Advice and tips on common issues for tenant farmers

Tenants, like all farmers, have many issues to contend with. Common issues that frequently arise include rent rises, changes in tenancy terms and succession.

We look at how to deal with some of these thorny issues.

See also: Changes to farm tenancy succession rules from September next year 

Justification for rent rise demands

When a landlord proposes a new higher rent, it is important to ask them for justification of that figure, advises the Tenant Farmers Association (TFA).

Agricultural Holdings Act (AHA) rents are based on the productive and earning capacity of the farm, which is based on budgetary evidence and comparable lettings on the same terms.

Farm Business Tenancy (FBT) rents cannot be used as comparable lettings to argue for an AHA rent rise, but instances where landlords attempt to do so are still relatively common, says the association.

For FBT tenants, first look at the tenancy agreement to check the basis for rent reviews, it advises.

If the agreement refers to the Agricultural Tenancies Act statutory basis (the rent the holding would reasonably be expected to let for on the open market), then ask the landlord for comparable evidence to justify their proposal, as irrelevant grounds such as inflation are often used to try to justify proposals, says the TFA.

Sometimes other ineligible justification is put forward, such as residential assured shorthold tenancy rents having risen, leading to the suggestion that this means the rental value of the farmhouse has gone up.

If the landlord cannot show that their justification is relevant evidence in accordance with the rent review formula attached to the tenancy, they would not be able to successfully pursue the review at arbitration, the TFA points out.

Succession and changes to tenancy terms

When negotiating a tenancy succession directly with the landlord, it is fairly common for them to try to vary the terms of the tenancy, but this can only be done by agreement.

However, when a tenant is applying to succeed through the tribunal route, the fallback position is that the successor will succeed on the same terms as in the previous tenant’s tenancy, says the TFA.

Within three months of the tribunal’s direction, either party can then serve notice for the terms of the tenancy to be considered by an arbitrator.

This does not include inserting completely new terms into the tenancy, says TFA chief executive George Dunn, but extends only to updating any terms which are considered out of date – for example, references to potato or milk quotas.

The tribunal route is expensive, so it is generally in both parties’ interest to negotiate a succession outside the tribunal.

While a successor may be willing to accept a few new practical and workable terms, George says the prospect of a tribunal can be used as leverage to try to negotiate for no new terms.

When a succession is being negotiated on an AHA agreement, the TFA advises that all tenant’s improvements and fixtures from the current AHA should be rolled on and written into the new succession agreement.

Succession is still a hot topic, says Charles Raine, of land agent Youngs RPS. All but one of those he has advised tenants on over the past five years have been agreed without the need for a tribunal application.

However, he warns to watch for attempts to reject a succession application by the landlord or their agent maintaining that three generations have already occupied the farm in succession.

“This may well be true, where occupation by the same family goes back perhaps into the late 1800s, but succession entitlement is not a question of time and generations in this sense,” says Charles.

“The counting of generations only begins with the generation that was in occupation at the time the 1976 succession rule came into effect.”

Also, farming families often do not realise that several potential successors may apply to succeed, each is treated as if they are the only applicant, and that the tribunal will hear more than one application.

“However, the tribunal will hear applications in the order they are submitted or directed by the deceased, and if the first one is found eligible and suitable, then the tenancy will be awarded to them.”

Succession rule changes reminder

From 1 September 2024, there are changes to the Agricultural Holdings Act 1986 tenancy succession rules.

From that date, the commercial unit test will no longer apply.

This stipulates that the applicant for succession cannot be in occupation of another agricultural unit capable of supporting two full-time agricultural employees.

However, the suitability test is being tightened, so that the potential successor must demonstrate that if the tenancy was available on the open market, they are of a standard that a prudent landlord would be willing to shortlist them for the tenancy.

Demonstrating suitability in this respect includes showing that a potential successor will be able to run the farm commercially and to a high standard, with care for the environment, and with or without other land.

Budgets and cashflows will be needed to support this, with bank and personal references helping too.

Tax issues on improvements and fixtures

It is important that tenants’ improvements and fixtures get the right accounting and tax treatment, advises Mike Butler of accountant PKF Francis Clark.

“There could be a tax loss, or a gain, depending on the circumstances,” he says.

For example, if you add tenant’s fixtures, the treatment should be to write it off over the remaining term of the tenancy, particularly where there is little prospect of any value in removing the fixture at the end of the lease.

“In the case of a relatively short farm business tenancy, you don’t want to be in the position of having an asset with a value on the balance sheet at the end of the tenancy but that is actually worth nothing.

“Each time you sign off the accounts, you need to consider if the asset is still worth what the balance sheet says it’s worth. If not, you have to consider making what is known as an ‘impairment to account’ for the loss in value.”

Tenants’ improvements should also be noted in the accounts as leasehold improvements with careful consideration by the tenant each year whether the improvement still has a value and, in particular, if that value will still exist at the end of the tenancy, advises Mr Butler.

Natural capital tenancy clauses

Land agent Philip Meade of Davis Meade Property Consultants is seeing a growing tendency for landlords to try to impose natural capital clauses in new tenancy agreements.

“These either seek to reserve use of the natural capital assets to the landlord, which may restrict the tenant’s ability to farm profitably, or they require the tenant not to enter schemes,” says Philip.

“If the landlord is controlling the soil, air and water then they are not the tenant’s at all, and the whole idea of a tenancy is that you have control of the land while you are in occupation.

“Tenants will usually need landlord’s consent to enter schemes, just as they usually need landlord’s consent to diversify.

“As well as the longer-term agreements such as for biodiversity net gain (which a tenant is unlikely to be able to enter into), there will be opportunities for tenants to do shorter natural capital agreements with local businesses, for example, to not plough for a number of years.”

The most successful landlord-tenant relationships are likely to enable a joint approach to natural capital issues, so that when an opportunity arises, both parties can engage with it and look at it together, says Philip.

FBT tenant’s fixtures at end of tenancy

An FBT tenant has the right to remove tenant’s fixtures during the term of the tenancy, but must make good the site after removal of any fixtures.

Alternatively, while there is no obligation for a landlord to take over a tenant’s fixtures at the end of a tenancy, a payment may be negotiated with the landlord for them to take the fixture over.

Once the tenant leaves the holding at the end of the tenancy, they lose the right to remove fixtures, the TFA warns.

Get things in writing

Records should be made of what is discussed, in person or on the phone, with landlords or their agents.

If a meeting is held and the landlord’s side does not confirm in writing what was discussed or agreed in a reasonable time, do this yourself, suggests TFA chief executive George Dunn.

This should make it clear that an acknowledgement is needed and that if none is forthcoming by a certain date, this will be taken as agreement with the tenant’s written record.

Resist the urge for a purge of old papers

Check first before having a good paperwork clearout, advises the TFA, citing a landlord’s written consent for an improvement as a good example of something that may lurk in a drawer unnoticed.

Consents for tenant’s improvements are sometimes decades old, but will be needed at the end of a tenancy or during a rent review.

Sometimes a tenant may be occupying verbally and may need to prove their occupation at some point, so receipts, notes, letters, delivery notes and so on can be of value in such instances.

The TFA advises that any written consents, memorandums and other relevant tenancy related documents are always kept – somewhere safe and preferably with a copy of the tenancy agreement.