A surrender and re-grant is where an existing tenancy is extinguished and a replacement tenancy is created in one move.
There are a number of scenarios in law where a surrender and re-grant may occur. It may be “implied” based purely on a change that has occurred (adding more land to a tenancy, for example), or it may be “express” where it is openly agreed between the parties.
The scenario tenant farmers are perhaps most likely to come across is an express surrender and re-grant instigated by the landlord for tax purposes.
Agricultural Property Relief is a relief from inheritance tax applicable to the agricultural value of property used for the purposes of agriculture.
For let agricultural property, the relief is 100% where the tenancy was granted after 1 September 1995, but only 50% where the tenancy was granted before this date.
Although this coincides with the date farm business tenancies (FBTs) were introduced, the tenancy granted after 1 September 1995 does not have to be an FBT in order for the landlord to benefit from the 100% relief. It could be a re-granted Agricultural Holdings Act (AHA) tenancy.
So some landlords, to reduce their tax liability, will seek to execute a surrender and re-grant of an AHA tenancy.
There is no obligation on the tenant to agree to a surrender and re-grant and therefore it is sometimes possible for the tenant to ask for an incentive.
This could be adding a joint tenant on to the re-granted tenancy (the next generation, for example); it could be investment in the holding, such as a new building; or something else the tenant wants or needs.
I would not say it is a common occurrence for landlords to instigate a surrender and re-grant but neither is it rare. The decision will depend on the circumstances of the landlord.
As it is connected to Inheritance Tax, it can be a bit of a morbid topic at times.
I had one example where a member’s landlord was not very well and therefore his advisers were trying to get the tenancies on his property re-granted before his death.
Get paperwork checked
The surrender and re-grant must be executed by a deed, and, providing the paperwork is drawn up correctly to preserve any rights, improvements and fixtures within the existing tenancy, there is little impact on the tenant.
In isolation it is neither a positive nor a negative exercise, but the potentially huge benefit to the landlord makes it possible and perhaps fair for the tenant to ask for something in return for agreeing to the surrender and re-grant.
In addition, we would usually suggest that the landlord covers the professional fees incurred by the tenant in getting the paperwork checked, and accepts any liability the tenant may have for taxation, such as Capital Gains Tax on the value of the surrendered tenancy and Stamp Duty Land Tax on the re-grant.
The tenant does not have to agree to the surrender and re-grant at all, however.
There is no statutory procedure for the landlord to force the tenant into it and therefore if a tenant is not comfortable with it, they can refuse.
If a tenant is approached by their landlord regarding a surrender and re-grant they should seek professional advice from the TFA, an agent or a solicitor before agreeing to anything, and certainly before signing anything.
Caroline Foot is an adviser for the Tenant Farmers Association.