalent to the cost of a new Bentley Continental. He was eventually compromised at just under a third of that, with the parties’ legal costs ultimately ringing in at more than the surrender premium.  Bearing in mind that this was less than an acre of farmland with a freehold VP agricultural value of approximately £5,000, the tenant got a significant return for his trouble (all he had to do was keep very quiet until the deal was done). More practically, the guests’ enjoyment of the hotel was diminished for a period of some months as bulk sewage tankers rolled past the dining room window while the parties negotiated the compromise. Some fairly simple steps could have been taken to avoid getting to this stage, most of which could have been achieved by some early conversations between landlord, tenant, solicitors and surveyors. Here are some of the measures that could be taken to avoid such scenarios: The landlord or land agent should have had an early-doors discussion with the tenant and arranged for either an outright surrender or a surrender and a re-grant of the affected land, with a surrender premium attractive enough to make him go quietly (and happily). This can often get overlooked when, for example, the landlords are distant trustees and the retained land agent isn’t asked to feed into the deal by the people brokering the development deal. The solicitor/surveyor acting for the seller, if not a rural property specialist, should ensure that personnel with suitable rural expertise are brought in. With higher-value/more complex deals, the commercial property development work is often outside the skillset of the rural practitioner, so it gets farmed out to the commercial property teams. Ironically, this frequently puts the potentially deal-breaking issues beyond the reach of the professionals best equipped to spot and deal with them. Practitioners dealing in rural land should think about using the Agricultural Law Association/Practical Law form of pre-contract agricultural enquiries, which draw heavily from Commercial Property Standard Enquiries 1, but ask all of the essential questions that would flush out whether or not there is a tenant on the land. Ending a 1986 Act tenancy First, is it written down? If you find that there is a tenant but not a tenancy agreement, then this should set off alarm bells. An unwritten agreement between a landowner and a farmer which took effect before 1 September 1995 will almost certainly be caught by the 1986 Act, rendering it liable to both rent controls and (more importantly) to the security of tenure described above.  Because at common law a tenancy is assignable unless it contains non-alienation provisions, a well-advised tenant would also have assigned this tenancy into a limited company (which doesn’t die, like people do) in order to deprive the landlord of the opportunity to resume possession of the holding on the death of the individual to whom he thought he had let it. Thus, the tenancy will continue for the indefinite life of the company and inflate the surrender premium exponentially. In any case, where a pre-1 September 1995 tenancy is not written down, the landlord may serve what is known as a section 6 notice (according to the 1986 Act) to “reduce the tenancy to writing”. Vitally, this has the effect (if the tenancy has not already been assigned) of disbarring the tenant from doing so. Ending the tenancy over the affected land Here are the three most used methods of resuming possession: to agree a surrender of the relevant part of the land (which in practice happens most of the time); or to serve notice to quit under case B of Part I of Schedule 3 to the 1986 Act; or if the tenancy has one, serve notice under the “resumption of part” clause. Surrender It is hard to over-emphasise the importance of getting a suitably qualified CAAV (Central Association of Agricultural Valuers) surveyor to assess what the tenant’s interest is actually worth before even starting negotiations.  Armed with this information, the landlord can then make a commercial decision about what they are going to offer. If the landlord has a retained land agent who knows the tenant (or the tenant’s agent) but hasn’t the expertise to value his interest, this personal relationship must take precedence. You can always buy in the valuation expertise and equip the landlord’s agent with the numbers that they need to do a deal. Case B The second (less friendly) method is to serve what is known as a case B notice to quit. This can be served on the tenant once the landlord has planning permission (or permitted development rights) covering the whole of the let holding. Part won’t do, and any attempt to split the underlying freehold artificially to create a tenancy that “fits” the planning permission will be considered unlawful (see Persey v Bazley [1983] 2 EGLR 3; [1983] 267 EG 519). Even if there are grounds to serve one, the case B notice is generally only used as a negotiating tool in tandem with an offer of a negotiated surrender. To keep the tenant’s price aspirations sensible, the landlord can remind the tenant that under case B they would get no surrender premium, merely statutory compensation on quitting. The tenant will know, however, that if the landlord is in a hurry to get his land back, seeing a case B notice through arbitration and the statutory notice period could stretch the time frames by a matter of years, rather than weeks or months. As such, the case B notice is often found to be of limited practical use. Resumption of part clauses As discussed above, case B cannot apply to a part of a letting. What was allowed in 1986 Act tenancies is what was known as a “resumption of part” clause – which allowed the landlord (often on only three months’ notice – see Parry v Million Pigs Ltd [1981] 2 EGLR 1; (1981) 260 EG 28) to take back part of the holding for non-agricultural use. Whether or not the resumption of part clause can be operated effectively will depend on the wording of the clause and the circumstances of the case, though more often than not the paid surrender is seen as the cleaner option and is generally preferred by developers. Ending a farm business tenancy (post-1 September 1995) The position under the Agricultural Tenancies Act 1995 is simpler: a landlord who has granted a term of more than two years or whose land is let on a periodic tenancy may wish to serve the 12 months’ notice under that tenancy in order to bring it to an end and replace it with a shorter tenancy. The tenant in these cases has little choice but to accept the position, but will always be grateful for a collaborative approach. What to do once the tenancy has ended Having gone through the pain of negotiating a surrender/ resumption of part of an agricultural tenancy, many landlords and developers are reluctant to relet the land, yet in most cases this is undoubtedly the best way forward: vacant land can lead to fly-grazing, occupation by travellers, fly-tipping, etc. Assuming that the tenant will carry on in business after the land is handed back, they will nearly always welcome the opportunity to have a new short-term farm business tenancy, which would enable them to farm the land right up until it is needed for development. The rent could be the same as under the previous tenancy – ie lower than market if a 1986 Act tenancy – but any security of tenure would be gone. The short point here is that the correct steps must be taken at the right time by suitably qualified people to avoid paying significant compensation. Simon Blackburn is a partner in the landed estates and agriculture team at Payne Hicks Beach