Do Farm Business Tenancies (FBTs) work?
Published February 7th, 2014
It is amazing to think that more than eighteen years have passed since the introduction of Farm Business Tenancy Agreements and I now wonder what the panic was about at that time. Such agreements are now widely used in the industry and as we do not, of course, have the option of granting new Protective Tenancies under the Agricultural Holdings Act 1996. By the very nature of the older style tenancies these are disappearing every year as tenants pass on or retire without succession. In any event succession is not available in every case and many small parcels of land which were held on Protected Tenancies do not have succession rights available.
When speaking with farmers about rent reviews and tenancy matters in general there remains much animosity from some farmers about the validity of FBTs and what they have achieved. Many tenants quote very high rents with no security and onerous repairing obligations. This is quite a contrast to the protected tenancies which had an accepted mechanism for assessing rent, security of tenure and shared liabilities.
Despite the feeling that FBTs have hindered the industry they use is extremely widespread and perhaps when one analyses the market place there are more long term agreements than many tenants realise. The majority of agreements do relate to small parcels of bare land, but pre 1995 these were let on either grazing licences or the Glasden vs Bower exception. Other options including Sham Contract/Share Farming agreements where landowners tried to avoid the grant of any security, sometimes unsuccessfully.
From the landlords point of view the FBT gives the landowner good flexibility to manage the land as they see fit, secure a reasonable rent and potentially enjoy full Inheritance Tax Relief on death.
We all know that FBT rents are dictated by the market. Although there are provisions for formulaic rents the formulaic option is very rarely used. Consequently the rent is ultimately determined by putting the land to the market and deciding how much people will pay.
In many cases there may be little to choose between prospective tenants, particularly where the letting is on an estate type situation and the parties may well be known to each other. We do, however, come across certain circumstances where a landlord makes a positive choice not to accept the highest rent simply because there is little belief in the abilities of a prospective tenant.
Ultimately the choice is with the landlord.
It is frequently quoted to me, usually by tenants undergoing some form of a review, that high rents are unsustainable and lead to farmer bankruptcies. Upon looking at farm accounts though this is far from the case. I am not aware of a significant number of farmer bankruptcies. It also seems to be the case that those offering higher rents are often better business managers. Whilst it can be more challenging running a higher cost business it can often lead to greater efficiencies and therefore greater profitability.
Many FBT tenants are using FBTs as only part of their farming operation, perhaps with other land held on traditional tenancies and blocks of owned land. This does mean that the FBT land has an added value and hence why rents are at a particular level.
Another key concern of prospective tenants is the level of security which is offered and it is true that the majority of tenancies run for less than five years. However, in our experience landlords are prepared to consider longer term tenancies for larger blocks of land or farms with houses and buildings. As with the rent the position is largely dictated by the market and if people are prepared to pay a particular rent for a property with a certain level of security then that is a business decision they are in a position to make.
The alternative to the flexibility is for legislation to impose long term security in respect of tenancies. This would go some way to reverting to the 1986 Act. I am sure that most landowners would have great concerns about this approach in the free market economy in which we now exist.
It is quite likely that any attempt to impose minimum levels of security would reduce the amount of property being brought forward. Take, for example, a family situation where land is being held, perhaps, pending development of a business but is not required at the present time and is let out. It would be illogical for such cases not to be permitted. There may be other situations where a short term agreement is the most suitable arrangement for a particular owner; another example would be on the death of a farmer whereby the family require say two or three years to resolve issues and make decisions.
When the FBT regime was introduced one of the key drivers was actually diversification, not the availability of land. The use of an FBT agreement enables a farm to be let and the tenant to undertake some element of diversification with the landlord’s agreement. Under the old AHA regime diversification presented a problem to landlords and tenants. From the tenants point of view diversification could potentially be a bar to succession. From the landlords point of view it could be a bar to Inheritance Tax Relief and could potentially give rise to a Protected Commercial Tenancy. Provided the agreement is intended to cover farming then some commercial use could be permitted. This might include farm shops, processing, contracting, haulage or other areas of diversification that we see frequently on farms.
In reality there we come across very little diversification on farms as a result of FBTs. In many cases where there is a good diversification opportunity, for example creation of a farm shop, landlords usually prefer to use the route of a Commercial Tenancy and keep the property separate from the farm holding.
Landlord’s agents are often criticized for loading repairing obligations on to tenants. Notwithstanding this many traditional estates are still prepared to use the “model clauses” which most farmers are comfortable with and relate to the Agricultural Holdings Act. There is no reason why tenants cannot seek to negotiate on repairing obligations and, as with all issues referred to above, the approach has to be commercial. Tenants should take particular care where property is let to them in a poor condition to make sure they are not expected to put the property in good condition before keeping it in good condition. There is a world of difference between “put and keep” and “keep”. Ultimately a prudent tenant will consider repairing obligations and make some adjustment in the rent they offer.
The question is often raised about the availability of land for young farmers and whether or not FBT’s help or hinder. It is no secret that whether you are young or old there is a shortage of farmland in the UK and nobody is making any more of it. This means that young farmers have to compete with more established farmers for land which does come available. However, farming is a business so opportunities have to be approached by all parties on a business footing.
FBT’s can provide opportunities for landlords to let small areas to young farmers and incomers to the industry, using short terms to minimise their risk and assess a tenant’s capability. There are certainly circumstances where this has happened to the mutual benefit of those concerned.
WORD OF WARNING
We do occasionally see FBTs being used in inappropriate situations. They do not suit certain equestrian ventures, for example. The Agricultural Holdings Act 1995 has a clear definition of what constitutes agriculture for the purposes of a FBT and this does not include the running of an equestrian centre. Such uses should be dealt with under a Commercial Lease.
Those preparing to enter a FBT are also advised to ensure the agreement is properly drafted and in writing. It is amazing how many property arguments stem from a gentleman’s agreement not being the paper it is written on. If the agreement is to run for more than three years then it can only be drafted by a Solicitor, Chartered Surveyor or a member of the Central Association of Agricultural Valuers. We frequently see agreements drafted by farm advisers and others who are not legally qualified to undertake the work. If the agreement is drafted by an unqualified person then it may not have legal status if it had to be tested in Court.
SO DO FBTs WORK?
There is no doubt that FBTs have had a massive effect on freeing up land to be brought to the market and ensuring that there is some certainty available to both parties. A prudent landlord will seek a prudent tenant and will also be seeking to let their property on market terms.
It could be argued that farmers have been cushioned by historic provision and even after eighteen years are not fully adapted to the new regime. There is, certainly in most parts of the country, quite a difference between FBT provisions and rents and those under the Agricultural Holdings Act.
Like any other business a farmer does not have to enter the fray to secure more land but may choose to do so in order to expand his business and grow profitability. If this is the case then there is no reason why land cannot be taken on FBTs providing the farmer is fully aware of the implications.