Farming tenancies: what you need to know

Mark Woodman, Solicitor at DAS Law, looks at what farmers need to know regarding a Farm Business Tenancy.

As a tenant it will usually be obvious if someone has a ‘Farm Business Tenancy’, since their landlord will have provided them with a written agreement calling it as such. There can, however, be instances where a Farm Business Tenancy may have been inadvertently created, through an informal arrangement or a grazing licence.

Grazing licences are created for short term occupation of land for the purposes of grazing horses or other animals. They are not usually any longer than 12 months and occupiers often do not have exclusive possession.  In some circumstances however, this licence can extend past the 12 month period with occupiers having exclusive possession and maintaining land, thus creating a Farm Business Tenancy.

It’s also particularly important to note that a Farm Business Tenancy does not need to be in writing, so it’s possible than many tenants may have one without even knowing.

In the absence of a written agreement confirming that it is a Farm Business Tenancy, a tenancy could be created if the following conditions are met:

A tenancy of agricultural land which ‘begins’ after 1st September 1995 is a farm business tenancy if it satisfies:

• The Business Conditions; and
• The Agriculture Conditions.

For the purposes of Agricultural Tenancies Act (ATA) 1995, a tenancy ‘begins’ on the day on which the tenant is entitled to possession of the holding in accordance with the terms of the tenancy agreement.

The business conditions

There are two elements to the business conditions:

1. All or part of the land comprised in the tenancy must be farmed for the purposes of a trade or business. However, this need not be an agricultural trade or business, since a purpose of the ATA 1995 was to facilitate the use of agricultural assets by farm tenants for a more diverse range of commercial activities. The definition of ‘farming’ includes, but is not limited to, ‘any agricultural activity’.
2. All or part of the land must have been so farmed since the beginning of the tenancy. However, it is not necessary that the same part or parts of the land should have been farmed for the duration of the tenancy. It is sufficient that there has been continuous farming activity throughout the tenancy, even though its location may have changed from time to time, perhaps according to the seasons.

The agriculture conditions

The agriculture conditions provide that the character of the tenancy must be primarily or wholly agricultural, having regard to:

• The terms of the tenancy;
• The use of the land comprised in the tenancy;
• The nature of any commercial activities on that land; and
• Any other relevant circumstances.

Unlike the business conditions, this condition does not have to be satisfied throughout the duration of the tenancy. It only needs to be satisfied at the date when a challenge is raised.

Definition of agriculture

The Agricultural Tenancies Act 1995 s.38 defines agriculture as including:

“…horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens, and nursery gardens, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes.”

Therefore the grazing of horses introduces complications because of the definition of agriculture in s.38 ATA 1995. Agriculture includes the use of land as grazing land, and also includes livestock breeding and keeping, but livestock only includes horses kept for farm work or for the sale of their meat or hides.

Horses are not considered to be livestock if kept for other purposes, such as rearing foals, riding, jumping, or recreation. These are all non-agricultural activities.

If the land being used by a tenant is used mainly for a non-agricultural activity, the grazing will be incidental to that activity.  In this situation, the tenancy would not then be a farm business tenancy since the main activity on the land is not agricultural.  However, if the tenant is involved in non-agricultural activities such as a livery yard, riding school, show jumping, or exercising horses and these activities are carried out offsite, then the land used for grazing the horses is likely to satisfy the conditions for a farm business tenancy.

It is important to remember that there will always need to be some form of business activity to satisfy the Farm Business Tenancy requirements. For example, if horses are kept just as a hobby then there will be no Farm Business Tenancy as this will not satisfy the business conditions.

Rent review

ATA 1995, ss 9–14 sets out default rent review arrangements in relation to contractual provisions made on or after 19 October 2006. However, the parties to a written Farm Business Tenancy agreement are free to opt out of those arrangements and to negotiate their own rent review machinery, provided that the machinery does not preclude a reduction in rent. This prohibits the adoption of ‘upwards-only’ rent review clauses. The prohibition applies whether the rent is to be determined in accordance with a particular formula which is set out in the lease or by an independent third party.

The statutory arbitration procedure may be invoked by either party serving a ‘statutory review notice’ upon the other in accordance with ATA 1995, s 10. The review date must be at least twelve months but less than twenty four months after the day on which the statutory review notice is given. Unless the parties have agreed the date and frequency of reviews, a statutory review cannot take place within three years of the beginning of the tenancy or within three years of the last rent review.

Renewal

When a fixed term tenancy expires, the landlord and tenant may decide to do nothing, in which case the tenancy will continue as a tenancy from year to year on the same terms. Or the tenancy may originally have been granted as a tenancy from year to year.

Recovering possession

Tenants under farm business tenancies do not enjoy any long-term security of tenure. However, the ATA 1995 affords a degree of statutory protection to tenants whose tenancy, when granted, was:

• An annual periodic tenancy; or
• For a fixed term of more than two years.

The ATA 1995 allows for three situations:

• Fixed term tenancies over two year: To terminate the tenancy at the end of the fixed term, the landlord must give at least a year's notice. Otherwise the tenancy becomes an annual periodic tenancy.
• Fixed term tenancies of two years or less: These end automatically at the end of the fixed term. No notice is required.
• Annual periodic tenancies: These can be terminated by not less than a year's notice expiring (in general) on the anniversary of the end of the first year.

Other special rules

Special rules imposed by the farm business tenancy regime include:

Compensation for improvements: Tenants will usually be entitled to compensation for improvements to which the landlord has given consent. In certain circumstances, consent may be implied and if consent is refused an arbitrator can impose it. The lease can prohibit improvements.

Compensation for milk quotas: Where a tenant adds milk quotas to a holding at their own expense, and does so with the landlord's consent, compensation will be payable at the end of the tenancy for the current value of the quota that remains attached to the holding. The amount may, at the insistence of either party, be settled by an arbitrator if it is not agreed.

Compensation may be carried forward if the tenant remains on the holding and take up a further Farm Business Tenancy immediately after the end of a previous one. Alternatively, they may choose to settle up even though they will remain on the holding under a new tenancy.

Need more help?

DAS UK customers have access to templates and guides on dasbusinesslaw.co.uk, including employment contract template and a number of other employment-related guides and templates.

You can access DAS Businesslaw by using the voucher code in your policy provider’s documentation.

Authored by DAS