TO WHAT EXTENT DO ON-FARM DIVERSIFICATION
ACTIVITIES, ESTABLISHED UNDER A FARM BUSINESS
TENANCY STRUCTURE, REMAIN WITHIN THIS
STRUCTURE ONCE ESTABLISHED?
by
CAROLINE LOUISE HORN
being an Honours Research Project submitted in partial fulfilment
of the requirements for the
BSc (Honours) Degree in
Rural Enterprise and Land Management
2015
Table of Contents
List of Figures ...................................................................................................... iii
List of Tables ........................................................................................................ iv
Abbreviations ........................................................................................................ v
Acknowledgements ............................................................................................. vi
Abstract ............................................................................................................... vii
1
INTRODUCTION ............................................................................................. 1
2
DIVERSIFICATION ......................................................................................... 2
2.1
2.2
2.3
2.4
2.5
3
Types of on farm diversification..................................................................... 2
Reasons to diversify ....................................................................................... 2
Diversification on tenanted farms .................................................................. 4
Landlords’ and tenant views of diversification ............................................. 4
Differences in diversification under AHAs to FBTs ...................................... 5
FARM BUSINESS TENANCY AGREEMENT ................................................. 6
3.1
What is an FBT? .............................................................................................. 6
3.1.1 Business criteria ............................................................................................ 6
3.1.2 Agricultural criteria ......................................................................................... 6
3.1.3 The notice conditions..................................................................................... 6
3.2
Objectives of ATA 1995 ................................................................................... 6
3.3
Lease or Licence ............................................................................................. 6
3.4
Uptake of Farm Business Tenancies ............................................................. 7
4 THE REGULATORY REFORM (AGRICULTURAL TENANCIES)
(ENGLAND AND WALES) ORDER 2006 ............................................................ 10
5
PART II LANDLORD & TENANT ACT 1954................................................. 11
5.1
5.2
5.3
6
7
History.............................................................................................................11
Contracting in and out ...................................................................................11
Link between LTA 1954 & ATA 1995 .............................................................11
RESEARCH GAP .......................................................................................... 17
METHOLDOLGY ........................................................................................... 19
7.1
Introduction ....................................................................................................19
7.2
Research Objectives ......................................................................................19
7.3
Research Methods .........................................................................................19
7.3.1 Philosophy ....................................................................................................20
7.3.2 Approach ......................................................................................................20
7.3.3 Research and Analysis Strategies ................................................................20
7.3.4 Choices ........................................................................................................21
7.3.5 Time Horizons ..............................................................................................21
7.3.6 Techniques and Procedures .........................................................................21
7.4
Semi- Structured Interviews ..........................................................................21
7.5
Telephone Interviews .....................................................................................21
7.6
Sampling .........................................................................................................21
7.7
Reliability ........................................................................................................22
7.8
Validity ............................................................................................................22
7.9
Ethics ..............................................................................................................23
7.10 Interview Strategy ..........................................................................................23
7.11 Limitations ......................................................................................................23
8
9
ANALYSIS ..................................................................................................... 24
DISCUSSION ................................................................................................ 25
9.1
9.2
OBJECTIVE ONE ............................................................................................25
OBJECTIVE TWO ............................................................................................28
i
9.2.1 Reasons to allow diversification within an FBT .............................................28
9.2.2 Implications of leaving the diversification within an FBT ...............................28
9.2.3 Advantages of incorporating the diversification within the FBT .....................30
9.2.4 Disadvantages of incorporating the diversification within the FBT .................31
9.3
OBJECTIVE THREE ........................................................................................32
9.3.1 Reasons to put the diversification on a LTA tenancy ....................................32
9.3.2 Implications of the diversification being on a separate business lease ..........32
9.3.3 Advantages of the diversification being on a separate business lease ..........33
9.3.4 Disadvantages of the diversification being on a separate business lease .....33
9.4
OBJECTIVE FOUR ..........................................................................................34
9.4.1 Recommendations to encourage governing diversification within the FBT ....34
10 CONCLUSION ............................................................................................... 35
10.1
Further Research............................................................................................36
REFERENCES ..................................................................................................... 37
BIBLIOGRPAHY .................................................................................................. 42
Appendices.......................................................................................................... 43
Appendix 1: Interview Questions ...................................................................... 43
Appendix 2: Transcripts ..................................................................................... 45
Appendix 3: Coding ............................................................................................ 75
Appendix 4: Interview Strategy........................................................................ 103
ii
List of Figures
Figure 1: Percentage of farms with diversified activities in England- 2006/07 to
2013/14………………………………………………………………………...................3
Figure 2: The total amount of hectares farmed under an FBT from 2009 to 2013...7
Figure 3: Average term length of FBTs………………………………………………...8
Figure 4: Percentage of land farmed under an FBT………………………................8
Figure 5: Possibilities available to landlord and agents to govern on farm
diversifications…………………………………………………………………………...18
Figure 6: Research Onion demonstrating the research approaches that were
adopted………….………………………………………………………………………..20
Figure 7: Research triangulation………………………………………………………22
Figure 8: Coding themes……………………………………………………………….24
Figure 9: A model to show the perceived tipping points of when an on farm
diversification is governed by an FBT or a commercial lease……………………...26
Figure 10: A model to show the ability to draw separate rent review provisions into
the same FBT for the farm holding and diversified business……………………….29
Figure 11: A model to assist with the governance of on farm diversification using
risk levels……………………………………………………………………..................31
iii
List of Tables
Table 1: Types of diversification………………………………………………………...2
Table 2: Comparison of terms between an FBT and a LTA agreement………..…13
iv
Abbreviations
AHA
ATA
DEFRA
FBT
FRI
HMRC
IFA
LTA
TRIG
Agricultural Holdings Act
Agricultural Tenancies Act
Department for Environment, Food and Rural Affairs
Farm Business Tenancy
Full Repairing and Insuring
HM Revenue and Customs
Improved Finance Agreement
Landlord and Tenant Act
Tenancy Reform Industry Group
v
Acknowledgements
I would like to thank Andrew Black for the support and guidance throughout this
project.
I would also like to thank my family not only for the continuous support through this
research project but through my time at Harper Adams University. The participants
of this research that kindly gave up their time, and the library staff that enabled me
to complete my final year research project. Finally I would like to thank my friends
for the support and enjoyment over the past four years.
vi
Abstract
Reviewing literature highlighted there is a vast amount of information regarding on
farm diversification within the tenanted sector. There is limited research detailing
how diversifications on farms that are ruled by an Farm Business Tenancy (FBT)
are currently governed.
This project is being conducted to examine how diversifications on farms
administered by an FBT are dealt with in terms of the tenancy agreement. The
project uncovers whether it is practicable and legally permissible to manage the on
farm diversification within the original FBT; or if a commercial lease is the more
suited choice. This is of particular importance since one aim of introducing FBTs
was to encourage diversification within the FBT.
The research discovered FBTs are able to govern on farm diversification to a certain
extent, however landlords and agents are unaware of the Agricultural Tenancies Act
(ATA) flexibility to govern on farm diversifications. Due to a lack of industry
guidance, and case law detailing the tipping point of when a farm becomes a
commercial unit, agents are not as willing to govern the diversification under the
original FBT. The main advantage of leaving the diversification within an FBT is it
reduces costs and management time. Solicitors agreed FBTs can govern on farm
diversifications, but as business tenancies enable them to earn a fee, they would
always put the diversification on a business lease. If guidance was produced this
would give agents confidence in their actions, and in turn could save landlords
money in terms of solicitors fees and time.
vii
1 INTRODUCTION
This research investigates whether it is possible for FBTs to govern on farm
diversifications. Also whether landlords and agents keep the diversification within
the FBT, or on a separate commercial agreement, even though FBTs were
introduced to encourage on farm diversification within the existing agreement.
DEFRA (2010) states the position of agriculture is now changing, households need
to increase their disposable income through means other than conventional farming.
Walley et al. (2011) agrees stating on farm diversification is held to improve the
economic viability of farms especially tenanted farms. If the project discovers FBTs
can legally govern on farm diversification but agents and landlords are not fully
aware of this capability, this could influence landlords and agents to keep the
diversification within the FBT. This will save landlords’ unnecessary solicitor’s fees.
This study is based on a national scale. Semi-structured interviews will be
conducted with industry professionals, landlords and tenants to gather as much
detail as possible as to what currently happens, and views on what could happen in
the future.
1
2 DIVERSIFICATION
From the literature reviewed it is agreed defining diversification is very subjective.
The Centre of Rural Research (CRR) (2002) defined farm diversification as activities
that are run on the farm that are dependent on land and farm capital assets. This is
agreed with by Maye et al. (2009) and McNally (2001) as they state diversification
can be classed as any activities that are run from the farm holding. In contrast in a
later report Ilbery et al. (2010) state all non-agricultural income that is created on
and off the farm, is classified as diversification.
For the purposes of this research, the definition of diversification will be in line with
CRR (2002).
‘Activities run on the farm that are dependent on land and farm capital
assets’
2.1 Types of on farm diversification
Clark, (2009) surveyed 118 agricultural businesses and concluded the most
common form of on farm diversification activities were;
Agri-tourism
Recreational
Accommodation
Catering
In contrast CRR’s (2002) investigation was on a larger scale and Table one details
the most common diversification activities:
Table 1: Types of diversification
Type of Diversification
Agricultural Services
Trading Activities
Most common activities
Agricultural contracting
Hay/straw sales/ farm shop/
retail
Holiday Cottages/ rented
accommodation/ caravan
park/B&B
Livery yard
Shooting/fishing activities
Accommodation
Equine
Recreational
(Source: Adapted from: CRR, 2002)
2.2 Reasons to diversify
From Clark’s (2009) survey, the main reasons to diversify were:
Financial reasons
To exploit new market opportunities
Business survival
Business expansion
There has been a detailed amount of research uncovering the driving factors behind
2
diversification. Maye et al. (2009) summaries them as being:
External Factors;
o Policy changes
o Market opportunities
o Location factors.
Internal Factors;
o Farm size
o Farm type
o Entrepreneurial skills of the farmer.
Grande, (2011) and Hansson (2013) agrees with Maye et al. (2009) internal factors,
stating success of on farm diversification is due to the age, succession, skills, and
expertise of farmers. This is backed up further as Walley et al. (2011) state a
decision to diversify must be based on an opportunity in the market that coincides
with internal resources that are available. Alongside this the main driver of the
diversification should be an entrepreneur who can identify the gap in the market.
Walley et al. (2011) state diversification is a popular strategy for farmers wanting to
survive due to a decline in farming profits and a changing economic environment.
Whitehead et al. (2002) agree stating income from UK farming has fallen by 70%
from 1995 to 2000 in which time saw a rise in diversification. In contrast CRR (2002)
states diversification is not an option for failing farm holdings, which is agreed with
by Prag (2002). From the literature reviewed it is agreed the most common reason
to diversify is to attempt to increase income (Walley et al., 2011; Maye et al., 2009;
Clark’s 2009). According to DEFRA (2015) farm business incomes are forecasted
to fall or remain relatively similar across all types of farm. Although in the short-term,
farm income has improved due to the low interest rate allowing investment, it is still
one fifth less than farm income was in 1995; meaning diversification may continue
to grow, especially on tenanted farms (DEFRA, 2014a). Figure 1 shows the
percentage of farms that have diversified from 2006 to 2014, with a large proportion
of the diversification being letting of agricultural buildings (DEFRA, 2014b).
(Source: DEFRA, 2014b)
Figure 1: Percentage of farms with diversified activities in England- 2006/07 to 2013/14
3
2.3 Diversification on tenanted farms
Restrictions preventing non-agricultural activities within the tenancy agreement is
the main reason tenants are prevented from diversifying (Barr et al., 2013). This is
supported by Maye et al. (2009) study which found through interviewing 52 tenant
farmers, 52% thought their tenancy agreement restricted them from diversifying
their farming enterprise, and 10% said their tenancy agreement prevented them
from diversifying altogether. The main reason being the average term for an FBT
was five years. This short-term lease makes it nearly impossible for the tenant to
recover the start-up investment that is needed for the diversification (Ilbery et al.,
2010). This is further backed up by DEFRA (2012a) as it is stated tenant farmers
are less likely to diversify due to the lack of collateral, therefore their inability to
finance the start-up of the diversification. In contrast CRR, (2002) state 66.4% of
wholly tenanted farms have diversified compared to 54.5% of wholly owned farms.
It should be noted the tenanted percentage does not distinguish between
Agricultural Holdings Act (AHA) tenancies and FBTs. Whitehead et al. (2002) state
from the various studies that have been carried out, 13% of farms have diversified
under an FBT compared to 23% under an AHA, and 19% were wholly owner
occupied. Whitehead et al. (2002) considers there is a lack of consensus on authors’
views whether FBTs do in fact promote diversification. He states some landlords,
tenants and agents feel FBTs are flexible in terms of tenancy clauses, therefore
accommodating farm businesses; however others feel the short average length of
term and high rents are barriers to diversification.
In response to the Tenancy Reform Industry Group (TRIG) encouraging on farm
diversification the code of good practice for diversification within agricultural
tenancies was produced (Bright, 2006). This sets out steps landlords and tenants
should follow in order to encourage diversification rather than resisting
diversification, or putting it onto a separate Landlord and Tenant Act (LTA) 1954
agreement (DEFRA, 2004). Some see this as a positive document to maintain good
landlord tenant relationships (DEFRA, 2004), however others argue it does not
encourage diversification on tenanted farms (Del Brioa et al., 2011).
Reuvid (2003) states the ATA 1995 is flexible enough to allow on farm
diversification, but landlords and professionals do not fully appreciate the flexibility
of the ATA 1995, which limits the use. It was noted there was not any research
evidence supporting this.
2.4 Landlords’ and tenant views of diversification
According to Ilbery et al. (2010) 50% of landlords would allow tenants to diversify
but only if the diversification activity was viable as a stand-alone business; does not
damage the landscape, or compete with something the estate has already
developed themselves.
Pieraccini, (2009) examined diversification within National Trust properties, which
highlighted that the National Trust’s stance is to encourage on farm diversification
through FBTs, rather than commercial agreements. Pieraccini, (2009) stated
farmers with AHA agreements are less likely to diversify and put the farming practice
first, unlike the farms governed by FBTs, as they offer much more flexibility in terms
of freedom of contract, therefore encouraging farmers to diversify. This research
states the landlord is the one pressing for diversification as opposed to the tenants,
this is further backed up by Whitehead et al.’s study (2002), as 90% of landlords felt
they would allow diversification if a tenant approached them. This contrasts with the
4
ideas that the tenant wants to diversify but is restricted by the landlord (Walley et
al., 2011). Pieraccini’s (2009) research looks into diversification on National Trust
Farms, therefore cannot be representative of all landlords. Whitehead et al.’s study
(2002) showed five percent of landlords felt they would need further flexibility within
an FBT to cover non-agricultural activities, instead of having to use the LTA 1954.
According to Ilbery et al. (2010) tenants feel landlords will only allow the
diversification if there is a significant rent increase. Many tenants stated the FBT
structure was commonly made up of standard clauses therefore a barrier to
diversification. In contrast, according to CRR, (2002) tenants stated it was the
relationship between the landlord and tenant that restricted the diversified activity.
2.5 Differences in diversification under AHAs to FBTs
Prior to the 1st September 1995, AHAs governed the letting of agricultural units.
Ilbery et al. (2010) stated farmers were happier to diversify on owner-occupied land
or long term secured tenancies, and prefer to rent bare land on FBTs. However,
many farmers are unable to secure an owner occupied farm due to the continual
rising land prices (Gibbard et al., 1999).
An AHA requires the agricultural holding to be used for the purpose of trade or
business. This means as long as a large proportion of the land is agricultural at all
times, the tenancy will be governed by the AHA (S.1(1) AHA 1986). This meant the
diversification would normally be removed from the AHA tenancy, as it would mean
the whole farm holding would be put at risk of not being covered by the AHA
(Dawson, 2000). In FBTs business conditions are set out in (S.1(2) ATA 1995),
which is similar to those set out in (S.1(2)AHA 1986). Agriculture is defined in the
same way in both the ATA 1995 and the AHA 1986, however the ATA uses the word
‘farming’ which gives a wider meaning than agriculture as it covers activities such
as stewardship and set-aside (Barr et al., 2013).
The agricultural condition or notice condition needs to be satisfied in FBTs, as
discussed at point 3.1.2-3.1.3. It is best practice to always serve the notice
conditions. If the notices are served correctly and there is a change in use balance
it will still remain an FBT so long as the tenancy allows diversification (Barr et al.,
2013). If the notices are not served correctly and there is an increase in commercial
activity this will not be governed by the ATA 1995, therefore will be protected by Part
II LTA 1954 meaning the tenant will have security of tenure, which is unfavorable to
the landlord (Reuvid, 2003). This is illustrated by the case of Hickson and Welsh Ltd
.v. Cann who traded in horses and bred, fattened and resold pigs under an AHA. It
was held the agricultural use of the land had been abandoned due to horses not
being agricultural, even though pigs were (Barr et al., 2013). If this case was
governed by an FBT and the correct notices were served this theoretically would be
covered by the ATA 1995 (Dawson, 2000).
5
3 FARM BUSINESS TENANCY AGREEMENT
3.1 What is an FBT?
Agricultural tenancies agreed since the 1st September 1995 are governed by the
ATA 1995 and are known as FBTs (DEFRA, 2012b). FBTs allow the letting of farm
holdings and agricultural land. The agreement will be covered by the ATA if the farm
business meets the ATA criteria, as outlined below (Garner and Frith, 2013).
3.1.1 Business criteria
All or part of the holding should be farmed for the purpose of trading or business,
from the beginning of the tenancy (S.1(2) ATA 1995). In theory if the business
condition ceases for one day, the FBT can be terminated (Dawson, 2000).
3.1.2 Agricultural criteria
The holding must be wholly or partly agricultural (S.1(3) ATA 1995). Dawson (2000)
and Barr et al., (2013) agree that the agricultural condition takes into account:
Terms of tenancy
Use of the land
Nature of any commercial activities
Relevant circumstances
3.1.3 The notice conditions
It is possible to waiver the agricultural condition by serving notice conditions (S.1(4)
ATA 1995). This must be served on or before the beginning of the tenancy, and
cannot be included in the tenancy agreement. The notice conditions do not have to
be served, but this means the agricultural criteria must be met at all times to remain
an FBT (Barr et al., 2013). The notice conditions do not allow the tenant to diversify
without consent, as there may be a user clause prohibiting non-agricultural use (Barr
et al., 2013).
3.2 Objectives of ATA 1995
The objectives of the ATA 1995 are:
Increase letting of agricultural land
Allow new entrants into agriculture
Allow rented land to be more economical, flexible and responsive to market
forces (Whitehead et al., 2002) (Garner and Frith, 2013) The Regulatory
Reform (Agricultural Tenancies)(England and Wales) Order 2006).
3.3 Lease or Licence
For there to be a tenancy there needs to be:
Exclusive possession
A definite term
A rent paid
This was illustrated by the case of Street v Mountford [1985]. This is a key case
determining whether a person has a lease or a licence. Although the Court of Appeal
held the intentions were clear from both parties, that it was merely a licence, the
House of Lords held Mrs. Mountford did have a lease as the above criteria was
present.
6
3.4 Uptake of Farm Business Tenancies
Gibbard et al. (1999) stated tenant farmers have declined since the beginning of the
century due to there being limited incentives for landlords to rent out their land, and
the ATA 1995 has not averted this trend. Gibbard et al. (1999) also stated in rural
communities, tenant farmers are not held in high regard unlike owner-occupier
farmers, and FBTs have become ‘add ons’ to owner occupied farms. This study was
done fifteen years ago, therefore the trend and social views may have changed, as
Munton (2009) stated there have been many changes in the agricultural industry.
Brown & Co, (2014) and (DEFRA, 2014c) indicated the amount of FBTs have
increased due to high demand from farmers, and increased supply from investors
who are buying more agricultural land and letting it out (See figure 2). This is further
backed up by RICS, (2014) as the land survey revealed strong land values are due
to a rise in commercial and lifestyle buyers.
Total hectares farmed under an FBT
(Thousand Ha)
1130
1120
1110
1100
1090
1080
1070
1060
1050
2009
2010
2011
Year
2012
2013
(Source: Adapted from DEFRA, 2014c)
Figure 2: The total amount of hectares farmed under an FBT from 2009 to 2013
Ilbery et al. (2010) found FBTs were referred to as unsecure tenancies due to the
average length of term, however this was only 8% of 52 tenant farmers interviewed,
therefore a minority view. Figure 3 shows the average length of an FBT over the
years.
7
Year
(Source: DEFRA, 2014c)
Figure 3: Average term length of FBTs
Figure 3 shows the average length of term was 4.2 years in 2012, ranging from 4.1
to 4.4 years from 2007 to 2012 (DEFRA, 2014c). Due to the short term of the
tenancy, landlords and their agents usually include a clause in the FBT preventing
non- agricultural use, precluding diversification (Barr et al., 2013).
Figure 4 illustrates FBTs are more common in the South than the North.
(Source: Maye et al., 2009)
Figure 4: Percentage of land farmed under an FBT
8
The obvious change from North to South could be because of the upland topography
in the North, which is managed in other forms like sporting agreements, rather than
FBTs (Maye et al., 2009).
9
4 THE REGULATORY REFORM (AGRICULTURAL TENANCIES)
(ENGLAND AND WALES) ORDER 2006
The Policy Commission of the Future of Farming and Food was established to
create a diverse agricultural sector to mitigate large damaging shocks to the industry
such as Foot and Mouth which occurred in 2001 whilst DEFRA was reviewing the
ATA 1995 (The Regulatory Reform (Agricultural Tenancies)(England and Wales)
Order 2006). As a consequence professional organisations came together and
created TRIG. They published the final report in 2003 making recommendations to
amend
existing
legislation
(The
Regulatory
Reform
(Agricultural
Tenancies)(England and Wales) Order 2006).
The main aim was to simplify and deregulate existing tenancy legislation. This aimed
to allow flexible letting of land, and permitted tenants to diversify the farm holding
away from agriculture. However, according to Whitehead et al. (2002) the majority
of FBTs are signed with standard clauses with little variation in terms of on farm
diversification. Munton (2009), Ilbery et al., (2007) agree with Whitehead et al.
(2002) stating the main aim has not been met, as well as hoped. Whitehead et al.
(2002) evaluation was done only two years after the legislation was introduced,
therefore this may not be the case now, as the full effects had not had time to reveal
themselves.
10
5 PART II LANDLORD & TENANT ACT 1954
Part II of the LTA is a statutory code governing business tenancies. A person can
have a business tenancy if they fulfill the following criteria:
Have a tenancy
Have held that tenancy for a time certain period
The premises are occupied for the running of a business
(S.23 LTA 1954).
If there is not a business tenancy, the agreement will be a licence, which will not be
protected by the LTA, as described by the case of Street v Moutford in point 3.3.
The LTA protects tenants whose agreements are not:
Contracted out
Tenancies for less than six months
Tenancies at will
Another type of tenancy e.g. Agricultural or mining (Ross, 2011).
5.1 History
In 1992 the British Parliament produced a periodic review of the LTA 1954 making
a series of recommendations (GB. Parliament, 1992). The main recommendation
was enabling the parties to contract out of renewal provisions by agreement rather
than applying to the courts; however, originally the Government did not introduce
this (GB. Parliament, 1992). On the 1st June 2004 the Regulatory Reform (Business
Tenancies) (England & Wales) Order 2003 was created allowing landlords to give
written notice to tenants to contract out of security of tenure. Currently the landlord
can issue a notice on the tenant 14 days prior to the date of commencement, which
contains the ‘health warning’ explaining the loss of protection (Garner and Frith,
2013).
5.2 Contracting in and out
Under Part II of the LTA 1954 a tenant has the right to renew the tenancy at the end
of the fixed term if the premises are in occupation, this is known as ‘contracted in’.
The landlord and tenant can mutually agree to ‘contract out’ meaning the tenant will
not have the statutory right to renew under S.24 (LTA 1954).
If the tenancy is contracted in the tenant can serve a S.26 on the landlord at the end
of the fixed term; stating the intended commencement date of the new tenancy. This
must be served 6-12 months before the date of commencement. The landlord can
serve a hostile S.25 on the tenant terminating the tenancy, stating any of the eight
statutory grounds (LTA 1954). This makes it hard for the landlord to evict a tenant
(Ross, 2011).
5.3 Link between LTA 1954 & ATA 1995
Prior to the 1st September 1995 the majority of agricultural holdings were governed
by the AHA 1986. Reuvid (2003) stated land or buildings used for diversifications
under AHAs would be surrendered from the AHA and granted a LTA tenancy
(Reuvid, 2003).
11
Dawson (2000) stated parliament’s intention when introducing FBTs was to ensure
when a tenant was investing money in an on farm diversification activity, they
achieved the security of tenure of the LTA 1954. As discussed in point 3.4 an FBT
does not offer this security of tenure. Dawson further explores that the ATA 1995
could act as a ‘trial run’, which enables the diversification activity to run for a short
period, allowing the landlord to assess the tenants’ suitability to operate the
diversification effectively. If the diversification is successful a LTA lease would be
granted. It is common practice for the security of tenure to be contracted out as
discussed in point 5.3, therefore not offering the provisions as Dawson stated
(Reuvid, 2003).
Table 2 shows the comparison of terms between the LTA 1954 and ATA 1995.
12
Table 2: Comparison of terms between an FBT and a LTA agreement
ATA 1995
LTA 1954
Terms
If written
If silent
If written
Rent Review
Dates
As stated- free to agree.
E.g. A certain amount over
a certain time, or by an
agreed formula5
On the term date every
three years to open market
rental value5
As stated- free to agree.
E.g. Market value as
determined by comparables,
upwards only provision4
Rent Review
Notice
12-24 months5
12-24 months5
6-12 months4
6-12 months4
Need a term to be a
tenancy. Could be how often
rent is paid2
As stated- usually 3-5
years6
Depends if contracted in.
Needs a term to be a
tenancy6
Length of Term
Length of
Notice to Quit
As
stated1
12-24 months if tenancy is
over two years. If tenancy
is under two years no NTQ
technically needs to be
served. Termination is on
the expiry date5
Same as if
written5
Repairing
Obligations
As stated1
There is no default.
It depends on the behavior
of the parties, if the landlord
undertakes repairs it may be
seen that the landlord is
responsible1
Resolution of
disagreements
Arbitration5
Arbitration5
13
If silent
On expiry unless apply to
court for interim rent. If
tenancy continues under
virtue of S.24, the court will
decide on a suitable rent4
stated4
Landlord must give 6-12
months. The tenant must give
three months4
As sated4
The courts decide.
Behaviour’s of the parties are
normally assessed. The
tenant does not normally
have to repair, as there are
no statutory provisions. 4
Court/arbitration4
Court4
As
Break Clauses
Fixtures
12-24 months’ notice
needs to be given unless
otherwise stated2.
As stated3
No provision6
Common to see with new
businesses. Usually three
years if complied with lease
including pre conditions6
No provision6
Tenant can remove if theirs,
unless in pursuance of
some obligations. Tenant
can obtain compensation if it
is agreed that the fixture is
not removed3
As stated6
No provision6
14
Tenants
Improvements
Succession
User
As stated- usually follow
the statutory provisions.
Need to have written
consent from the landlord3
No statutory right to
succession5
As stated- mainly
agriculture as long as
notice compliance5
Tenant has a statutory right
to compensation unless
removed from holding. No
obligation for landlord to
compensate tenant where
no permission has been
granted. The amount shall
be equal to the increase
attributable to the
improvement in the value of
the holding at the
termination. If the tenancy
was granted after 18th
October 2006 it may be
subject to a maximum figure
or the actual cost whichever
is less3. Where the landlord
refused to give consent or
did not respond within two
months of written request
the tenant can refer it to
arbitration3.
No statutory right to
succession5
Agricultural5
15
As stated -usually three
months’ notice to claim4
Tenant entitled to
compensation unless it was
an obligation. Tenant has
three months’ notice from the
date of NTQ to claim
compensation. If the tenancy
comes to the expiration date
the tenant has between three
and six months before the
end date to claim
compensation. Landlord
cannot unreasonably withhold
consent for a tenant wanting
to create an improvement4.
Amount equal to additional
value or reasonable cost.
Court will decide if unable to
agree.
No statutory right to
succession6
No statutory right to
succession6
Business6
Business6
Tenant
Compensation
As agreed in writing2
No provision2
As agreed in writing4
Tenant eligible for
compensation if landlord
opposes renewal of tenancy
under cases E, F, G.
Compensation is assessed at
1x the ratable value of the
property or where the tenant
has been in occupation for 14
years or more, at two times
the ratable value4.
What is being practiced6
N/A6
Insurance
As stated2
What is being practiced3
As stated- usually landlord
insures and recoups from
tenant. Insurance may be
included in the rent sum.
Rarely the tenant insures6
SFP
Transfer back to landlord
at end of tenancy1
No provision1
N/A6
(Source: 1(CAAV, 2008) 2(CAAV, 2012) 3(CAAV, 2007) 4(LTA 1954) 5(Agricultural Tenancies Act 1995) 6(Edwards, 2015. Pers. Comm. Ms Edwards is a partner at Hatchers Solicitors)
16
6 RESEARCH GAP
After reviewing the literature it is clear there has been a considerable amount of
research into what makes a successful diversification venture, how many tenant
farmers diversify, and the drivers behind the diversification.
It is observed from reviewing the literature there is limited research detailing how
the diversified activity on a farm under an FBT is most commonly governed. Whether
it is common practice to keep it within the original FBT or to remove it from the FBT
and put it onto a LTA lease. There is limited literature looking at the explanations
behind why landlords and agents remove the diversified activity from the FBT. This
is important currently as diversification rates are continually increasing on tenanted
farms.
Figure 5 shows the possibilities agents and landlords have when governing an on
farm diversification proposition.
17
(Source: Authors own)
Figure 5: Possibilities available to landlord and agents to govern on farm diversifications
18
7 METHOLDOLGY
7.1
Introduction
The following chapter reviews the research methods that are used to collect data,
which will meet the following research objectives with sufficient strength.
7.2 Research Objectives
1. To review the ATA 1995 in comparison to the LTA 1954, in particular the
perceived designed ability of the ATA to address the increasing level of on
farm diversification.
2. To assess why landlords may decide to permit a diversified activity to remain
within the original FBT structure, the implications this may cause and any
advantages and disadvantages for both the landlord and tenant.
3. To assess why landlords prefer to remove the diversified activity from an FBT
structure, and relocate it within one governed by the LTA 1954 on
commencement of the diversification activity. This will examine any
implications, advantages and disadvantages for both landlord and tenant.
4. Assess why landlords prefer to remove the diversified activity from an FBT
structure and relocate it to within one governed by the LTA 1954 once the
activity has become established. This will examine any implications,
advantages and disadvantages for both landlord and tenant.
7.3 Research Methods
The Research Onion is a model devised by Saunders et al. (2012) which is a
systematical aid helping establish which research method to adopt. (See Figure 6).
19
(Source: Adapted from Saunders et al., 2012).
Figure 6: Research Onion demonstrating the research approaches that were adopted
7.3.1 Philosophy
This refers to the underlying nature of the research, which justifies how the study
will be carried out (Bryman, 2012). This research will take an interpretive approach,
because the research is conducted on people as oppose to objects. This is
appropriate as it is necessary to speak to landlords, agents, tenants and solicitors
to gain an insight into their personal opinions and their actions in dealing with on
farm diversification. This approach is also suited to in depth qualitative research
(Saunders et al., 2012).
7.3.2 Approach
This research will take an inductive approach because currently there is not an
explanation of the research question. In this case observations are the starting point
(Beiske, 2007). The literature review highlighted it was unknown if and why agents
and landlords removed on farm diversifications from FBTs.
7.3.3 Research and Analysis Strategies
The research strategy is how the researcher proposes to conduct the research
(Saunders et al., 2012). There are seven strategies but this research will take a
grounded theory approach as it aims to generate a theory. This will suit the research
question, as the researcher is going to answer the research gap, and not proving
an existing theory. Grounded theory allows the researcher to analyse the
information by transcribing the interviews, and coding key common themes (See
Appendix 3), which forms the basis of a theory (Flick, 2011).
20
7.3.4 Choices
This research will adopt a mono method exploratory study, as an in depth insight
was needed focusing solely on the objectives. Bryman (2006) states using multiple
methods of data collection overloads the researcher with some unnecessary data
7.3.5 Time Horizons
This is a time frame that the project should to be completed in (Saunders et al.,
2012). Due to the time restraints involved with the research project and a ‘snapshop’ of the current issue was required. A cross- sectional method was adopted as
oppose to a longitudinal approach.
Interviews were carried out over one month; this limited chances of any significant
events happening which would change the interviewee’s opinions regarding the
research topic.
7.3.6 Techniques and Procedures
As a grounded theory allows several techniques and procedures, and due to the
exploratory nature of the work, face to face and telephone interviews were
conducted lasting, approximately 20 minutes.
7.4 Semi- Structured Interviews
Semi-structured interviews allow the flexibility for the interviewees to expand on their
answers, which may lead to more discussion points, but also retains the main
research objectives unlike case studies and questionnaires (Wills, 2007). Openended questions allows the interviewee to develop their answers in more detail,
subsequently allowing the researcher to ask further questions to gain more detail,
or omit certain questions (Saunders et al., 2012). This is particularly appropriate to
this research, as personal views needed to be explored, therefore focus groups
were not used as respondents could influence others answers (Wills, 2007).
A copy of the questions, which were used in the interviews, can be seen in Appendix
1 and transcripts are at Appendix 2.
7.5 Telephone Interviews
Leon et al. (2003) stated telephone interviews are much the same as in-person
interviews. Response rates are lower than face-to-face interviews, but this was
overcome by targeting certain professionals who were happy to be interviewed
therefore the researcher was not relying on callbacks (Gillham 2001). Some
interviewees will not want to take time to meet in the office, as there may be a
perception office meetings could go on for some time (Gillham, 2001). Interviewees
are happier to talk over the phone even out of office hours, therefore not disrupting
their working day and can focus on the researchers questions (Gillham, 2001). A
mix of telephone and face-to-face interviewees were conducted, giving a balance
between response rates and costs.
7.6 Sampling
A non-probability purposive sampling technique was used, allowing the interviewer
to select interviewees based on their profession and experience of dealing with on
farm diversifications (Struwig and Stead 2007). Interviewees were then selected
from large and small surveyors and solicitors, resulting in a range of landlords and
21
tenants being interviewed. This brought together views of 11 individuals, five were
agents, two were landlords, two were tenants and two were solicitors.
Patton (2014) states there may not be an exact number of interviewees that need
to be carried out, but a starting figure should be identified. As the interviews begin
this number may be adjusted, depending on discoveries. Although the larger the
sample size, the more reliable the results are.
7.7 Reliability
Interviews are susceptible to low reliability due to interview and participant bias if
they are not carried out consistently (Saunders et al., 2012). To maintain reliability,
the researcher asked questions free from interviewer bias and leading questions.
The questions were asked in the same tone of voice in similar surroundings to
reduce any influences (Saunders et al., 2012). Interviews were voice recorded and
notes were taken to protect the data against any bias however it was felt
interviewees gave more restrained responses knowing they were recorded.
7.8 Validity
Validity is a measure of how accurate the findings are from the research (McNeill,
2005). Qualitative research will allow the author to gather thorough and detailed
information, however it is recognised some interviewees may have biased opinions,
and others may have a different view upon reflection. Although semi-structured
interviews allow higher validity because areas of discussion can be clarified during
the interview, and observer error is lessened, it should be noted statistical
generalisations cannot be made (Saunders et al., 2012).
Yin, (2011) stated the key control issue is the validity of qualitative research.
Triangulation can be used to collect three different reference points, which in turn
will strength the validity of the results (See figure 7). Patton, (2014) stated this could
be expensive, therefore limits the amount of triangulation that can be carried out in
this research.
Landlords/Agents
Solicitors
Tenants/Agents
(Source: Authors Own)
Figure 7: Research triangulation
22
Before the research interviews took place, professionals were contacted to
ascertain the general views and understanding of the research question. A pilot
interview was conducted on a family friend (Blaxter et al., 2010). Interviews were
then set up with landlords, agents, solicitors and tenants to get a fully informed
answer on the research objectives. Figure 5 was shown to the interviewees to
demonstrate the issue that is being researched. Broadly the same questions were
asked to landlords, agents and solicitors and similar questions were asked to
tenants, however some interviews explored different ideas, which lead to other
questions being asked. More agents were interviewed, as these are the people
dealing with the issues raised on a daily basis, therefore will have more knowledge
of the issues.
Dates and times were agreed between the interviewee and the researcher to gain
the best time to talk free of distractions, as it was understood how busy the
interviewees would be.
7.9 Ethics
As third parties were involved with this research project, ethics needed to be taken
into account (Blaxter et al., 2010). An evaluation form was completed before the
research project began detailing the project and any considerations that needed to
be taken into account. Ethics has always been at the forefront of the research project
with interviewees remaining anonymous and transcripts typed as a true and correct
record. Farmers and professionals talking about their farms and clients are not very
willing to share data, therefore at the beginning of the interviews it was made clear
to the interviewees that the interview would remain anonymous, also encouraging
them to expand on their views (Saunders et al., 2012). If participants were not happy
to be interviewed, no pressure was applied and they were not interviewed.
7.10 Interview Strategy
The questions asked were intended to fulfill the research gap. Justifications of these
questions can be seen in Appendix 4.
7.11 Limitations
Some agents and solicitors gave very detailed responses; however, it would have
been beneficial to speak to more parties. Due to the small sample size this increased
the chance of the data being skewed, but because of time and cost limitations, a
larger sample size could not have been achieved.
Notes were taken along with audio recordings in the interviews to limit observer error
(Blaxter et al., 2010), however reliability could have been improved by video
recording the interviews, as these could have been used to assess the body
language of the interviewee and interviewer (Blaxter et al., 2010).
23
8 ANALYSIS
Transcribed interviews were inputted into NVivo which is a qualitative analysis
software program, whereby themes and sub themes were coded. (See Figure 8).
Implications
Keeping the activity
within an FBT
Advantages of
diversification
remaining within an
FBT
Disadvantages of
diversification
remaining within an
FBT
Implications
FBTs designed
ability to address the
increasing level of on
farm diversification
Putting the activity
within a business
lease on
comencement
Advantages of
diversification being
put on business
lease
Putting the activity
onto a business
lease once
established
Disadvantages of
diversification being
put on a business
lease
Specific clauses
involved with dealing
with the
diversification
(Source: Authors Own)
Figure 8: Coding themes
24
9 DISCUSSION
9.1 OBJECTIVE ONE
To review the ATA 1995, in particular its perceived designed ability to address the
increasing level of on farm diversification.
Although the literature review showed there were many barriers to diversification, it
was shown FBTs attempted to encourage on farm diversification, especially
compared to AHAs (Whitehead et al., 2002).
Most respondents agree diversification rates have increased over the years and are
continuing to rise due to the rising volatility of agricultural markets but many are
concerned as to whether the ATA sufficiently covers the increasing levels of
diversification, this is in line with Whitehead et al., (2002).
Table two in point 5.4 demonstrated similar terms can be drawn up in an FBT to that
in a commercial lease, therefore FBTs have the ability to govern on farm
diversification. The main issue preventing agents confidently using the ATA when
on farm diversification arises is because of the scale and the possibility of future
growth of the diversification.
This study revealed it is possible for an on farm diversification to be governed by
the ATA through a well-drafted FBT as Respondent seven (a solicitor from a national
firm) stated. Other agents acting for both landlords and tenants also stated
diversification could be governed by the ATA but only to a certain extent. This is in
agreement with point 2.4 of the literature review stating there is a lack of
appreciation of the flexibility of the ATA. Some solicitors agreed with this, but due to
the nature of their work they would put the diversification within a LTA agreement.
Respondent nine (solicitor) stated “I am a trained property lawyer who specialises
in agricultural business leases, so this is what I know and know works”. Although
the solicitors stated it is possible for a farm diversification to be governed by an FBT,
they would not turn clients away. The tenants (Respondents 10 and 11) did not have
much knowledge of business leases, therefore did not have an input into the type of
lease that was used.
One agent from a national surveyors firm who acts for landlords and tenants said
there are many uncertainties meaning the diversification activities are put on a
business lease. The main issue revealed was the lack of understanding and
knowledge of when a farm becomes a commercial unit, therefore if governed by the
wrong tenancy, a judge would hold the unit to have protection under Part II LTA
1954, as discussed in the literature review. The tipping point of when a farm
becomes a commercial unit was discussed through the interviews. Some agents
stated achieving planning permission on the land or buildings was the tipping point,
others suggested the tipping point was the turnover rent, however they were unsure
of the amount this point would be. The suggested tipping points are illustrated in
Figure 9. This raises the question of what a farm actually is today. A farm on the
urban fringe may be very different to what a farm is in West Wales. This creates a
problem, as one definition does not fit all cases.
25
LTA
1954
FBT
Adding value
to farm
produce
Good
landlord
tenant
relationship
Planning
permission
achieved
Potential for
quick and
large growth
of the
business
Diversification
turnover is less
than 25% of the
whole holding
Diversification
turnover is 2550% of the
whole holding
Complex
business set
up
Diversification
turnover is greater
than 50% of the
whole holding
(Source: Authors own)
Figure 9: A model to show the perceived tipping points of when an on farm diversification is governed by an
FBT or a commercial lease
Figure 9 shows a tipping table model for when a diversification remains within an
FBT or placed within a LTA agreement. The further away the reason from the pivot
indicates there is more weight in the agent/solicitor putting the activity on that
particular agreement. The closer the factor is to the pivot means there is much more
uncertainty as to which agreement should be used.
Carrying out interviews highlighted the lack of confidence and uncertainty agents
had when dealing with on farm diversifications on tenanted farms, with many
respondents using words such as ‘cautious’, ‘vary’, and ‘uncertain’. Respondent
eight (an agent from a large institutional firm) stated agents need to be made to feel
more comfortable in their ability to use the ATA for on farm diversifications, whether
this is legislation changes or guidance produced.
26
One agent from a small firm of surveyors acting for landlords and tenants felt there
was not enough diversification currently happening for the government to address
this problem. Respondent one (an agent from a national surveyors firm who acts for
landlords and tenants) raised the point whether the government looks at this issue
soon, or in another 20 years when there is a higher level of diversification, and a
larger issue. This relates back to the literature review as farm incomes are
decreasing, diversifications may still be increasing (DEFRA, 2014b).
27
9.2 OBJECTIVE TWO
To assess why landlords may decide to permit a diversified activity to remain
within the original FBT structure, the implications this may cause and any
advantages and disadvantages for both the landlord and tenant.
9.2.1 Reasons to allow diversification within an FBT
The main idea drawn out of the agents’ interviews was it depends on the scale of
the diversification. One agent from a large institutional firm acting for landlords and
tenants said ‘it is perfectly fine within an FBT, if it is a small scale diversified activity’.
Common examples that respondents gave were;
Liveries
Storage units
Small farm shops
Although all parties interviewed had contrasting views on what diversifications would
be allowed under an FBT, the examples given are similar to the examples
considered in point 2.2. An agent who is from a small firm of surveyors said as long
as the diversified business related to the farming element, it would be suitable within
an FBT. E.g. A farm shop where the tenant sells produce from the farm holding. The
differentiating opinions links back to the difficulty in defining diversification as
discussed in point 2.1.
Another reason to re-grant an FBT incorporating the diversified activity was to
include other family members. For example, a tenant’s wife wanted to run a B&B in
the farmhouse; this remained within the FBT but extra clauses were added and the
wife’s name was put on the tenancy agreement to avoid issues if they spilt up.
Although respondents had different views of when a diversified activity could remain
within an FBT, they all agreed it was on a case-by-case decision and the whole
business had to be taken into account.
9.2.2 Implications of leaving the diversification within an FBT
The interviews revealed agents were worried about the complexity of rent reviews if
the diversification activity was included in the FBT. This is because there would be
less comparables as stated by Respondent two (an agent from a large institutional
firm acting for landlords and tenants). Due to the lack of suitable comparables, the
risk increases of having a rent that does not fully justify the capability of profit that
the whole farm could earn. Agents and solicitors agreed it is possible to have a
different rent formula for the diversification, to the farming element drawn into the
FBT, as demonstrated by Figure 10.
28
(Source: Authors own)
Figure 10: A model to show the ability to draw separate rent review provisions into the same FBT for the farm
holding and diversified business
29
According to one agent (from a small firm of surveyors acting for landlords and
tenants), another common issue with the diversification reaming within an FBT is
how end of tenancy compensation is dealt with. The diversification activity will
usually have required a financial investment, either by the landlord, tenant or both.
This creates another reason for parties to disagree, especially agreeing what are
the tenant’s improvements and what are classed as fixtures. This is a barrier to
diversification on farms governed by an FBT because of the short terms as
discussed in the literature review. It was discussed with respondents if terms are
agreed from the outset, and drafted into the FBT problems should be limited.
9.2.3 Advantages of incorporating the diversification within the FBT
Most respondents agreed the main advantage was the lower cost associated with
an agent incorporating the diversification within an FBT, rather than instructing a
solicitor to draw up a LTA lease. Agents would commonly instruct a solicitor to draw
up a commercial lease. The turnaround of drawing up an FBT is much quicker than
instructing a solicitor to draw up a business lease, therefore benefiting the client in
terms of money and time. Cost and time was found to be the main driving force for
agents to leave the diversification within an FBT. If agents explain to landlords that
they can use the existing FBT to govern the diversification, it shows they are thinking
of innovative ways to manage the estate cost efficiently, and proactively, increasing
the chances of client retention. If this approach is used across each office of a
national firm of surveyors on each estate, the solicitor’s fees may dramatically fall,
therefore increasing the surveyor’s fees. This is especially the case when the
existing FBTs can govern the most common types of on farm diversification.
Although the solicitors agreed it was a cheaper option, they could not give any other
advantages, as discussed in 9.1.
Leaving the diversification within an FBT would mean there is more chance IHT
relief could be claimed on the whole of the holding, presuming the diversification is
de-minimus to the farming element, or it forms part of the agricultural element. As
Respondent two (an agent from a large institutional firm acting for landlords and
tenants) stated; it depends how HMRC evaluates the holding, but there is more
chance it will gain APR, if the diversification is on an FBT as oppose to a separate
business lease.
It was agreed by all interviewees farmers understand FBTs more than business
leases. Three respondents stated the ATA 1995 is more widely recognised than the
LTA 1954. It was revealed although agents are more comfortable in dealing with
FBTs, it does not mean all agents are good at drafting sound agreements, and this
gives rise to tenancy disputes. Because of this, agents feel more comfortable in
instructing a solicitor to deal with the diversification to avoid the liability being placed
on them.
Most landlords and agents stated having a separate business lease for the
diversification meant more management and administration time needed to be
allocated to each farm holding. This is because the agreements are likely to have
different term dates, rent review provisions, break clauses and termination dates.
This gives rise to more mistakes being made especially in terms of serving critical
notices. If all were governed under one FBT this would mean one term date, break
clauses etc. In terms of rent provisions different formulas can be used for the
agricultural element and the diversification element, but both have the same rent
review date meaning a single rent is negotiated (see figure 10).
30
9.2.4 Disadvantages of incorporating the diversification within the FBT
The main issue revealed from the interviews was the uncertainty of the growth of
the diversification. If the diversified activity was successful and grew dramatically
and a disagreement between parties occurred, the tenancy agreement would be
inspected. It could be held a commercial business as oppose to an agricultural
holding, therefore securing protection under the LTA 1954. This is unfavourable
from the landlords’ point of view as discussed in point 2.6 of the literature review.
Agents stated they have learnt from previous experience or colleagues experiences
where there has being disagreements between parties, therefore are cautious with
how they deal with the diversification due to the risk. Figure 11 shows a model that
an agent could use to examine the risk level; therefore identifying a suitable solution.
(Source: Authors own)
Figure 11: A model to assist with the governance of on farm diversification using risk levels
Respondent three (an agent form a small firm of surveyors) stated farmers are not
typically the best entrepreneurs, which disagrees with point 2.3 in the literature
review. Respondent three sated the farmer is unlikely to be the most suited person
to manage the diversification. If the diversification was allowed within the FBT but
the tenant farmer was putting more effort into the diversification, and neglecting the
farm, the landlord would want to take the diversification back in hand. This would
cause pressure on the landlord tenant relationship, which leads to further
complications in the management of the holding.
31
9.3 OBJECTIVE THREE
To assess why landlords prefer to remove the diversified activity from an FBT
structure, and relocate it to within one governed by the LTA 1954 on commencement
of the diversification activity. This will examine any implications, advantages and
disadvantages for both landlord and tenant.
9.3.1 Reasons to put the diversification on a LTA tenancy
The most common reason to put the diversification on a LTA tenancy at
commencement was the uncertainty of the growth of business and whether this
would then become more predominant than the agricultural element on the farm.
Landlords and their agents were very uncertain whether the tenant would achieve
security under the LTA 1954 if there were a dispute and a judge had to rule.
Respondent five (an agent from a large firm of surveyors mainly acting for landlords)
stated instead of placing the diversification within an FBT or a business lease a
license agreement could be used instead. This respondent uses an Improved
Finance Agreement (IFA) to govern a loan from the landlord to the tenant, which
allows the tenant to improve the farm holding, for example putting a building up. The
landlord would pay for a large percentage of the building and the tenant would pay
the landlord back over a certain time frame. This agreement runs with the tenancy
agreement but the loan repayment is kept separate from the rent, therefore does
not get merged in the rent figure (see figure 10). The agreement had its own terms
that related to the loan. Respondent five stated this agreement has being used on
diversifications such as Glamping. The IFA was used as the landlord and tenant did
not want a business lease due to the cost and perceived complexity. The client was
enthusiastic about the innovative and proactive idea and instructed Respondent five
to manage the holding. In contrast other agents stated a licence may not be suitable
due to the factors which distinguish a lease and a licence as discussed in point 3.3.
Respondent seven and nine who are solicitors, stated that on farm diversifications
on AHA tenancies have always being taken out of the AHA and governed by a
separate business lease. It was highlighted that because this procedure has being
practiced over many years, agents will continue to instruct solicitors to draw up a
business lease. Some agents agreed with this as they stated their peers have dealt
with the issue by drawing up a business lease, leading them to do the same. None
of the agents had any guidance notes detailing how diversification should be dealt
with across firm. Respondent eight (an agent from a large institutional firm) is
producing a guidance note detailing what the institutional firm would like to see
present in an on farm diversification. This firm was very proactive about governing
on farm diversifications within FBTs.
9.3.2 Implications of the diversification being on a separate business lease
One agent from a large institutional firm acting for landlords and tenants stated
putting the diversified activity onto a business lease means the landlord can achieve
Full Repairing and Insuring (FRI) terms, putting all the onerous on the tenant which
is quite rare within an FBT. This disagrees with Table two as FRI terms can be
achieved within an FBT, due to the freedom of contract.
According to one solicitor, business rents are typically higher than agricultural rents
and this means from a landlord’s point of view, depending on their estate objectives,
a larger return on their assets can be achieved if the diversification activity is on a
business lease.
32
9.3.3 Advantages of the diversification being on a separate business lease
The interviews revealed if the farm business setup is complex, agents did not feel
comfortable in their skills to deal with this. Usually in this case a solicitor would be
instructed anyway, and from the solicitors interviews it was established solicitors
would always put the diversified activity onto a LTA tenancy.
It was found due to the uncertainty of when a diversified farm holding becomes a
commercial unit as discussed in point 9.1, protecting the client’s interest outweighed
any benefits of leaving the diversification within the FBT. As discussed before,
agents and solicitors know putting the activity on a LTA agreement is successful,
therefore more inclined to carry on doing so to protect the clients’ interest.
9.3.4 Disadvantages of the diversification being on a separate business lease
The most common disadvantage associated with putting the diversification within a
business lease is the cost and time that is associated with instructing a solicitor, to
draw up the lease, as discussed in point 9.2.3. The research showed the cost to
instruct a solicitor to draw up a business lease ranges from £750 to £5,000.
Solicitors and some agents stated this cost was value for money as it was protecting
the client’s interests. However landlords and agents agreed that this cost is
expensive, especially if the agent could draw up an FBT with the diversification
included. From the landlords point of view this would be very beneficial as drawing
up FBTs are normally included in the management fee.
The tenants and their agents stated business leases are not very well known or user
friendly. An agent highlighted if a business lease was given to a farmer, they may
be concerned with what the landlord is requiring them to sign, therefore becoming
mistrustful of both the agreement and the landlord. This will put pressure on the
landlord-tenant relationship.
33
9.4 OBJECTIVE FOUR
Assess why landlords prefer to remove the diversified activity from an FBT structure
and relocate it within one governed by the LTA 1954 once the activity has become
established. This will examine any implications, advantages and disadvantages for
both landlord and tenant.
The research discovered both agents and solicitors thought due to the typical shortterm length of an FBT as discussed in point 3.4, the diversification will be discussed
and negotiated at the beginning of the tenancy. The tenants agreed with this, as it
was decided at the outset that their diversification was going to remain within an
FBT, or be put on a 54 Act. In contrast one agent stated most farm diversifications
start off small as a side-line business, often without permission, therefore months or
years later, it is decided how it will be governed. It was discussed that expertise,
desire and financial investment generates large restrictions for starting a successful
business straight away, this is in agreement with point 2.4 of the literature review. It
is unlikely a tenant would invest a huge amount of money into a farm that has a term
of less than five years. Similarly a landlord will not want to invest a large amount of
money into a farm holding if the tenant isn’t going to be the right person to manage
the commercial business, although point 2.5 of the literature review highlighted
some landlords are encouraging diversifications. See Objective Three for
implications, advantages and disadvantages.
9.4.1 Recommendations to encourage governing diversification within the
FBT
Agents stated by removing the common user clause that prohibits non-agricultural
use there would be a cost to the landlord. This is not an issue for landlords who
encourage diversification, but seems to be a problem for larger private landlords, as
it will have an effect on the holding, location, and the estate’s reputation. This factor
needs to be overcome first.
There needs to be a clearly defined tipping point for when a diversification activity
can no longer remain within an FBT. This could be defined through the turnover of
the diversified business, achieving planning permission, or a particular size. This
would give agents confidence to leave the diversification within the FBT.
The notice conditions could be adapted to clearly ensure that if the use changes, so
the holding could be classed a commercial unit, it would not be protected by Part II
of the LTA 1954, but would remain as an FBT or a commercial lease without the
security of tenure.
These points need to be published as formal guidance or legislation so landlords
and agents can rely on it. This in turn may bring case law to the forefront, which will
provide guidance on what is allowed. This will then possibly start to increase
confidence levels of agents and landlords using FBTs to govern on farm
diversification (Edwards, V, 2015. Pers. Comm. Mrs Edwards is a partner of
Hatchers Solicitors LLP).
34
10 CONCLUSION
This research shows FBTs have the ability to govern on farm diversification, as the
terms typically seen in a business lease can be written into an FBT. A key advantage
that is often overlooked of FBTs is the suitability to govern on farm diversification.
This is not due to the scope of the ATA 1995 but the lack of appreciation from
professionals, tenants and landlords, which leads them to putting the diversification
within a LTA tenancy.
An advantage for leaving the diversification within an FBT is the cost saving potential
through reduced solicitors fees and management time. Additionally both parties
understand FBTs, and there are increased chances of achieving IHT relief over the
whole holding. The main disadvantage uncovered is that professionals are uncertain
as to when the diversification causes the farm holding to be classed as a commercial
unit, therefore achieving security of tenure. The perceived implications of keeping
the diversification within an FBT were that FRI terms would be harder to achieve,
however the research showed FRI terms could be achieved within an FBT.
The main advantage for putting the diversification within a business lease is that
professionals are completely certain the landlord’s interests are protected.
Subsequently there is potential for a large solicitors fee for putting the diversification
onto a business lease. The implication of putting the diversification within a business
lease is it would be easier to achieve higher rents due to business rents being
greater than agricultural rents. However the report showed rents can be negotiated
by mutual agreement, and the diversification activity rent can be kept separate and
defined by a different formula.
It was discovered solicitors would always put the diversified business onto a
separate business lease because that is what they are trained for. It was revealed
agents and solicitors had the same mentality that as diversifications were taken out
of AHA agreements, this procedure is the accepted practice for diversification within
FBTs. The tenants that were interviewed did not have any influence on how their
diversification venture would be governed. They simply wanted to diversify,
demonstrating trust in their agents and landlords.
It was found to be uncommon for the diversified activity to be removed from an FBT
once established, due to the short term of an FBT, as this would have been
discussed at the beginning of the tenancy. This would not be the case if the tenant
started the diversification without permission, as the FBT would need to be
surrendered and re-granted to take into account the terms of the diversified activity.
Overall professionals demonstrated uncertainty and contrasting views about what
is legally acceptable, due to the lack of guidance and case law, but also the lack of
knowledge of the flexibility of the ATA 1995. The main uncertainty was the tipping
point of when a farm becomes a commercial unit, therefore when it was
unacceptable for the diversification to remain within the FBT. It was discussed that
this could be hard to define due to the major differences in farm holdings in
geographical areas.
35
10.1 Further Research
The objectives of this report have being achieved through interviews; however,
further studies could be carried out to quantify how many landlords and agents put
the diversification onto a business lease. Also quantifying the size of these farms
and the diversification activity in terms of turnover and scale, to see if there is an
agreed definable tipping point.
As discussed in the methodology it would be beneficial to carry out further interviews
to strengthen this reports findings. Research could be carried out into the
effectiveness of the ideas discussed in point 9.4.1, to encourage the diversification
activity within the FBT. This would provide solid advice for landlord and agents on
how to deal with on farm diversification, with a view on saving solicitors fees and
maintaining landlord-tenant relationships.
36
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