Business Clinic: How do we negotiate AHA partial tenancy surrender?

Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help.

Here, Duncan Sigournay, a partner and head of agriculture at law firm Thrings, and Carter Jonas associate Caroline Raspison, give advice on considerations in negotiating the partial surrender of a secure tenancy in exchange for the farmhouse, buildings and a small acreage of land. 

See also: Business Clinic: can a discretionary trust aid succession?

Q: Is it common practice for a tenant to surrender part of their AHA tenancy agreement on a block of productive farmland, on the condition that the landlord sells them the freehold of the farmhouse, outbuildings, and a small amount of surrounding ground? I am a secure AHA tenant with an institutional landlord.

We have a robust next-generation successor in his late 20s, meaning the estate faces a multi-generational tenancy. However, the farmhouse has severe structural and energy efficiency defects, alongside long-term repair neglect by the landlord.

Conversely, the productive land we are offering to give back has high market demand locally from large-scale anaerobic digester (AD) plants looking for ground. We want to know if this type of rationalisation swap is a recognised industry practice, and how best to approach the landlord’s agents to initiate it.

A: Agricultural Holdings Act 1986 tenancy surrenders come in all shapes and sizes as does the amount of consideration (cash or otherwise) landlords are willing to provide. No two are the same.

Surrenders can arise in a number of situations and can be driven by either the landlord or the tenant. A tenant may be motivated in order to have an orderly exit and to provide for themselves after farming or because no successors are coming through.

Agreeing to a partial surrender might be linked to the granting of a succession tenancy so as to avoid a lengthy or potentially problematic Tribunal application.

From a landlord’s perspective, they might need the land and or some buildings back in order to unlock development or diversification potential.

Although there is a clear mechanism under the 1986 Act for recovering land in such situations, known as a Case B notice to quit, it is quite a cumbersome process that could see the matter contested via arbitration. 

Regarding land for AD, if it is for the plant itself, rather than simply being an attractive potential crop market for your landlord, many developers would be reluctant to get involved in a process that requires planning to be obtained before the process of recovering the land can be started.

If you add the fact that many AHA tenancies do not allow access for pre-planning surveys, you can see why developers might prefer less complicated sites.

For surrenders of part of the holding, you need to think carefully what the impact will be on the farming business. 

You mention that you’ll be acquiring the farmhouse as part of the deal. That is not an uncommon situation. Many tenants may have been living in the farmhouse for many years and often do not relish the idea of moving.

In such situations the landlord may wish to impose a right of first refusal to acquire it back should you subsequently wish to move. 

In your case you might want some comfort as to what can be done by the landlord on the land around the farmhouse. Covenants can be negotiated to deal with this.

As with any property acquisition, you need to know what you are getting into in terms of the costs of upkeep. Indeed, the landlord might be keen to offload the property so as to avoid a looming repair bill. 

Another aspect with a surrender of whole or of part is to ensure that any surrender is a clean break, in that there is no opportunity for the landlord to bring any end of tenancy claims against you for the surrendered property.

Landlords are entitled to bring dilapidations claims at the end of the tenancy. If a tenant has not kept up with their own repairing obligations, then such claims could be considerable, so avoiding them is important.

As part of the surrender the parties can agree that no end of tenancy claims will be brought by either against the other.

Typically, the nature of the deal and the availability of a surrender premium or other consideration paid to the tenant will be greatly influenced by what the surrendered land or buildings are going to be used for.

Farmland that is destined to have houses built on it will be significantly more valuable than, for example, land being taken back for in-hand farming.

You mention that your tenancy has succession rights. If there are one or two successions to go the tenancy could potentially endure for a very long time.

During that time the landlord’s rental yield is likely to be quite modest while being saddled with significant repairing obligations.

The potential long-term nature of the tenancy needs to be factored into any deal. On the other hand, a final generation tenancy with an elderly tenant is likely to be worth less to recover unless there is a truly exceptional opportunity that could be unlocked by negotiating an immediate surrender.

Because there are so many potentially relevant factors it is imperative that an experienced land agent or surveyor is instructed to ensure that you get the best deal possible. They will also be best placed to advise on negotiation strategy. 

Once the main terms are negotiated you will need professional advisers – a lawyer to ensure that those terms are properly documented and a specialist accountant to advise on the tax treatment of any deal.

Always involve your accountant early on in the discussions since there may be ways to structure things more tax efficiently.

A: It isn’t unusual for this type of discussion to take place between an Agricultural Holdings Act (AHA) landlord and tenant, but it is ultimately a matter for negotiation and there is no way to compel either party to agree.

By making an approach, you’re not committing yourself to anything or putting your AHA tenancy at risk. All you’re doing is indicating to your landlord that you’re willing to discuss the possibility of restructuring the holding, which could be mutually beneficial.

If the landlord is open to the conversation, a starting point could be to value the farmhouse and any land in its current state, considering the property’s condition and any other factors that affect its value, both subject to the current AHA tenancy and on the assumption of vacant possession.

A tenant’s improvements, fixtures and tenant right (end of tenancy valuation matters) could also be factored into this valuation. The difference between the tenanted value and the vacant possession value is known as the vacant possession premium (VPP).

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A secure AHA tenancy with one or even two successions remaining can reduce the value of a property by up to 50%, or even more for the most secure tenancies.

The age of the tenant and any successors and the likelihood that the succession rights can and will be exercised are important factors, as they determine how long the holding could remain tied up under the secure tenancy and therefore the level of discount.

When landlords and tenants negotiate a surrender or a purchase, the VPP is often shared between the parties. If the VPP was 50%, the tenant might receive 25% compensation for surrendering the tenancy or acquiring the property at a 25% discount.

In your situation, it may be possible to apply that principle to both sides of the transaction, with a share of the VPP on the land being reflected in a further discount on the value of the farmhouse and surrounding buildings.

By negotiating together, both parties can benefit; the tenant purchases at less than full VP value, while the landlord receives more than they would from selling to a third party subject to the tenancy.

Of course, each situation varies according to the parties’ personal circumstances and objectives, as well as the existing relationship between the parties, so this is very much a general guide.

As already stated, neither party can be compelled to agree such a deal, so it is purely a matter for negotiation.

The farmhouse may be the part of the holding the landlord is most willing to dispose of, particularly if it requires significant investment to address structural problems and energy efficiency issues.

Agricultural land often continues to generate reliable income, whereas an ageing farmhouse can become a financial drain.

However, much will depend on the landlord’s objectives. Some institutional landlords rarely sell assets, placing a greater value on retaining ownership than on the proceeds of a sale, while others may see merit in disposing of buildings that require substantial expenditure.

Before giving up any part of an AHA tenancy, however, it is important to be absolutely certain it is the right decision. Secure AHA tenancies are irreplaceable assets.

Once surrendered, it would be extremely difficult, if not impossible, to replace those rights.

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