Tenancy surrender negotiations: How deals can be done
© HerbySussex/iStockphoto Common reasons for a tenancy surrender include retirement, poor health, the loss of land to development, the need for investment in farm infrastructure and a lack of successors.
Landlords seeking to rearrange their assets, sometimes for inheritance tax (IHT) planning, have also been behind some surrender negotiations.
On the back of droughts, poor yields, high input costs, support cuts and diseases, the dire economic outlook at the moment might be the final push for a tenant to make the decision to have that conversation with the landlord, says Caroline Squire, Tenant Farmers’ Association (TFA) adviser and rural surveyor.
“It’s just a bit of a sad outlook at the moment,” she says.
Many farms need investment, particularly on slurry and silage storage to make them compliant, but unless the terms of the tenancy oblige the landlord to make such investments, many are unlikely to so do, given the relatively poor return, she says.
See also: Advice on tax and legal issues when a farm tenancy ends
Duncan Sigournay, a partner in law firm Thrings, agrees that the challenges of the past couple of years have had an impact.
“I think it’s certainly making people think more about a possible exit strategy, especially if there is no successor.”
Even where there is a potential successor, some realism has crept in about what the future might hold and the expectations that often go with a long history of a family being on the same farm, says Duncan.
“What looks and feels like the wrong thing initially can actually turn out to be the best thing for the family and allow people to go in a different direction, but it’s hard, especially if any pressure is being felt,” he says.
Surrender by negotiation
Caroline points out that a surrender is always a negotiation.
“So it is a case of either party making an informal approach, and then if there is appetite from the other party, those negotiations can progress.
“There is no way to force the other party to offer the terms you want if they are not interested.
“But we often see there is a way to meet in the middle, it depends on the personal circumstances of both sides.”
Where a tenant is in ill health or has no successor in the case of an Agricultural Holdings Act (AHA) tenancy and the landlord is aware of this, then a landlord may use this to their advantage in a surrender negotiation to offer as little as possible.
In such cases, often the best deal achieved is what is known as a “no claims” exit, where the claims of each party for dilapidations and tenant’s improvements cancel each other out.
While most AHA landlords are likely to meet an approach for a potential surrender positively, it’s harder for a farm business tenancy (FBT) tenant to give up before the end of the fixed term, says Caroline.
She has seen instances where such tenants have had to pay an extra few months’ rent in return for being allowed to leave before the end of their term.
FBT tenants have the right to compensation only for their improvements that have the written consent of the landlord, as well as routine improvements made in the normal course of farming.
Compensation for fixtures is entirely down to negotiation.
Instances of surrender of AHA tenancies to be regranted an FBT in its place are less common now that IHT relief is not so generous, says Caroline.
Advice is essential
Tenants in a surrender process must at least get advice on the paperwork so that they can be sure the agreement doesn’t let them in for anything unexpected, says Caroline.
“For example, if you have agreed a certain payment and for the farm to be left in a certain way, such as removal of some tenant’s equipment, then the paperwork should reflect that, including where it is agreed there will be no dilapidations.
“They should also take tax advice, and if they are retiring, consider how much they need to live on and where they will live – sometimes it’s possible to negotiate accommodation elsewhere on the farm or estate as part of the deal,” says Caroline.
Surrenders come in all shapes and sizes, as do the payments to recognise what a tenant is giving up, and don’t necessarily involve land, points out Duncan.
He gives the example of a landlord wanting to take back several residential properties to house workers for another one of his businesses, resulting in a negotiation with the tenant and an acceptable payment.
“At the other end of the spectrum is a situation where the parties have fallen out and a landlord is taking quite an aggressive stance – serving notices to quit or other notices – and, in the end, the tenant sees the writing on the wall, either because they haven’t got a very good case or the funds to fight it, or because they just think they don’t want to be there anymore and eventually a deal gets struck leading to a relatively orderly exit.”
Surrender of an AHA tenancy can be followed by a short-term FBT of two or three years in order for the farm business to wind down, says Duncan.
Sometimes surrender negotiations develop as a result of a succession application, where possible settlement discussions involving the taking back of some land and buildings turn into an opportunity for a landlord to possibly buy out the tenant as an alternative to the succession.
“Until then they may not have really thought about it.
“The succession application itself can be the prompt for them to re-evaluate and think it may be a good idea to agree a surrender, especially if the succession case may not be as strong as the tenant thinks or the landlord had expected and so they see that as an opportunity.”
Equally, if the applicant has a strong case, the landlord might not get another chance at getting the land back for 30-40 years, more if a further succession is available, and there might be a deal to be done.
“It’s interesting, and things can turn. It might look like one thing and then it can get tipped into something quite different. It’s obviously focusing landlords’ minds a bit at the moment.”
In another case Duncan advised on, as part of the deal, the landlord part-funded the purchase of a house far from the tenanted farm in order for the tenant to be able to surrender and move away to be near family.
He warns of the need to get both land agent and tax advice, with the land agent negotiating on the compensation and that the tax treatment of surrender payments can be complex.
“You can make a good situation bad by structuring it the wrong way,” he warns.
Other surrender considerations
- Environmental schemes How will these be dealt with? Options include transferring eligible schemes to the landlord, or for those not transferable, negotiating a sum that will cover any clawback. Alternatively, a short-term leaseback arrangement may be made so the tenant can see out their commitment for the remaining term of the environmental agreement
- Notices to remedy Do not ignore these, doing so will make any negotiation harder work
- Subletting Whether residential or commercial, put arrangements in order. Handshakes and verbal agreements are relatively common, but sub-tenants have legal rights. Recent changes in legislation, such as the Renters Rights Act, which came into force in May this year and forthcoming changes to commercial letting law, must be observed. Any sublets should be in accordance with the terms of the tenancy, which typically requires the landlord’s agreement, points out Duncan.
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Case B notice to quit can turn into surrender negotiation
Landlords cannot simply take land or buildings from a tenant unless they have a legal or contractual ground on which to base this.
Aside from a breach of the tenancy, a common ground is where the landlord gains planning permission for a use other than agriculture, which allows them to issue a notice to quit on the land or buildings in question.
Blockers to this include where the tenancy terms do not allow access for intrusive surveys, in which case a negotiation to resolve this could be part of a surrender process, says Tenant Farmers’ Association adviser Caroline Squire.
She also points out that landlords sometimes try to exceed their rights with a Case B notice – for example, by attempting to take back more land than the tenancy terms allow.
“If the tenancy only allows them to take 10 acres a year, that may be a good lever for negotiation if the planning permission covers more than this.”
Thrings’ Duncan Sigournay has advised on Case B notices which turned into surrender negotiations and points out that things can change considerably from what appears to be the case at the outset, especially when farming fortunes change or new legislation puts a different slant on the circumstances.
However, Case B arbitration work is less common now than in the past as developers are less tempted by sites where a tenant is in place because they know how long and complex the process can be to gain vacant possession. Landlords and developers are much more likely to seek a negotiated settlement so as to avoid the costs and time associated with a contested arbitration, says Duncan.
