Appendix
B
Letter from the Department for Environment, Food
and Rural Affairs to the Committee Specialist
Proposal for the Regulatory Reform (Agricultural
Tenancies) (England and Wales) Order 2006: response to request
for information
Thank you for your letter of 17 May seeking further
information regarding the above Regulatory Reform Order (RRO).
The Committee has requested clarification on two
points in order to establish whether the proposals maintain any
necessary protection as required in Section 3(1)(a) of the Regulatory
Reform Act 2001. The Committee highlighted the changes that would
be introduced by Article 6 of the proposed Order and asked:
Q1 Please explain why the department believes
it is appropriate to leave the meaning of the term "substantial"
with reference to area or value of the historic component of a
new holding established by incorporation of additional land in
a holding subject to a tenancy under the Agricultural Holdings
Act 1986 without specific definition, such as might be provided
by, for example, a definition based on a particular fraction or
percentage of the area or value of the holding.
The term "whole or substantial part" is
already in use in agricultural tenancy legislation and is familiar
to the industry and practitioners. It originates from section
18 of the Agriculture (Miscellaneous Provisions) Act 1976, which
introduced the provisions on statutory succession. The "whole
or substantial part" terminology is currently used in Section
34(1)(b)(iv) of the 1986 Act dealing with succession rights. This
section provides that succession rights apply where a tenancy
was granted to a person who immediately before 12 July 1984, was
the tenant of the holding or of any agricultural holding which
comprised "the whole or a substantial part" of the
land comprised in the holding. Section 35 of the Act defines "related
holding" for the purposes of the succession provisions, using
the same term.
The term "whole or substantial part" is
also used in section 4(1)(f) of the Agricultural Tenancies Act
1995[7].
Where land has been added to or removed from a holding, section
4(1)(f) of the 1995 Act provides that the 1986 Act will continue
to apply to the tenancy provided that certain conditions are met,
including the condition that the original holding constitutes
the whole or a substantial part of the land comprised in the new
holding. Where succession rights applied to the original tenancy,
these will continue to apply to the new tenancy (by virtue of
s.34 of the 1986 Act).
Article 6 would amend sections 69, 73 and paragraph
5 of Schedule 9 to the Agricultural Holdings Act 1986. The changes
proposed serve two separate and distinct purposes. The use of
the term "substantial" is common to both sets of amendments.
However the considerations that apply to each are different and
I will deal with them separately.
Proposed Article 6 paragraphs (1), (4) and
(6) amendments
Paragraphs (1), (4) and (6) of Article 6 to the RRO
amend sections 69(1), 73(1) and paragraph 5(1) of Schedule 9 to
the Agricultural Holdings Act 1986. They insert the words "or
in any agricultural holding which comprised the whole or a substantial
part of the land comprised in the holding".
To put these proposed changes into context, they
relate to a tenant's right to compensation for improvements to
the holding on the "termination of the tenancy" and
"on quitting the holding" provided for at section 64
of the 1986 Act. Section 69 of the 1986 Act addresses the problem
where the tenant remains on the holding for more than one tenancy.
In this case a tenant may carry out an improvement during the
first tenancy, but may not quit the holding until the termination
of the second tenancy. Section 69 provides that the tenant is
not deprived of his right to compensation in these circumstances.
Section 73 provides for similar provisions in respect of a landlord's
right to compensation for tenant dilapidations. Schedule 9 repeats
these provisions, in relation to old improvements.
As the 1986 Act is currently drafted, our view[8]
is that the right of a tenant or a landlord to compensation only
applies where the tenant has remained "on the holding",
i.e. the same holding. If the holding has become smaller or larger,
then it would not be the same holding and the tenant or landlord
would lose the right to compensation. Article 6 therefore amends
the 1986 Act to ensure that tenants and landlords do not lose
the right to compensation where there has been a change to the
holding, provided that the original holding comprises "the
whole or a substantial part" of the land comprised in the
new holding.
The protection provided by sections 69(1) and 73
of the 1986 Act comes into play when successive 1986 Act tenancies
are created as a result of the application of section 4(1)(f)
of the 1995 Act. It is therefore necessary to ensure that all
these related provisions continue to operate in concert. If we
were to change the terminology used in sections 69(1) and 73 of
the 1986 Act, parallel changes would need to be made to the related
1986 and 1995 Act provisions.
When the RRO was being prepared we did consider amending
section 4 to define "substantial part" in section 4(1)(f)
by reference to either area or value. However, we were advised
that such an amendment would be outside the vires of the Regulatory
Reform Act, unless we created a separate category for those who
vary a tenancy knowing that the variation will have effect as
a surrender and regrant (see paragraph 2.5.5 of the Explanatory
Document) and applied the amended definition to that category
only. Our view was that this distinction would be difficult to
apply in practice because it is not always possible to distinguish
between those who knowingly effect a surrender and regrant and
those who do so unwittingly. Further, those who wish to benefit
from the "area or value" definition can do so using
a written contract of tenancy under the new provisions at section
4(1)(g) of the 1995 Act.
As we are not proposing to change section 4 of the
1995 Act generally to define substantial in terms of "area
or value", it is not possible to change the wording of the
related 1986 Act provisions. As a result the proposed changes
made by paragraphs (1), (4) and (6) of Article 6 to the RRO, of
necessity, follow the existing "whole or substantive"
part terminology used elsewhere in the legislation.
Proposed Article 6 paragraphs (2), (5) and
(7) amendments
Paragraphs (2), (5) and (7) of Article 6 to the RRO
insert a new section 1A at sections 69, 73 and Schedule 9 to the
Agricultural Holdings Act 1986. These amendments are consequential
on the proposed new section 4(1)(g) to the 1995 Act. These amendments
ensure that a landlord or tenant does not lose right to compensation
where a new 1986 Act tenancy has been created under section 4(1)(g)
of the 1995 Act. Similar consequential amendments are also made
to sections 34, 35 and 49 of the 1986 Act to ensure that succession
rights are continued in relation to new tenancies created by use
of new section 4(1)(g).
During the preparation of the RRO, we discussed with
the Tenancy Reform Industry Group (TRIG) whether the term "substantial"
should be defined more precisely e.g. by including a figure or
percentage. TRIG were against this approach, as they considered
that a more precise definition would lead to parties devising
specific arrangements to ensure they fell whichever side of the
dividing line was most advantageous. They were concerned that
this would detract from the business led approach to restructuring
that they were seeking to foster. However, TRIG thought there
would be some merit in specifying that "a substantial part"
could mean by area or value.
When we consulted 4 of the 20 the responses to the
original consultation exercise specifically suggested that "substantial
by reference to either area or value" should be defined with
greater precision. We reviewed these comments with TRIG when we
examined all the responses to the consultation exercise, and concluded
that the initial TRIG reservations about specifying a fixed boundary
remained valid.
While (as noted above) we were advised that it would
be outside the vires of the Regulatory Reform Act to define "substantial
part" by reference to area or value in relation to section
4(1)(f) of the 1995 Act, we were advised that there were vires
to do so in relation to the proposed new section 4(1)(g) of the
1995 Act (which applies where there is a written contact of tenancy
which states that the 1986 Act is to apply). We concluded that,
although we could not amplify the use of the term "substantial
part" everywhere that it is used in the 1986 and 1995 Acts,
it would nevertheless be helpful and appropriate to do so in new
section 4(1)(g) of the 1995 Act, and would implement one of TRIG's
recommendations.
When looking at these amendments, it is important
to remember that a change in the structure of a holding would
be carried out by agreement between the parties. In particular
a change to the holding where the parties sought to apply the
1986 Act under the proposed section 4(1)(g) of the 1995 Act would
require a new written contact of tenancy.
The Committee also highlighted the changes that
would be introduced by Article 13 of the proposed Order and asked:
Q2 Please indicate i) whether the department considers
a notice to quit served for a period greater than two years could
validly be revoked or amended by the party who served it, or overridden
by a notice from the other party specifying a shorter period;
and ii) whether the department considers any disadvantage may
arise for parties to a tenancy where notice to quit is served
with an effective date some years in the future, and if not, why
not.
Article 13 of the proposed Order amends sections
5(1), 6(1)(c) and 7(1) of the Agricultural Tenancies Act 1995
by removing the upper limit of 24 months for the service of a
notice to quit a Farm Business Tenancy (FBT).
The Agricultural Tenancies Act 1995 introduced the
concept of a FBT. A FBT can run for a fixed term e.g. 2, 5 or
15 years, or for a period, e.g. from year to year. Section 5 of
the Act makes special provision for a FBT of more than 2 years.
A tenancy for a shorter fixed term will end automatically on the
term date. However where a tenancy is for more than 2 years the
tenancy will run its course and will then continue as a tenancy
from year to year, unless either party serves a written notice.
Section 6(1) specifies the requirements that a notice to quit
a tenancy from year to year must meet. This includes the requirement
to serve the notice at least 12, and less than 24 months, before
it is to take effect. Section 7(1) provides that a notice to quit,
given in pursuance of a provision in the tenancy agreement (i.e.
a break clause in a fixed term tenancy), must be given between
12 and 24 months before it is to take effect.
The Tenancy Reform Industry Group noted that some
landlords and tenants wished to set up a "rolling tenancy".
Under such an arrangement a tenancy would run for an initial (say)
5 year term and then continue on a 5 yearly rather than an annual
basis. The 24 month upper limit on notice periods effectively
precluded such an arrangement even where both parties agreed such
an arrangement should be established. In some individual cases
TRIG reported that "novel" tenancy agreements had been
established in an attempt to get round the 24 month limit. TRIG
considered that for certain landlords and tenants rolling tenancy
agreements would be attractive. In view of this the Group recommended
that such arrangements should be legitimised by removing the 24
month upper limit on notice periods. TRIG considered that this
would ensure that if the parties agreed a 5 year notice period
in a tenancy that otherwise operated from year to year, they would
know that there was at least 5 years before the tenancy could
be determined.
Can a notice to quit served for a period greater
than two years be revoked or amended by the party who served it,
or overridden by a notice from the other party specifying a shorter
period?
Once a valid notice to quit has been served it cannot
be revoked or amended. However, where such a notice has been served
the parties could, if they wished, agree to surrender the tenancy
before the end of the notice period. Conversely they could agree
to start another tenancy at the end of the notice period. They
could also serve notice to terminate earlier under a break clause,
if there is one in the tenancy agreement. In most cases a FBT
will include a break clause enabling either party to withdraw
from the tenancy agreement at specified break points having served
the appropriate notice. It is also usual for a FBT to include
provisions to terminate the tenancy in exceptional circumstances,
for example the death or incapacity of the tenant, or where a
tenant fails to pay the rent. Further, under common law, where
a notice to quit has been served, a second notice can validly
be served taking effect earlier than the first notice.[9]
As article 13 of the RRO is drafted, it removes the
upper limit of 24 months, but retains the minimum notice period
of 12 months. Unless parties agree otherwise in the tenancy agreement,
the effect of common law and sections 6 and 7 of the 1995 Act
as amended would be that a landlord or tenant could serve a series
of notices, each taking effect earlier than the last, until the
minimum 12 month notice period under the 1995 Act is reached.
Under the 1995 Act as currently drafted, the parties
cannot agree to a minimum notice period beyond 2 years in the
tenancy agreement, as a notice must be served less than 24 months
before the date on which it is to take effect. They cannot therefore
establish a rolling tenancy as highlighted by TRIG. However, following
the proposed change it will be possible for the parties to include
a minimum notice period in excess of 2 years in the tenancy agreement.
This will give them the certainty that the tenancy cannot be terminated
for at least the minimum notice period, at any time during the
tenancy. Any notice that does not meet the minimum period specified
in the tenancy agreement would be invalid under the terms of that
agreement. For example if the parties agree a three year minimum
notice period, a notice given two years before taking effect would
be invalid under the tenancy agreement. However, they could not
agree a minimum notice period of less than 12 months, as a notice
given less than 12 months before taking effect would still be
invalid under the Act.
The proposed amendment to section 5 of the 1995 Act
allows a notice to terminate a fixed term tenancy of more than
two years at the end of the fixed term, to be given at any time
before the last 12 months of the fixed term, and not just in the
12 - 24 month window before the term date. If a notice is not
served, then the tenancy will continue as a tenancy from year
to year. A notice issued under section 5 of the 1995 Act cannot
be amended or revoked as there are no provisions in the Act allowing
parties to do so. A notice issued under section 5 can only have
effect at the end of the fixed term whenever it is served. Consequently
the termination date cannot in practice be brought forward by
the issue of a second subsequent notice. This is different to
the position in relation to notices served under sections 6 &
7 of the 1995 Act where the termination date of an ongoing tenancy
could be brought forward by the issue of a second subsequent notice,
where the tenancy agreement does not specifically preclude this.
Will any disadvantage arise for parties to
a tenancy where notice to quit is served with an effective date
some years in the future, and if not, why not?
As explained above, where the tenancy agreement is
silent as to the notice period, either party will be able to serve
a subsequent notice to quit taking effect earlier than the original
notice to quit until the minimum 12 month notice period is reached.
This ensures that changes in the circumstances of parties can
be catered for. In view of this the Department does not consider
that abolishing the upper limit of 24 months will disadvantage
either party.
Where parties choose to agree an extended minimum
notice period under the amended provisions, that is a matter of
freedom of contract. Freedom of contract is a central theme of
the 1995 Act and consequently the parties already have considerable
freedom to agree terms in relation to fixed term tenancies. They
can agree fixed term tenancies for any length of term without
a break clause. A party who agrees a minimum notice period of
say 5 years is in no worse a position than a party who agrees
a 5 or 10 year tenancy without a break clause. If a notice to
quit is served and circumstances change, parties are still free
to agree a surrender (or to commence a new tenancy when the current
tenancy terminates). In general terms the longer the notice period,
the more certainty there is for both parties. The Department considers
that the proposal to remove the 24 month limit is entirely consistent
with the freedom of contract concept which underpins the approach
to FBT's in the 1995 Act.
The change is also consistent with the business led
approach to restructuring which is at the heart of a number of
the changes proposed in the RRO. However, as with other situations
where the parties are free to agree terms, it is usual for the
parties to seek professional advice, although there is no obligation
on them to do so.
6 June 2006
7 The authors of Scammell and Densham's Law of Agricultural
Holdings, 8th edition, comment on s.4(1)(f) at p.908:
"Provided that a substantial part of the new holding was
also in the old tenancy, section 4(1)(f) is capable of operating.
What is substantial will be a matter of fact in each and every
case, but it does not necessarily mean that the additional land
must amount to only a small percentage of the new holding: the
wording is a substantial part, not the substantial
part." Back
8
This is also the view of the authors of Scammell and Densham's
Law of Agricultural Holdings (8th edition), at p.374. Back
9
Thompson v. McCullough, [1947] K.B. 447, CA, at 447, 452; cited
in Woodfall on Landlord and Tenant at para 17.267. Back
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