Diversification under AHA tenancies

The agricultural sector is entering an age of rapid change. Environmental pressures, evolving trade arrangements, new technologies and the withdrawal of direct subsidy combine to drive that change. However, the strict provisions of historic Agricultural Holdings Act 1986 (AHA) tenancy agreements create constraints for tenants.

The straitjacket of “agriculture”

The definition of agriculture in the Agriculture Act 1947 is quite narrow:

“Agriculture” includes 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 grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes, and “agricultural” shall be construed accordingly.

AHA tenants are usually restricted to using the holding for 'agricultural purposes only'. So many forms of rural diversification, from the rearing of young poults, donkey sanctuaries or keeping horses for livery, risk being in breach of the tenancy user clause. Such breaches (or alleged breaches) can be exploited by landlords by serving Case D notices to remedy, which place the tenant in a vulnerable position if the breach is not remedied by the notice deadline.

A proposed diversification may also breach an alienation covenant. For example, a farm cottage assured shorthold tenancy (AST) instead of underletting to a farm worker employed on the holding. A change of use may breach an alterations covenant (for example, placing new caravans on the land).

All these diversifications therefore need the landlord’s consent for which the landlord often demands a price. Unlike for commercial leases, there is no statutory implied qualification that consent must not be unreasonably withheld.

Diversification licences

Often landlords are willing to consent to diversification through a formal licence authorising the change of use. A well-drafted licence will pay attention to the following issues.

• Licence fee: reserving a licence fee (separate to the rent) is often prudent. Without this, the diversified use may not give rise to an increased rent when the statutory rent review formula is applied.
  
  
• Permitted use: it is important to define this precisely. We are all familiar with examples of 'mission creep' where, for example, consent to the use of one caravan for an agricultural worker evolves into the occupation of several by people employed off the holding.
  
  
• Terminability: it is important to define this tightly and, usually, to provide the consent for a short period to maintain flexibility.
  
  
• Remember that the principal source of livelihood test for AHA successions now takes into account income arising from diversified activities to which the landlord has consented in this way.

The tenant of an AHA tenancy usually only has a year-to-year tenancy so cannot underlet for longer than a year. Whilst the tenant might be able to let a cottage out on a periodic AST, a five-year lease of a commercial unit in an old barn is not legally possible (this does not stop some tenants trying). Where commercial unit underlettings arise it may be more sensible to surrender them out of the AHA tenancy and let them back to the tenant under a business lease for a fixed term with underletting provisions.

Requests for landlord’s consent or variation of terms

The Agriculture Act 2020 (AA) has enabled the snappily entitled Agricultural Holdings (Requests for Landlord’s Consent or Variation of Terms and the Suitability Test) Regulations 2021. Part of these regulations, which came into force on 21 June 2021, allows an AHA tenant to refer a 'qualifying request' to arbitration under the AHA. A qualifying request is one where the landlord has refused consent to a matter that requires consent under the tenancy (or to a requested variation of terms of the tenancy) where the tenant makes that request for the purposes of:

• enabling the tenant to request or apply for relevant 'financial assistance', or
  
  
• complying with a statutory duty applicable to the tenant in respect of the use of the holding.

Broadly speaking, 'financial assistance' means the subsidy for public goods outlined in section 1 of the AA; environmental land management schemes. Effectively, this provides tenants with formal recourse to arbitration where the landlord is resisting a qualifying request for diversification that seeks to tap into these environmental subsidies. As one might expect with the AHA, there is a rigid timetable for the service of notices by the tenant, counter notices by the landlord and for reference to an arbitrator (or third party determination).

If the request is not a qualifying one there remains no formal recourse for the tenant so the landlord may be able to command a fee for his consent. Note, however, that the Tenancy Reform Industry Group published a code of good practice for projects, schemes or works requiring landlord’s consent in agricultural tenancies in July 2021, click here to read.

Improvement finance agreements

The AA has brought back improvement finance agreements (IFAs) from the dustbin of history. Diversification often comes hand in hand with capital improvements. Historically, landlords were sometimes reluctant to invest in a holding for fear that any capital outlay would yield no return through the statutory rent review formula. As a consequence, many entered into IFAs with their AHA tenants which expressly provided for a return on capital by way of an interest payment over a period of 10 or 15 years. This payment stood separately from the rent reserved under the lease. It was always questionable what an arbitrator would make of these arrangements in a full scale AHA arbitration and after some decisions unfavourable to landlords the use of IFAs fell out of fashion. That may now change as the AA provides that where there is an agreement under which the tenant is to make payments for improvements financed by the landlord, the rent review will disregard:

• the fact that the tenant is required to make those payments, and
  
  
• any benefit to the tenant arising from the improvements until the last payment has been made.

This allows the IFA to sit outside the existing tenancy agreement and ensures that neither party is penalised by its existence. The idea of a landlord investing in a tenant’s plan for a farm shop or other diversified activity is once more a commercial possibility.

Read the Rural Estates Newsletter Spring 2022 in full here.

If you require further information about anything covered in this briefing, please contact James Maxwell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2022