A Farm Business Tenancy is a formal agreement between a landlord and a tenant who wishes to operate a farming business on that land. This can be a complicated leasing agreement, and there can be a wide range of terms and conditions within it that stipulate how the land can be used, and any legal obligations that might pertain to it.
That means you will need professional legal advice to navigate the process, and we at Lovedays Solicitors are experts in the world of agricultural law. It is important to understand how a Farm Business Tenancy works, and how it will affect you and your business plans in order to ensure that it is suitable for the parties involved.
We have therefore put together an essential guide of all the elements of a Farm Business Tenancy that you need to be aware of.
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What is a Farm Business Tenancy?
Farm Business Tenancies (FBTs) were created under the Agricultural Tenancies Act 1995 to set out an agreement between a landowner and a tenant who wishes to rent all or part of a farm for their business needs. This will give them the right to use the land primarily or wholly for agricultural purposes and will outline the obligations of both the tenant and the landlord.
The FBT can refer to the agricultural land or farm buildings required to run the business, but it will only qualify as a Farm Business Tenancy if at least some of the land is farmed during the tenancy. In most cases, there will be a formal Farm Business Tenancy agreement in place, however, an FBT can be inadvertently created if a Grazing Licence is extended beyond 12 months with the tenant having exclusive possession and maintenance of the land.
Whilst the words ‘tenancy’ and ‘lease’ generally mean the same thing, there is a distinct difference between the two. Typically, a lease refers to a business lease and a tenancy is used in residential agreements, however, when an agricultural letting qualifies under the Agricultural Tenancies Act 1995, the lease is then referred to as a ‘farm business tenancy’. It is still a type of business lease, but it holds a different name for these purposes.
Qualifying Conditions for FBTs
As a Farm Business Tenancy is different from other types of leases, there are certain conditions that need to be met in order to qualify. Not only is it necessary for some of the land to be farmed throughout the life of the tenancy, but if the land is agricultural to start with, then notices can be exchanged between the landlord and tenant confirming that it will remain an FBT throughout but allowing the tenant to diversify away from agriculture if the rest of the agreement allows this.
Should these notices not be exchanged for the tenancy begins, then the tenancy business must be primarily agricultural in order for it to still be considered to be a Farm Business Tenancy.
The land must be farmed for the purposes of trade or a business, but this can apply to ‘any agricultural activity’ and not exclusively farming. Whilst at least some of the land must be farmed for the duration of the tenancy, it does not have to be the same piece of land, and therefore a tenant can change the location of the farming within the land during the tenancy, for example, in line with the seasons, as long as the practise is continuous.
Key Features of FBTs
Each Farm Business Tenancy needs to have certain key features within it relating to matters such as the terms of agreement, notice requirements, rent and the review features. These terms must be met in order for the agreement to be legal and must be maintained to ensure that the agreement remains valid throughout the duration of the tenancy.
The features of a Farm Business Tenancy are in place for a number of different reasons. They are not only designed to protect the landlord and tenant, and to ensure that the agreement is fair and reasonable for all parties, but also to protect the land itself and to maintain consistent farming practises in the area.
Agriculture can apply to many different things, such as horticulture, the growing of fruits and seeds, the breeding and keeping of livestock, dairy farming, using the land for grazing, meadow land, osier land, market gardens and nursery gardens, or for woodlands that are ancillary to the farming land for other agricultural purposes.
This means that no two Farm Business Tenancies will be the same, as no two areas of land are the same, and neither are the different business plans of tenants. That means that each Farm Business Tenancy must be unique to the situation and drafted professionally to ensure that all of the relevant areas have been covered thoroughly and correctly.
A Farm Business Tenancy is different to many other types of lease as the land in question is exclusively possessed by the tenant, with only restricted rights and control given to the landlord. This is to allow greater levels of certainty and stability for the tenants over a much longer period of time, meaning that the land can be subject to much more sustained investment and development as a result.
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Term of Agreement and Notice Requirements
As part of any Farm Business Tenancy, there will need to be specific attention given to the terms of agreement. Fixed tenancies of less than two years will automatically expire at the end of the term, meaning that a notice to quit from either the landlord or the tenant is not required.
If the agreed term is for a longer period than this, written notice must be supplied at least one year in advance. IF this type of tenancy comes to an end without notice being given, then the tenancy will become a periodic one under the same terms until one year’s notice is given by either party.
The Agricultural Tenancies Act 1995 states that the maximum period of notice that can be given is 24 months, but the Regulatory Reform (Agriculture Tenancies) (England and Wales) Order 2006 allows tenants and landlords to agree on whatever maximum notice period they wish in their own agreements.
Break clauses can also be added to the agreement, which gives either party the option to break after a set amount of time, however, at least 12 months’ notice must be given before the break clause can be operated. A surrender of tenancy can also be negotiated by mutual agreement. A landlord also still has the option to obtain possession of the land if terms of the lease are breached, such as failing to pay the agreed rental sum.
Rent and Review Procedures in FBTs
An important part of any lease agreement is to set out the rent that is due to be paid. This should be agreed by both the landlord and the tenant and can include terms relating to any down payments or deposits that might also be required.
When agreeing on rental terms, the amount should be fair and reflective of the size and quality of the land, as well as any restrictions that it may be subject to. The agreement should stipulate not only the amount, but also how and when that rent should be paid.
As well as the rent, any Farm Business Tenancy should also include the subject of rent reviews. This is because the lease can often be overtaken by increasing market rents, and therefore ensures that it remains fair and reflective of the current markets.
Rent reviews are usually favoured by landlords, particularly in the case of long-term leases, but these can be contracted out of the agreement if both parties agree, but they will still be able to choose for themselves how often reviews should take place.
They cannot agree to exclude the possibility of future rent reductions and either party can then demand a review every three years.
There is a lot of flexibility available within Farm Business Tenancies with regard to rent reviews, so it is important to get proper legal advice on this subject, especially when leases are over a long period of time, to ensure that all parties are protected in a fair and transparent way.
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Tenant’s Rights and Compensation for Improvements
During any Farm Business Tenancy, a tenant may want to make improvements to the land that they occupy. They are within their rights to do so, but if they are leaving the landlord in a better situation when they quit than they were originally, then the tenant may be entitled to compensation. This can apply to physical improvements that have been made as well as intangible ones.
A physical improvement may refer to improvements to properties on the land or access, whilst intangible improvements can be things such as planning permission that was not taken advantage of before the tenancy ended or a milk quota that was acquired during the tenancy. Whatever the improvement in question, it is important to remember that no compensation will be payable if the landlord has not given consent to it.
If the parties are not able to reach an agreement to consent, then the Agricultural Tenancies Act 1995 gives the tenant the right to demand arbitration if they have not already made a start on the improvements. The arbitrator can also determine the value of the improvement whilst taking into account any financial contributions from the landlord or any grants that have been applied.
It is important to remember that a tenant will also make routine improvements during their tenancy, such as repairing fences, and these can be carried out before seeking consent if they are part of the normal course of farming.
Any compensation that is paid to the tenant should be at the current value of the improvement when the tenant quits the property, therefore allowing them to benefit from the increase in capital value, and no agreement to the contrary can be made. This is something landlords should take into consideration when giving consent, and they may therefore prefer to undertake the work themselves.
Diversification and Non-Agricultural Use
A tenant may want to diversify what they do during the tine of their tenancy, but it is important that they seek the permission of the landlord first. This means that the tenant can change the use of the land to a non-agricultural business after the lease is granted if all of the right notices have been exchanged before it began. The Agricultural Tenancies Act 1995, does not state what limits there are on this kind of diversification, and it may become more complicated to prove that some of the land is still farmed.
Nonetheless, it is permitted for tenants to run peripheral or additional business operations on the land alongside the agricultural purposes, and so they may choose to open a farm shop, put together a caravan or glamping site or use the land to graze horses (which do not count as livestock as part of the Act, as they are not used for the production of food, wool, skins or fur, or for the purposes of being used for the farming of land).
If diversification goes far enough to no longer qualify as an FBT, then the tenancy will become regulated by the Landlord and Tenant Act 1954 like all other business leases.
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Lovedays Solicitors: Your Partner in Agricultural Land Transactions
Granting of Agricultural Tenancies
At Lovedays Solicitors, we have vast experience in dealing with all kinds of agricultural land transactions, and can advise you every step of the way, whether you are a landlord or a tenant. We understand the agricultural market and can therefore assist in putting together and granting agricultural tenancies.
As part of our role, we can help to draft your unique Farm Business Tenancy agreement and can ensure that all parties are happy with the terms within it, so that it represents something that can support your business and help it to flourish in what is a sometimes tricky landscape.
Our specialist team of agricultural lawyers will negotiate between parties to grant a tenancy that is fair to everyone and ensures the correct and legal farming of agricultural land for the duration of the agreement.
Advising on Agricultural Tenancies
As experts in the field of agricultural law, we can also advise on Farm Business Tenancies, by carrying out all necessary investigations and research. We can therefore provide sound and informed advice that takes the whole picture into consideration.
We can assist in explaining any terms of the agreement which are unclear, and our friendly and experienced team are always on hand to answer any questions that you may have. We can help with dealings between parties and with any governing bodies, as well as ensuring that all aspects of the Farm Business Tenancy fall within the rules set out in the Agricultural Tenancies Act 1995.
Conclusion
Farm Business Tenancies are important in order to protect the interests of landlords and tenants in the world of agriculture. They are in place to ensure that the agriculture industry remains intact and that businesses within it can continue to grow.
Lovedays Solicitors have been representing their Derbyshire based clients since 1905 and have developed an in-depth understanding of the laws and challenges surrounding agricultural agreements.
We can therefore help with any Farm Business Tenancy queries, from drafting and granting an agreement, to dealing with extensions, notices to quit, rent reviews and compensation enquiries, so please get in touch with our friendly and professional team to see what we can do for you.
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