Rural: Investment on Tenanted Agricultural Holdings
Thu 25 February 2021
We are finding that many tenants, and some landlords, are considering significant investment on their tenanted farms. This is often part of a drive to diversify and increase profitability, particularly when considering the upcoming changes to agricultural support. Both tenants and landlords have been seeking our advice as to how their investment would, and should, be treated at the end of the tenancy.
, Associate and Rural Chartered Surveyor based at our Northallerton office, sets out some of the key considerations for both tenants and landlords where one or both parties wish to invest on their tenanted farm, using investment in new buildings as an example.
For any new building to be erected and to be treated as a tenant’s improvement at the end of a tenancy, the landlord’s written consent is required, regardless of whether a tenancy is a Farm Business Tenancy (an FBT) or a tenancy under the Agricultural Holdings Act (an AHA tenancy). Those improvements with written consent can be assessed for compensation at the end of the tenancy. If written consent has not been acquired, new buildings are referred to as tenant’s fixtures and are not eligible for compensation.
Tenant’s fixtures belong to the tenant and are their responsibility to remove (to sell or re-use elsewhere, subject to serving notice) at the end of the tenancy. The landlord can elect to take them over at the end of the tenancy at an assessed price, depending on the type of tenancy. If the landlord doesn’t want them, they must be removed, and the land must be restored.
Investments with the landlord’s written consent are called a tenant’s improvements. Consent can be given subject to the agreed cost of the building being written down over a period of years (whereby the tenant would be compensated for the recorded investment if their tenancy ended), or it can be unconditional (whereby the compensation is assessed based on any value still in the investment).
Written consent means that the building remains on the farm at the end of the tenancy, which is often good for the landlord. It also provides an incentive for a tenant to invest in the farm as they will know that they will be compensated for the building if they leave the farm within the write-down period (or if there is still value in the investment if there is no write-down period). The building remains the tenant’s asset until the landlord takes it over and the tenant is responsible for insurance and repairs.
Under an FBT, a tenant can apply for arbitration if written consent for a new building is refused. There are also provisions for compensation at the end of the tenancy if written consent is given but there is no specific mention of how the compensation will be calculated. Under an AHA tenancy, if consent is not obtained the building is treated as a tenant’s fixture (see above) with very different compensation provisions.
The landlord can also agree to invest in a new building and can charge rent on it. This can provide a good return for the landlord and, of course, investing in the farm can help make it more profitable and viable. Recent reforms mean that a landlord can now get a return on their investment in the holding without affecting the rent review process.
When putting up a new building, it is also important to obtain the appropriate Local Planning Authority consent – on which our Planning and Development team can advise – and ensure the building is properly insured. As AMC agents, youngsRPS can also advise on finance if it is required.
If you are a tenant considering investing in your farm or a landlord with a tenant who wishes to invest, we would strongly recommend you seek advice on your position and options. Once matters are agreed it is vital that they are properly recorded in a Memorandum drafted by a rural/agricultural professional, signed and dated by the parties and attached to the tenancy agreement.
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