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Agricultural Estates NewsletterWinter 2014

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Agricultural Estates Newsletter Winter 2014

Editorial

“Nil desperandum” I whispered to myself encouragingly over the summer as I swatted my way ineffectually up various chalk streams. Now winter is here I find myself muttering the same words at my desk, gazing over a rainswept Kingsway, feeling a bit glum about the relentless river of regulation running through the professional lives of lawyers and land agents.

From energy efficiency regulations to red tape in the private rented sector, this newsletter contains plenty of examples of new and complex regulation. How can one hope to get to grips with it all? And nothing, it seems, is ever simple: try agreeing surrenders of AHA tenancies or terminating 1954 Act business tenancies and we soon find ourselves muddled in statutory complexity. I hope the articles in this newsletter provide some helpful fingerposts.

And yet, as I ponder at the window, I also sense a thin bat’s squeak of hope: just as the gentle art of angling is not really about catching fish (most obviously when I am on the riverbank), so lawyer and land agent should not lose heart at the amount they do not know. There is always someone else nearby who does. Nil desperandum. For us there is only the trying.

James Maxwell

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IHT Treatment of Trusts and the Taxation of Employee Benefits – Simplification?

CAP Update

Energy Efficiency Regulations

Landlord’s Liability for a Tenant’s Nuisance

Red Tape in the Private Rented Sector

Pipe Dreams Revisited

Employment Update

Terminating Business Tenancies with Security of Tenure

A Valuer’s Duty

Surrenders of Agricultural Holdings Act Tenancies

Landed Estates Group

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Contents

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IHT Treatment of Trusts and the Taxation of Employee Benefits – Simplification?

Writing about HMRC consultations, draft legislation and announcements about as yet undefined changes in tax law runs the risk of being more confusing than helpful. At the time of writing, however, two areas of proposed change are likely to have particular relevance to our readers. Both arise from proposals to simplify areas of tax and we are not alone amongst tax practitioners in reacting with both cynicism and dread when either HMRC or politicians talk about “simplification” of tax. History has taught us that such measures usually mean increasing the scope of the tax (generally by abolishing reliefs) and increasing the volume of legislation (generally to tackle perceived “avoidance”).

Inheritance Tax Treatment of TrustsThe first of the current proposals is the simplification of the inheritance tax (IHT) treatment of trusts. This has been running for a couple of years now and is on its third consultation. Unlike some recent consultations where there seems to have been little evidence of clear intention on the part of HMRC to listen, these proposals have during this period been substantially modified in the light of recommendations from consultees.

There is no denying that the calculation of IHT 10 yearly charges has, since their creation in 1984 (their incidence was increased significantly by the Finance Act 2006), been technically complex – in many cases to such an extent that the cost of computing the charge and checking HMRC’s computations on an assessment has been disproportionate to the actual amount of the tax payable. It can also be problematic because the calculations depend upon historic information about the settlor’s history of gifts at the time the settlement was created. That information is often lost in the mists of time.

From HMRC’s point of view, however, there is another motive in these changes. That is to counter a perceived avoidance opportunity in the creation of multiple settlements each of which would have its own nil rate band. After being in relatively common practice for decades following the original introduction of IHT, this was finally considered to be a threat when HMRC lost the Rysaffe case in 2003.

The essence of the proposals as they stand in the consultation issued in June 2014 (which closed for comment in September) is as follows:

1. Each individual will be given a “settlement nil-rate band” (SNRB) which is separate from his or her own general IHT nil-rate band (NRB).

2. It will be for the settlor to decide, when creating any settlement, whether and if so how much of the SNRB it should have.

3. Unlike the general NRB, which effectively regenerates every seven years, an individual has only one SNRB available during his or her lifetime. The SNRB will be the same as and will change in line with the general NRB.

4. 10 yearly charges will in future be calculated by simply deducting the amount of the SNRB (if any) applicable to the settlement and charging the balance of the value of the trust fund (after reliefs) at 6%.

5. There will be anti-forestalling provisions so that the new rules will apply to all settlements created on or after 6 June 2014.

6. In relation to settlements created before 6 June 2014 the old rules continue to apply to the extent that they determine the amount of the NRB attributable to the settlement.

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7. Historic information about the settlor’s previous chargeable transfers at the time such a settlement was made will still be need to be held. Beyond this, however, the actual amount of the charge will be calculated at the flat rate of 6% on the remaining value of the trust fund.

The intention is that the new rules will become law as part of the Finance Act 2015, the timetable for which is itself somewhat uncertain because of the General Election due on 7 May 2015. A settlor contemplating putting agricultural property which qualifies for 100% APR, or chattels on which conditional exemption will be granted, or a business qualifying for 100% BPR, into a new settlement might well not wish to allocate any of his SNRB to that settlement, on the principle that the future 10 yearly charges should be eliminated by those reliefs. Instead, the settlor might save his SNRB for a settlement intended to hold cash or investments which will not qualify for any relief. Taxation of Employee BenefitsThe other consultation which deserves attention ahead of its becoming law relates to the taxation of employee benefits. This is a proposed wide ranging reform and “simplification” of the present complex rules which have evolved over a considerable period of time. One of the particular areas of relevance to landed estates is the treatment of estate employees provided with free accommodation as part of their terms of employment. The issue of whether such accommodation is a taxable benefit to any particular employee is currently determined by a number of factors, including established practice in the sector and whether the employee is required to occupy the accommodation for the better performance of his or her duties. The Office of Tax Simplification has suggested that the rules for calculating such benefits are outdated and that such an exemption should

be framed more closely around whether the accommodation is ‘necessary’ for the job.

The duties of the modern estate worker are in many cases very different from what they would have been 10, 20 or 50 years ago; in some cases the need to live on the estate is now hard to justify, but for others who perform multiple roles in the diverse business that most landed estates tend to be, living on the estate is more crucial than ever. Such duties as membership of the fire rescue team for an historic house and its contents are an example. It is to be hoped that the new legislation will fully recognise this. One aspect of the proposal that does seem clear is that where there is a taxable benefit on the provision of accommodation the tax is likely in future to be based on the open market rental value of the property provided.

Many estates have come under HMRC’s scrutiny on this subject in recent years and it is not currently clear how the new simplified legislation will affect the sector. However, now is the time for estate owners to review their estate workers’ contracts of employment and to consider this issue both with their accountants and their solicitors.

Both consultations cite “simplification” as an end goal; it remains to be seen whether the legislation which is likely to follow will calm the fear of tax practitioners that such reforms are simply aimed at increasing revenue.

Rhoddy Voremberg

Now is the time for estate owners to review their estate workers’ contracts of employment and to consider this issue both with their accountants and their solicitors.

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CAP Update

The trickle of further detail from DEFRA has continued in recent weeks.

Active FarmerKeen readers of this newsletter will recall that the European regulation 1307/2013 contains a definition of “active farmer”, as well as a “negative list” of entities that are, prima facie, not entitled to qualify for the new Basic Payment Scheme (BPS) (subject to certain re-admission criteria). These include airports and railways, water companies, those offering real estate services and those providing permanent sports and recreation grounds.

DEFRA has published guidance, although inevitably it is not the complete picture. In particular, under the term real estate services, DEFRA has written “this is likely to involve property developers and estate agencies. We do not have all the details on these activities yet, but more information will be available before the end of the year”.

Plainly this is bad news for estate agents who also farm. That said, one suspects not an enormous number of estate agents do farm. Of greater interest is the definition of “property developer”. Many estates will undertake, from time to time, a certain amount of property development (some on a very substantial scale). Those estates will need to consider carefully the guidance that DEFRA will, one hopes, publish before the end of the year.

On a slightly more positive note, DEFRA has grasped the nettle of giving guidance as to what constitutes “permanent sports and recreation grounds”. The guidance is sufficiently detailed to address a variety of scenarios: gardens open to the public, clay pigeon shooting, rugby pitches (with permanent structures), golf courses and camping grounds (assuming permanent

structures). Operating any of those may disqualify one from being an active farmer.

As mentioned at the outset, it is possible for those falling foul of either, say, real estate services or permanent sports and recreation grounds, to re-qualify as active farmers. To do so, a farmer will need to pass one of three criteria:

1. that annual SPS or BPS payments are at least 5% of total non-agricultural receipts in the most recent financial year; or

2. that total agricultural receipts are at least 15% of total receipts in the most recent financial year; or

3. that the primary business objective is agricultural.

DEFRA has now published reasonably comprehensive guidance on what constitutes receipts from agricultural activities. Those who find themselves having to attempt to requalify would do well to study this guidance closely.

Greening: Crop DiversificationAs previously reported 30% of the BPS payment will depend on compliance with the “greening” requirements. In order to meet crop diversification obligations, farmers with between 10 hectares and 30 hectares must grow at least 2 crops (with the larger not covering more than 75% of the arable area); those farming over 30 hectares must grow at least 3 crops (with the largest not covering more than 75% and the largest two together not covering more than 95% of the arable area). What counts as a ‘crop’ for the crop diversification rules is a matter of some complexity. The most up-to-date list is on www.gov.uk/cap-reform. Happily, fallow land counts as a crop.

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In order to comply, farmers will need to ensure that these crops are in the ground from 1 May to 30 June in a claim year. This is the ‘inspection period’ for crop diversification. The RPA plans to inspect about 5% of the farms during this period to ensure compliance. If the crop has been harvested by the end of the inspection period, the indications are that the RPA will accept that the crop was present if stubble or other crop residue is still there.

Greening: EFAsThere is also more detail on ecological focus areas. As is well known, farmers with over 15 hectares of arable land must comply with an obligation that 5% of that land be allocated as an EFA. We reported in the last newsletter about various features that can count towards the EFA. It is now clear that a hedge (or hedgerow) can count towards the EFA total if it is growing on or adjacent to arable land which forms part of the holding and has a continuous length of at least 20 metres. The hedge can include gaps, as long as any gap is not more than 20 metres. There is no minimum or maximum width or height for a hedge. The general rule is that if the farmer is responsible for the land on both sides of the hedge (even if one side has a nonarable or nonagricultural use such as a road or wood) then he can claim both sides of the hedge towards the EFA total. Each metre of hedge is worth 10m² of area towards the EFA target (or 5m² if only half the hedge counts).

Many farmers will be dissuaded from relying on hedges in order to establish their EFA, as it will usually be easier to do that using other features such as fallow land, and because of fears that delays in mapping hedgerows by the RPA will result in delays to the 2015 BPS payment.Careful attention needs to be paid to the periods in which the EFA feature must be in situ in order to count towards the 5% target. Fallow land, for

example, must be present from 1 January to 30 June (note that the crop diversification fallow period is limited to 1 May to 30 June). Particular care should be taken when relying on catch crops (an EFA period of 31 August – 1 October in the claim year) and cover crops (an EFA period commencing on 1 October in the claim year and expiring on the following 15 January). A farmer who makes a forward commitment in May to having these features in place will need to include indemnities in any contract for sale of the land taking place later in the year. Outgoing tenants yielding up possession in Michaelmas of the claim year will probably wish to stay clear of relying on catch crops and cover crops towards their EFA targets.

Some Other DevelopmentsIt is also now clear that land with solar panels on it will not be eligible for the BPS, even if it is being grazed; nor can any features on it count towards an EFA.

DEFRA has also announced how it will address the risk of double funding between greening and Environmental Stewardship agreements. All appropriate ELS options can be used towards EFA requirements. Whilst no HLS agreements will have their payments adjusted for greening, about 4,000 ELS agreements starting on or after 1 January 2012 may have their payments reduced if they included “double funded” options. Natural England is writing to all agreement holders who may be affected.

Edmund Fetherston-Dilke and James Maxwell

DEFRA has grasped the nettle of giving guidance as to what constitutes ‘permanent sports and recreation grounds’.

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Energy Efficiency Regulations

The Energy Act 2011 has been around for a while now, but it is only in the last few months that the Government has consulted on one of its principal elements. The Act requires:

• regulations to be put in place to provide that private landlords may not let a property if it falls below a certain energy efficiency level (minimum standard regulations); and

• regulations allowing a domestic tenant to request that a landlord make energy efficiency improvements (tenant’s improvement regulations).

The requirements appear to be motivated not just by the Government’s green agenda but also by a concern over fuel poverty in some households. Technically, the relevant sections of the Act are not yet in force, but the drive with which the Department of Energy and Climate Change is approaching the issue affirms their stated aim to have the regulations in place before the general election in May next year.

The Minimum Standard RegulationsThe consultations confirmed that the minimum energy efficiency level will be Energy Performance Certificate (EPC) rating E, so those properties rated F and G will need to be improved to rating E before they can be let. This applies to both domestic and non-domestic properties, though there are some minor differences in the detail. Those properties which do not require an EPC on a letting will not be affected. Equally, if the property does not have a valid EPC – which may legitimately be the case, if the EPC regime has never applied to that property – then the new regulations will not apply.

For domestic property, the new regulations will apply to properties in England and Wales

let under assured tenancies (including ASTs) pursuant to the Housing Act 1988 and regulated tenancies under the Rent Act 1977. They will not apply to social landlords or social housing, or property occupied under a licence rather than a lease. Notably there is no exemption for very long or very short leases of domestic properties (in contrast to non-domestic properties), provided the lettings fulfil the criteria for an assured or regulated tenancy.

The consultations set out a detailed process involving the landlord obtaining a Green Deal Assessment (the Green Deal is considered further below) and quotes and investigating other funding options. As long as a landlord with an F or G rated property carries out at least those works meeting the “Golden Rule” – essentially, works that pay for themselves in financial savings due to reduced energy use, taking into account available funding – they will be able to let their property. Incidental expenses (such as the cost of third party consents) have not been taken into account in these calculations, but the Government is seeking views about them.

The Government has suggested several exemptions:

• Where the EPC rating is F or G, as long as the landlord has undertaken all the works that meet the “Golden Rule”.

• Where the required works would result in a material reduction in a property’s value (according to a valuer accredited with RICS).

• Where the works require any form of consent and that consent is not granted, or is granted subject to “unreasonable” conditions (through no fault of the landlord, who must have used “best endeavours” to obtain it). What is meant by “unreasonable” and “best endeavours” will hopefully be clarified, but it may depend on the circumstances.

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The minimum energy efficiency level will be Energy Performance Certificate rating E, so those properties rated F and G will need to be improved to rating E before they can be let.

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These exemptions would only last for 5 years – from which date is not clear – or until the tenant moves out, if the reason for the exemption is that tenant’s lack of consent. Whether or not a landlord will need a certificate of exemption from the local authority has not been decided; the consultation asked for views on this.

The Government’s preferred timescale is for the regulations to apply to new tenancies from April 2018 and to all existing tenancies from April 2020, allowing landlords time to improve their properties. It is acknowledged that the standard required will rise further over time, to meet the Government’s plan to ensure that as many fuel-poor homes as possible reach rating C by 2030. It is not yet clear when the details of this “trajectory” will be put forward.

Local authorities will be responsible for enforcement, with the burden likely to fall on trading standards officers, as it does with the EPC regime. Sanctions for non-compliance will include fines (up to £5,000 for domestic properties) and a requirement to do the works within 6 months, although there is no suggestion that a breach of the regulations will invalidate the tenancy. It would always be the landlord who faces enforcement action, even if they have delegated their obligations to an agent and it is the agent who has failed to comply.

A number of elements of this regime are unclear, including whether the regulations will apply to lease renewals (the Government is considering including them even though they do not require an EPC) and periodic leases (where technically new leases begin with each period), as well as the consequences of a sale by a landlord part-way through the laborious process described in the consultation. What may prove particularly complex is the dynamic between the landlord and tenant as regards the Green Deal, since it

is the bill-payer (usually the tenant) who makes the Green Deal payments through their energy bills, rather than the landlord for whom the works are done.

What is already apparent, however, is that the key to dealing with the proposed regulations will be keeping records of all stages of the procedure – EPCs before and after the works, Green Deal Assessments and quotes, details of consents required including applications and correspondence and any valuation to show a likely reduction in value.

The Tenant’s Improvement RegulationsFrom 1 April 2016, the Government proposes that landlords may not reasonably refuse a tenant’s request for consent to energy efficiency improvements. The tenant’s improvement regulations will apply to the same leases as do the minimum standard regulations, and also will only apply where an EPC is required. However, in contrast to the minimum standard regulations, these regulations will apply regardless of the EPC rating, and even if there is no existing EPC.

A tenant would first have to obtain an EPC, a Green Deal Assessment or a report from a qualified surveyor recommending improvements for the property, and would need to seek funding from, for example, the Green Deal, grants or their own sources. They would then be able to make a request of the landlord (submitting certain evidence) that those improvements be made. The request could be at any time during their lease (except where the landlord or the tenant has served notice to end the tenancy or court action has begun for the tenant’s rent arrears). The landlord would have three months to respond, accepting the proposal (including any Green Deal finance, if proposed), rejecting it (with reasons) or – it is suggested – giving a counter-proposal. The tenant would have two

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months to respond to any counter-proposal, agreeing to it or withdrawing their request, otherwise the request will lapse.

The proposed regulations are unlikely to specify when a landlord’s refusal will be reasonable and when it will not, because it will depend on the circumstances. However, the consultation does suggest some examples, such as:

• if the tenant’s request does not contain the required information or it does not cover any necessary “making good” works;

• where the landlord already has plans to make energy efficiency improvements;

• where the tenant has previously refused to consent to a landlord’s request to carry out similar works;

• where the electricity meter is shared with other premises and the other users of that meter do not agree to the Green Deal repayments;

• where a consent is required (such as planning permission or freeholder consent) and is refused (though freeholders might be given a similar obligation not to unreasonably refuse); and

• where the works would cause a net material decrease in the property value.

The tenant would be entitled to apply to the First-tier tribunal to resolve disputes, for example if the landlord refuses but the tenant does not believe the explanation is reasonable, or it disputes the landlord’s counter-proposal.

Reliance on other regimes By necessity, the new regulations will be built on the back of the Energy Performance of Buildings (England and Wales) Regulations 2012 (EPC regulations). This has the unfortunate consequence of multiplying the errors inherent in those regulations: where there is uncertainty about when an EPC is required, there will be uncertainty over whether the new regulations apply, on top of any oddities within the new regulations themselves.

In the same way, the two sets of regulations rely heavily on the Green Deal functioning properly (and the difficulties outlined in Louisa Passmore’s article in our Summer 2013 issue remain). Moreover, the regulations will undoubtedly change the way the Green Deal operates, due to the vast increase in demand for assessments which may not necessarily lead to the recommended works being done.

What next? The Department of Energy and Climate Change has confirmed to the writer that a draft of the regulations is being prepared and is likely to be in its final form by the end of the year. Given the DECC’s determination to plough on with the new regulations, it is unlikely that they will be the subject of a further consultation prior to being laid before Parliament.

Shona Ferguson

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Landlord’s Liability for a Tenant’s Nuisance

It is quite common for a landowner to become embroiled in a dispute when a neighbour or neighbours complain about nuisance caused by the landowner’s tenant. A nuisance is an unlawful interference with the use and enjoyment of another person’s land. Such disputes can stem from a variety of causes, for example, dust or vibrations caused by a workshop or noise caused by leisure uses such as a clay pigeon shooting or music from a wedding venue. Landowners often have a lurking anxiety that they might find themselves liable for their tenant’s nuisance, which (after all) they might be said to be permitting or authorising by letting the land to the tenant for the very purposes that are causing the nuisance.

The recent supreme court case of Coventry v Lawrence has caused a stir of excitement amongst property lawyers (for its decision on when a court should be prepared to award damages in lieu of an injunction), but the case also provides useful guidance on the circumstances in which a landlord might find itself liable for the nuisance caused by its tenant.

The case concerned a claim for noise nuisance brought by an individual against a neighbouring motocross and speedway operator. Ultimately, the court found against the speedway operator, but the claim against the operator’s landlord was dismissed.

In Coventry v Lawrence, the Supreme Court set the threshold for a landlord to be liable at a very high level: the nuisance must have been an “inevitable, or almost certain, consequence of the letting” or the landlord must have “directly or actively participated in the nuisance”.

The Supreme Court looked at the following two alternative tests which should be used to establish a landlord’s liability:

1. At the time of the letting, was the nuisance an inevitable, or almost certain, consequence of the letting?

In this case, although the landlord knew that the property was to be used for motorsport, and that use resulted in nuisance, this was not sufficient for the landlord to be liable. The property could have been used for motorsport without a nuisance being caused. For instance, the tenant could have installed effective noise bunds around the perimeter of the track.

If the nuisance was inevitable at the time of the letting, the existence of tenant’s covenants against causing nuisance in the lease would not have protected the landlord from liability.

2. Had the landlord participated “actively” or “directly” in the nuisance?

This was decided on the facts and the majority held that the following factors were sufficient evidence to demonstrate that the landlord had not participated in the nuisance:

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Landowners often have a lurking anxiety that they might find themselves liable for their tenant’s nuisance, which (after all) they might be said to be permitting or authorising by letting the land to the tenant for the very purposes that are causing the nuisance.

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• doing nothing to stop or discourage the tenant from causing a nuisance did not amount to participation;

• trying to mitigate the nuisance could not create an inference that the landlord authorised it (the landlord had laid a straw bale wall around the track to reduce noise); and

• attempting to defend the nuisance claims against the tenant was not tantamount to participation or authorising the nuisance.

On the facts of the case, the claim in nuisance against the landlord was dismissed, but it was a close thing: two of the judges considered that the landlord had participated in the nuisance.However, the case is reassuring news for landlords (investment landlords especially) because it sets the bar high for a landlord to be liable for a nuisance caused by a tenant. Nevertheless, if a landlord is letting a property for a use which will inevitably result in a nuisance to neighbours, or if, on the facts, the landlord has actively or directly participated in the nuisance, liability for landlords could still arise.

Patrick Hammond

If a landlord is letting a property for a use which will inevitably result in a nuisance to neighbours, or if, on the facts, the landlord has actively or directly participated in the nuisance, liability for landlords could still arise.

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Red Tape in the Private Rented Sector

In recent years, the Government has been making a concerted effort to improve standards in the domestic private rented sector. The initiative goes back to 2008, when the Government-commissioned Rugg Review recommended, amongst other things, regulation for lettings and managing agencies and the introduction of redress schemes. The Government began consulting on its strategy as early as 2009 and the project continues, with new measures having come into force in the last few months – namely the obligation for property managers and lettings agents to belong to a redress scheme and an RICS Code of Practice for private rented housing. These coincide with obligations on landlords to check the immigration status of their tenants as well as more robust, EU-derived legislation to deal with misleading and aggressive sales practices.

Redress SchemesThe snappily-named Redress Schemes for Lettings Agency Work and Property Management Work (Requirement to Belong to a Scheme etc) (England) Order 2014 came into force on 1 October 2014, and does largely what the title suggests.

Those who “in the course of business” act on instructions from prospective landlords and tenants of assured tenancies (including ASTs) under the Housing Act 1988 (except long leases) will need to belong to a redress scheme to deal with complaints about that work from those prospective landlords and tenants. “Long leases” means those defined as such for the purposes of the enfranchisement of leases of flats – so, broadly, those granted for more than 21 years. There are of course exceptions: for example, the regulations do not catch those who only provide information or facilitate communication between prospective landlords and tenants, employers (if the prospective tenant is an employee or contractor), or those providing legal services.

In relation to property management, a person who (again, “in the course of business”) acts on instructions to carry out such work must belong to a redress scheme to deal with complaints, although there is more flexibility here since those who may make such a complaint are not defined. The application of the property management requirement is also wider, taking in not only assured tenancies but also protected tenancies under the Rent Act 1977 and long leases. Again, there are exceptions, including social landlords, local authorities, managers of commonhold land and refuge homes.

Some have suggested that the definition of “property management work” is open to broad interpretations, perhaps even including a landlord who employs a contractor to carry out repairs following a request from a tenant. However, the Government guidance suggests that the intention is to catch managing agents only, stating that landlords themselves should not normally be affected because they are not acting on behalf of another person. It would therefore appear that in-house property managers employed by a landlord are not obliged to join a redress scheme.

There are three redress schemes referred to in the Government’s guidance which are either administered or approved by the Government: Ombudsman Services Property, Property Redress Scheme and Property Ombudsman. Estate agents are already required to sign up to a redress scheme, but those already registered will now need to make sure that their scheme also covers their lettings agency and management work – otherwise they may face a fine of up to £5,000.

The Government’s current guidance can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/361556/Lettings_Agents_and_Property_Managers_redress_scheme_leaflet.pdf

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Estate agents are already required to sign up to a redress scheme, but those already registered will now need to make sure that their scheme also covers their lettings agency and management work.

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RICS Code of PracticeThe Royal Institute of Chartered Surveyors has launched a Code of Practice (available here: http://www.rics.org/Global/Private_Rented_Sector_code.2014.pdf) to address standards in private rented sector housing. This comprehensive code was developed at the request of the Department for Communities and Local Government and involved leading organisations in the residential property industry. It aims to ensure good quality homes to rent, consistent and high standards of management and consumer choice.

As with all codes of practice, there is no obligation on landlords and agents to sign up to it, but those to do so agree to abide by it. At the very least it provides a summary of how landlords and agents should be behaving in regard to their tenants – going beyond just legal requirements and covering best practice and ethical considerations – in relation to marketing, lettings, maintaining properties, terminating and renewing tenancies and special requirements for multi-let buildings. It sets out clearly which requirements are to be satisfied by landlords and which by agents, and there is also a useful checklist at the end of the Code, to help inexperienced landlords.

Misleading and Aggressive PracticesLegislation to combat misleading and aggressive commercial practices is not new: the Consumer Protection from Unfair Trading Regulations 2008 made it a criminal offence for businesses to use such practices. The one aspect missing was the ability of a consumer to have access to private redress. The new Consumer Protection (Amendment) Regulations 2014 have introduced this ability in relation to assured tenancies (including ASTs) and leases of holiday accommodation, amongst other services not related to the property industry, and are in force

from 1 October 2014. No other property contracts are affected, so the regulations will not apply to a sale of a freehold or any other type of lease.

What counts as “misleading” or “aggressive” is fairly broad, provided the action was a significant factor in the consumer entering into a contract or making a payment they would not otherwise have agreed to. An action can be misleading if it contains false information or is likely to mislead the average consumer in its overall presentation, which means that even omissions, if they affect the overall presentation, could be misleading. A trader (such as a landlord, or an agent acting on their behalf) claiming to have a firm commitment to a Code of Conduct, when in fact they do not, could also count. Aggressive practices include harassment, coercion and undue influence, as one would expect, but also any action that significantly impairs the average consumer’s freedom of choice. According to the Government guidance, this could include “pressure selling” and a salesperson overstaying their welcome in someone’s home.

If a trader is guilty of misleading or aggressive practices, the consumer would have one of two “standard remedies”, neither of which require the consumer to prove any loss, or show that the trader had any particular intention or acted dishonestly. The first remedy is their ability to terminate the contract if they complain within 90 days, rejecting the goods or the service, as long as it is possible to reject it (so in the case of a service, it must not have been fully performed). This could include a tenancy agreement that has been signed before the tenant moves in or a holiday let which is paid for in advance.

The second remedy is the ability to request a discount, for example if a service has already been performed (or partly performed) or the consumer complained too late. It is not entirely

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clear from the guidance how to judge when a service has been performed in the case of a tenancy: has it been fully performed once the initial letting has been made and the tenant has moved in, or only when the tenancy expires?

Landlords should bear in mind that if they employ agents to let or manage properties under assured tenancies or holiday accommodation, and their agents are guilty of misleading or aggressive practices, it is the landlord who would suffer the tenant’s claim, not the agent. Further clarification can be found in the Government’s guidance note which can be seen using this link: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/343753/bis-14-1430-misleading-and-aggressive-selling-rights-consumer-protection-amendment-regulations-2014-guidance.pdf

Immigration ChecksIn our Summer 2013 issue, Michal Chudy and Louisa Passmore reported on the then Immigration Bill, which came into force in May as the Immigration Act 2014. The new requirement for landlords to check the immigration status of prospective tenants or occupiers before letting their property is to be the subject of a pilot in Birmingham, Walsall, Sandwell, Dudley and Wolverhampton from 1 December this year. The Government has helpfully provided an online “right to rent” tool to help landlords to identify whether their property is affected and to comply with their obligations, together with a helpline (0300 069 9799).

The Code of Practice also promised by the Government is now available in “working draft” form (https://www.gov.uk/government/publications/right-to-rent-landlords-code-of-practice) and provides detailed explanations of how the requirements will work. Notably, the Code of Practice states that landlords may

delegate some of their obligations to agents; if there is a written agreement requiring the agent to carry out the immigration checks, it will be the agent, not the landlord, who suffers a penalty (up to £3,000) if they fail to do so. If an agent finds that a potential occupier does not have a right to rent and reports that to the landlord, if a lease or licence is then granted to that person, it is the landlord who would be liable. Landlords and agents should document their arrangements in their agency agreement, including any timescales for checks and reports to the landlord.

The Government expects to evaluate the pilot in Spring 2015, with a phased introduction of the new requirements to take place across the UK next year.

More to ComeThere is more regulation to come. One project in the pipeline is the potential reform of residential property management services, which is likely to follow a study currently being undertaken by the Competition and Markets Authority to ascertain issues in the market, such as leaseholders not being aware of their rights and having no influence over how services in their buildings are provided. A second is the consolidation of the existing consumer protection legislation through the Consumer Rights Bill, which will also introduce some new provisions, such as spoken or written statements becoming part of a binding contract if a consumer relies on them, and the need for letting agents to publicise their fees. The Consumer Rights Bill reached the House of Lords committee stage on 13 October 2014 and, if it becomes law, is likely to be in force around October 2015. Landlords and agents should watch out for further red tape.

Shona Ferguson

Aggressive practices include harassment, coercion and undue influence, as one would expect, but also any action that significantly impairs the average consumer’s freedom of choice.

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Pipe Dreams Revisited

Adoption of Private DrainsIn our Summer 2013 issue we reported on the transfer of responsibility for existing private sewers and lateral drains to water companies. Since those heady days things have gone sadly quiet as regards new sewers and drains. The Water Industry (Schemes for Adoption of Private Sewers and Lateral Drains) Regulations 2011 applied only to those private sewers and lateral drains in existence at 1 July 2011, leaving open the fate of those to be created after that date.

Section 42 of the Flood and Water Management Act 2010 (Act) is intended to deal with this (once in force). Those sewers and drains which are built between 2 July 2011 and the implementation of section 42 will, at some point, be automatically adopted, but this is dependent on section 42 coming into force. Thereafter, adoption will be mandatory and anyone wishing to connect a new sewer or lateral drain to the public sewer will be required to enter into an adoption agreement with the sewerage undertaker specifying the required standards of construction. The Government has already been given the power to make regulations setting out the standards it expects; an adoption agreement will only be able to deviate from those standards by express agreement between its parties.

Whilst section 42 is fully in force in Wales, in England a date has not yet been set. A consultation on the detail closed in November 2012; the responses are being considered alongside those to the 2012 consultation on sustainable drainage systems (SUDS) with a view to implementing the provisions at the same time. Given that SUDS are currently the subject of a second consultation, considering how to implement those provisions through the planning system rather than the scheme proposed by the Act, we could be waiting a long time.

Might section 42 go the way of the private water supplies consultation? After lengthy consideration, this initiative was shelved because the preferred option – that is, transferring ownership of some private water supply pipes to water companies – was considered too costly for property owners due to the likely increased bills.

Regulation of Septic TanksNow this is undoubtedly a topic of considerable interest. In our Spring 2011 newsletter we reported on the introduction of the Environmental Permitting (England and Wales) Regulations 2010 and the requirement to register any discharge of domestic sewage from septic tanks and sewage treatment plants. There was something of an outcry about the onerous nature of these new requirements and, consequently, the requirements were suspended in August 2011. The long-awaited consultation was launched in Spring 2014. DEFRA has now published the Government’s response to the consultation, which confirms the introduction of simplified regulations from 1 January 2015.

Under the new rules, there will be no requirement to register a discharge as exempt. As long as the discharge complies with a set of standard requirements, there will be no need to register with the Environment Agency or obtain a permit. DEFRA has provided a summary of the new requirements. The detailed rules will be published on the gov.uk website in January 2015. In general, it seems that as long as the discharge is:

• 5 cubic metres or less per day to a river, lake, stream, estuary or the sea and comes from a sewage treatment plant;

• 2 cubic metres or less per day to groundwater and comes from a septic tank or sewage treatment plant;

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• domestic and does not cause pollution; and

• outside a sensitive area or groundwater source protection zone 1 (SPZ1) – ie usually the 50 metre zone around a well, spring or borehole used for a domestic water supply;

then no permit is required from the Environment Agency.

The septic tank or sewage treatment plant must be maintained in accordance with the manufacturer’s specification and Environment Agency guidance. There is no longer a requirement to keep records of maintenance work or notify the Environment Agency if the discharge system stops. However, the Government will continue to recommend keeping records as good practice and when a property is sold the new owner will need to be given written notice stating that there is a small sewage discharge on the land and providing details of the waste water system and its maintenance.

Permits will be required for new discharges (commencing on or after 1 January 2015) in or near designated sensitive areas. The Environment Agency is proposing to reduce the number of areas which are designated as sensitive. A permit will not be required for existing discharges into designated sensitive areas if the standard requirements (mentioned above) are met.

All small sewage discharges into groundwater in a SPZ1 (whether existing discharges or new discharges after 1 January 2015) will require a permit.

Private Water SuppliesThe owners or managers of private water supplies will be well aware of the duties that the Private Water Supplies Regulations 2009 place on local authorities to test the quality

The common law liabilities associated with the provision of drinking water and the escalating cost of regulatory compliance regarding water quality has brought the problem of private water supplies into sharp focus for many rural landowners.

of water provided to houses on a private supply. This involvement very often leads to the local authority requiring the landowner to carry out improvements to the water supply. In some circumstances, landowners and water supply users may even find themselves served with a Regulation 18 Notice under the 2009 Regulations. The common law liabilities associated with the provision of drinking water and the escalating cost of regulatory compliance regarding water quality has brought the problem of private water supplies into sharp focus for many rural landowners.

Private water supplies are problematic. The precise location of the source is sometimes unknown, the route of pipes long-forgotten and the repair of pipes, tanks and pumps often in a sorry state. Moreover, there may be uncertainty as to who actually takes a supply of water from the supply. Some users will be Estate tenants, but others will be the owners of cottages sold off many years ago. Often there will be considerable confusion as to the legal basis on which such cottages continue to enjoy the supply. Some will have provisions in their title deeds; others will have two page terminable licences provided by the Estate office. In short, a private water supply is very often a dreadful muddle.

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This presents challenges to landowners who wish either to cease the private provision of water to some or all of those on the system (whether tenants or third party owners) or landowners who wish to continue the supply but to recover the increasing management costs from the users. The process of bringing about such changes needs to be carefully considered from the outset and dealt with very sensitively, given that domestic water supply is an emotive concern for the users (and it seems inevitable in these circumstances that one of the users is a retired solicitor with a lot of time on his hands). Estates need to be aware that section 80 Water Industry Act 1991 empowers local authorities to serve a notice on the owners/managers of private water supplies where they are failing to provide water ‘sufficient for domestic purposes’. Drinking Water Inspectorate guidance extends section 80 to cover threatened disconnections. The DWI directs local authorities to use section 80 notices to ensure that the owner of a private water supply continues to provide a supply until such time as a permanent alternative supply arrangement is put in place. In other words, there is a statutory prohibition on the physical disconnection of domestic properties from a private water supply until such time as an alternative source of water (whether from a borehole or the mains) is provided.

The implications of this statutory prohibition on landowners wishing to effect changes to the management of a private water supply (whether through disconnection or seeking increased subscriptions from users) are complex. Before embarking on such a process, landowners would be well advised to take legal advice and to think through with their professional advisers the best way of achieving their aims, through discussions with the water supply users, the local authority and even the DWI.

James Maxwell

Private water supplies are problematic. The precise location of the source is sometimes unknown, the route of pipes long-forgotten and the repair of pipes, tanks and pumps often in a sorry state.

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Employment Update

1. Holiday Leave and Holiday Pay Entitlement of Casual Workers

In light of the number of developments in this area over recent years, we set out below a summary of the legal rights to holiday leave and pay currently enjoyed by casual workers.

Holiday LeaveBasic leave entitlementAll workers qualify for basic statutory annual leave under the Working Time Regulations 1998, regardless of their length of service. The statutory leave entitlement of a full-time worker is 5.6 weeks’ (28 days’) paid holiday per year, which can include bank holidays.

Accrual during part years of serviceIt is good practice to state a worker’s leave entitlement in their contractual documentation so that both parties are clear on this issue from the outset. Given the short-term nature of casual worker appointments, often there will be a need to calculate the period of time they are due to work as a proportion of a full holiday year.

In effect:

• leave accrues at the rate of 1/12 of a full year’s entitlement at the beginning of each month of employment (ie 2.33 days per month on the basis of the worker being entitled only to the basic statutory entitlement); and

• where the amount of leave accrued includes a fraction of a day, this fraction should be rounded up to the nearest half-day (ie 2.5 days per month on the basis of the worker being entitled only to the basic statutory entitlement).

Understandably, a monthly rate will not be entirely appropriate where an appointment is to last days/weeks rather than months. Similarly, it

will not possible to specify the leave entitlement/accrual rate where it is not known in advance for how long a casual worker will be employed. The most straightforward way to deal with this is by permitting a casual worker to accrue holiday at a specified notional rate of the hours they are due to work. This rate is commonly set at 12.07% (this being the 5.6 weeks’ holiday entitlement calculated as a proportion of the remaining 46.4 working weeks in the year).

Holiday Pay Workers are entitled to be paid holiday pay at the rate of a week’s pay for a week’s leave. For casual workers it is generally accepted that any holiday pay should be based on their average pay in the twelve working weeks prior to termination. If there are variable elements of pay, for example overtime or bonuses for reaching certain targets, then this could affect the calculation method and in such cases taking tailored legal advice is recommended.

Payment for holiday leave should be made at the time when the leave is taken. The practice of including holiday pay in workers’ basic wages (so called “rolling up” of holiday pay) has been deemed unlawful. It is therefore vital that the holiday pay is separately identified on workers’ pay slips.

Pay on the termination of employmentWhen a worker’s employment ends, they must be paid in lieu of any accrued but unused holiday entitlement. This calculation should be based on the period actually worked and the amount of holiday actually taken, rather than any notional rate used (if applicable). Casual workers engaged on a series of discrete contracts will be entitled to payment for any accrued holiday at the end of each assignment and holiday will not accrue between jobs. Casual workers who are engaged on an

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“umbrella contract” which continues between assignments will continue to accrue holiday even when they are not working and will be treated like other full-time workers.

2. Family-friendly Rights

Flexible WorkingIn our Summer 2014 newsletter, we discussed the anticipated extension of the flexible working regime from 30 June 2014. To recap: previously, the opportunity to apply for flexible working was restricted to parents and carers, but now all employees with at least 26 weeks’ continuous service are entitled to ask their employer to accommodate their flexible working requirements for any reason (although an employee can only make one statutory request in any 12 month period).

What remains unchanged, however, is that employers are under no statutory obligation to grant a request as long as it cannot be accommodated on the grounds of any of the following business reasons:

• burden of additional costs;

• detrimental effect on ability to meet customer demand;

• inability to reorganise work among existing staff;

• inability to recruit additional staff;

• detrimental impact on quality;

• detrimental impact on performance;

• insufficiency of work during the periods the employee proposes to work; and/or

• planned structural changes.

When making their decision, employers should weigh the benefits of the requested changes for the employee and the business against any adverse business impact in the form of any of these business reasons.

Given the newly-extended reach of this right, it is worth introducing a flexible working policy. This will help increase consistency and transparency, thereby giving employees confidence that decisions are made objectively and that they will not be disadvantaged for making a request. Issues that a policy should cover include: how employees should make an application and what information it should contain; a statement that the employer will consider the request and only reject it for one of the eight statutory business reasons; who can accompany the employee to any meetings; arrangements for appeals; and time limits on dealing with requests.

Antenatal RightsSince 1 October 2014, fathers and partners of expectant mothers have been entitled to take unpaid time off on up to two occasions to accompany the mother to an antenatal appointment. The maximum amount of time allowed off for each appointment is six hours and thirty minutes. This right applies to all employees regardless of their length of service, although agency workers must have at least 12 weeks’ service.

An employer can ask an employee to provide a signed declaration stating: that s/he has a qualifying relationship with a pregnant woman; that the purpose in taking time off is to accompany the woman to an antenatal appointment; that the appointment has been made on the advice of a medical practitioner; and the date and time of the appointment.

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Shared Parental LeaveIn our summer 2014 newsletter, we outlined the new regime of shared parental leave (SPL) which will come into effect from 1 December 2014 and will apply to the parents of children expected to be born or placed for adoption on or after 5 April 2015. It is a completely new concept of family leave, intended to give working parents greater flexibility over their entitlement to take time off to care for a new child.

In summary, SPL provides for the following:

• The default position is that mothers will remain entitled to 52 weeks’ maternity leave, including two weeks’ compulsory maternity leave.

• Fathers (or the spouse or partner (of either sex) of the child’s mother) continue to be entitled to two weeks’ ordinary paternity leave.

• The SPL regime will only be triggered if the mother opts to end her maternity leave at any point after the end of the compulsory maternity leave.

• In such circumstances, the parents can share the remaining leave (ie up to a maximum of 50 weeks, being the remainder after the two weeks’ compulsory maternity leave taken by the mother). They can also share the remaining 37 weeks’ statutory pay.

• Parents can choose to take periods of SPL at the same time as each other or alternately.

• Parents can take SPL in a single block or in discontinuous blocks.

• Employees may give up to three notifications of an intention to take SPL, giving at least eight weeks’ notice each time. The system of notification requirements is perhaps the most complex area of the new regime, and further advice can be provided.

Given the implementation date for the SPL regime, employers could start receiving queries about it at any time. As a minimum, it is advisable for employers to prepare a policy on SPL setting out the eligibility criteria, employees’ entitlements, and what is expected of them in terms of notice requirements and evidence. Existing maternity and ordinary paternity leave policies can be retained in their current form, but additional paternity leave policies should be scrapped.

One of the most keenly debated topics about SPL concerns enhanced shared parental pay (ShPP). It is clear that if enhanced ShPP is paid, the same amount must be paid to both mothers and fathers of the same employer taking SPL to avoid the risk of discrimination. Less clear is whether employers who currently offer enhanced maternity pay will have to provide the same level of enhancement for ShPP. The Government’s guidance indicates that employers may continue to offer enhanced benefits to women only without the risk of discrimination, on the basis that women on maternity leave have special protection as a result of their biological position which can justify difference in pay. However, this position is by no means certain and is likely to be challenged in the courts. Further updates will follow if applicable.

It is a completely new concept of family leave, intended to give working parents greater flexibility over their entitlement to take time off to care for a new child.

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3. National Minimum Wage

Agricultural workers in Wales, and those employed in England before 1 October 2013, are entitled to the terms and conditions set out in the Agricultural Wages (England and Wales) Order 2012 as long as this entitlement is specifically stated in their contract. These pay rates have been covered in previous editions of this newsletter.

Agricultural workers in England who started on or after 1 October 2013 no longer fall within the Agricultural Wages regime, and instead must be paid at least the National Minimum Wage. The current minimum hourly rates are:

• £6.50 for those aged 21 and over;

• £5.13 for those aged 18 to 20;

• £3.79 for those aged 16 to 18; and

• £2.73 for apprentices.

Michal Chudy

Agricultural workers in England who started on or after 1 October 2013 no longer fall within the Agricultural Wages regime, and instead must be paid at least the National Minimum Wage.

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Terminating Business Tenancies with Security of Tenure

Estates will often have an old grain store or cart shed occupied by a local business or artisan. The lease has brought in a modest income for years, but recently the landowner has been looking with fresh eyes at the opportunities this farm building presents. However, regaining possession is difficult if the tenant has security of tenure under the Landlord and Tenant Act 1954. Under the 1954 Act tenants have a statutory right to renew their tenancy on its contractual determination. This affords them the right to renew for a term of up to 15 years (or longer if the parties so agree) and there is no limit to the number of statutory renewals. This article will focus on two of the most commonly cited grounds for termination which may be available to a landlord.

Intention to Develop or Reconstruct – Ground fThis is a ground for opposing a tenancy renewal where:

“on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding.”

There are a number of factors to consider here. First, ground f only relates to works to be carried out to “the holding”. This is defined as the part of the premises which the tenant occupies for the purposes of its business. For example, if a landowner has let the entirety of an old cowshed to a tenant but works are only being done to one part of the shed which the tenant does not in practice occupy for the purposes of its business, then the works in question will not qualify.

The entirety of the landowner’s works must be considered. If he already enjoys a right under the lease to carry out the works in question the ground will not be established.

Ground f encompasses a number of potential works. Demolition is given its ordinary meaning of the physical destruction of the premises. Reconstruction involves interference with the structure of the premises, most usually their demolition and replacement with something new. Construction involves the creation of something new rather than just altering what is already there. Mere refurbishment is unlikely to be sufficient.

It is important for the landowner to demonstrate that they have a firm and settled intention to carry out the works and a reasonable prospect of achieving that intention. The following would help the landowner establish this.

• board minutes on its intention, if it is a company;

• planning permission for the development;

• plans and drawings for the development;

• consents from third parties;

• a building contract;

• financing;

• vacant possession of any other part of the development site;

• a business plan for future use.

Even if the landowner does succeed in making out ground f, the tenant can still defeat the landowner’s opposition to a lease renewal by agreeing to (i) a new lease which entitles the landlord to carry out the works or (ii) a new lease of only part of the premises which allows the works to be carried out.

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Intention to occupy the premises for the purpose of its own business – Ground gThe landowner can oppose renewal if:

“on the termination of the current tenancy the landlord intends to occupy the holding for the purposes, or partly for the purposes, of a business to be carried on by him therein, or as his residence”

Personal occupation by the landowner is not necessary; occupation by a farm manager, agent or other such party would suffice. However, occupation must be for the landlord’s own purposes; wishing to grant a new lease to a new third party (who is perhaps willing to pay a higher rent) is not sufficient. The landowner must also intend to occupy within a reasonable time of termination of the tenancy.

The landowner must either intend to occupy for the purposes of a business (where at least part of the premises must be used for such purpose) or as a residence (where the entire premises must be used for such purpose).

Again, the landlord must show a firm and settled intention to occupy the premises and the court will look for evidence similar to that set out above. If it is likely that the landlord will only occupy the premises for a short period of time, the landlord will not have the requisite intention.

Importantly, a landowner cannot rely on this ground if it has owned the premises for less than 5 years.

ConclusionAs can be seen, establishing either ground is far from straightforward. In the case of ground f, landowners frequently underestimate the scale of works and the practical steps necessary to undertake them. In the case of ground g, it is not uncommon for landowners to overlook the fact that occupation must be for their own purposes rather than to re-let the property to a new third party.

Landowners must not be tempted to misrepresent their intentions to tenants. If a tenant was to give up possession on the basis of representations that turn out to be untrue, then the tenant will have a claim for misrepresentation against the landlord. Similarly, if a landlord’s bona fide intentions to redevelop the property change, the landlord is under a duty to inform the tenant of that fact.

It should also be remembered that, in either case, if the landlord successfully opposes the lease renewal, it will nonetheless be required to pay the tenant statutory compensation. The sum payable is calculated as a multiplier of the rateable value of the property. Where the tenant and any predecessor that carried on the same business have been in occupation for business purposes for 14 years or more, the compensation is calculated as a multiplier of twice the rateable value.

Tom O’Malley

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A Valuer’s Duty IX

In 2011, the Court of Appeal in Scullion v Bank of Scotland plc (t/a Colleys) held that a valuer did not owe a duty of care to a buy-to-let purchaser of residential property, where the purchaser relied on the valuation for purposes beyond those for which it was originally given. In October this year, the High Court confirmed the limits on the duty to an investor in the somewhat different circumstances of Freemont (Denbigh) Ltd v Knight Frank LLP (2014) and provided a useful overview of the current law on the extent of a valuer’s duty.

The Facts The case involved development land on the outskirts of Denbigh, North Wales, which was formerly the site of the Grade-II* listed North Wales Hospital; it was in extreme disrepair. Knight Frank were instructed by the claimant to prepare a valuation of the property for secured lending purposes, because as part of the intended redevelopment, the claimant would be required to provide a bond from a bank as security for the performance of obligations in a planning agreement. The valuations given were £17m with outline planning permission and £18.7m with detailed planning consent.

Due to these valuations, the claimant later rejected several offers from developers to buy the site, because they could not match these amounts. Although outline planning permission was granted, detailed planning consent was never obtained and over time the site fell into even further disrepair, to the extent that the claimant believed that the costs of reinstating the site were likely to be so high as to render it worthless. They claimed that Knight Frank had negligently over-valued their property, and as a result they had lost the opportunity to sell the site before it lost all its value.

The Finding The Court of Appeal did not accept the claimant’s assertions, however, finding that Knight Frank did not owe any duty of care to them for the purpose of a sale of the site. The initial contract between the parties had stated that the valuation was for secured lending purposes only. There was no indication from the conduct of the parties at the time that they intended anything further, and any common law duty of care owed by Knight Frank did not extend beyond the terms of the contract. Furthermore, the judge in the case found that after the “controlling mind” of the claimant had realised he might have a claim against Knight Frank, he had “set about concocting” notes of prior discussions which misrepresented what had actually been agreed.

The Current LawStephen Smith QC (sitting as Deputy Judge of the High Court) helpfully set out in his judgment a summary of the current law in relation to the duties owed by valuers, which can be paraphrased as follows:

1. a valuer is likely to owe a common law duty of care to the person for whom the report was prepared (aside from any duty set out in an agreement between the parties);

2. the common law duty of care is likely to be limited to the purposes for which the report was prepared;

3. a valuer valuing premises for mortgage purposes (at least, if they are modest residential premises) may also owe a common law duty of care to the purchaser of those premises, if the valuer knows that his report is likely to be shown to the purchaser, the purchaser intends to use the premises to live in (not to let) and the valuer knows

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that his report is likely to be relied on by the purchaser for the purpose of deciding whether to buy the premises; but

4. a valuer instructed to produce a report for a lender for security purposes is unlikely to owe a common law duty of care to an investor who relies on the report for other purposes.

The fourth point above may be considered harsh, since Scullion was thought by some as rather unfair in painting those who intend to live in their properties as more deserving of legal protection than those who invest in residential property. Nonetheless, Freemont (Denbigh) confirms the 2011 finding and establishes that this principle applies to forms of investment other than buy-to-let. Valuers should make sure that the purpose of a valuation is clear at the outset.

Shona Ferguson

Valuers should make sure that the purpose of a valuation is clear at the outset.

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Surrenders of Agricultural Holdings Act Tenancies

Agricultural tenancies (AHA tenancies) under the “old” regime of the Agricultural Holdings Act 1986 (1986 Act) tend to be seen by landlords as less attractive than farm business tenancies (FBTs) under the “new” regime of the Agricultural Tenancies Act 1995 (1995 Act). FBTs give the landlord certainty as, subject sometimes to the service of notice, they terminate on the expiry date and a market rent is payable. In contrast, AHA tenancies are difficult to terminate, some carry succession rights and the rent is typically lower. Furthermore, tenancies granted after 1 September 1995, when the 1995 Act came into force, offer the landlord the potential of 100% agricultural property relief from inheritance tax (compared with a maximum agricultural property relief of 50% for earlier AHA tenancies).Landlords therefore often seek opportunities to negotiate surrenders of AHA tenancies and this article considers some issues that the landlord should bear in mind when negotiating a surrender.

Possibility of a successionOn the death or retirement of a tenant who has an AHA tenancy entered into before 12 July 1984, a close relative who is “suitable” and “eligible” may apply for a succession tenancy. A second succession on the same grounds is also possible, potentially tying up the land for three generations. If there is any danger of a successor who would otherwise qualify on the suitability and eligibility grounds disputing the surrender then it might be sensible to make the potential successor(s) seek independent legal advice and then acknowledge in writing that no rights are claimed.

DilapidationsWhere the property is in disrepair, it may be appropriate for the tenant either to be given some time to carry out specific remedial works or pay compensation to the landlord. The compensation

cannot exceed the amount of any diminution in the value of the landlord’s reversion as a result of the dilapidation. This means that if the landlord wishes to do something which would render repair worthless (such as demolish a building), the compensation will be reduced, sometimes to zero.

Compensation for improvementsThe subject of improvements under the 1986 Act is complicated but, in most cases, consent has to be given by the landlord for compensation to be due to the tenant at the end of the tenancy. Where compensation is claimed, the landlord should make sure the item is of a type which qualifies for compensation and that the tenant produces evidence of the landlord’s consent.

Compensation for disturbanceWhere a landlord serves a notice to quit, the tenant may in certain situations (the most common of which is a notice to quit for re-development purposes) be entitled to compensation for “disturbance”. Again, the rules are complex but some tenants will receive up to six years’ rent as compensation and a tenant will expect to be compensated properly if he agrees to surrender land without the landlord having to serve a notice to quit and sit out the notice period.

Tenant’s fixturesIn most situations the tenant is entitled to remove anything fixed by him to the holding by giving at least one month’s notice before the end of the term. The landlord can serve a counter-notice to buy the fixture by compensating the tenant and both parties will want to document which fixtures should remain and, where they are to remain, what compensation the tenant should receive.

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CropsWhere the tenant is leaving crops in the ground, he will expect compensation and a valuation may be required. Otherwise it is often agreed that the tenant should have a right of holdover for a period to allow the tenant access for harvesting (and sometimes storage) notwithstanding that the tenancy has been surrendered.

Farm saleThe tenant will have tractors and other farm equipment and, in many cases, livestock. It may be appropriate for a farm sale to take place and, if the sale will take place after the surrender, suitable rights will need to be given to the tenant. Often the landlord will want to list tidying up works which are expected within a particular timeframe to ensure the farm is left in good order for an incoming tenant.

Transfer of schemesIn all likelihood the tenant will claim single farm payment entitlements and other schemes might affect the farm, such as environmental schemes, woodland grant schemes and water abstraction licences. It is important the landlord understands what responsibilities will be taken on, what payments are due and what paperwork needs to be completed to ensure the schemes are transferred to the incoming tenant. Where not covered by the tenancy agreement (which is often the case given how much schemes have changed), the landlord may need to compensate the tenant for a transfer and the tenant may wish the landlord to indemnify him for any scheme breach after the surrender (and vice versa for any pre-surrender breach). If the schemes are held by a farming business, the farming business may need to be a party to the surrender documentation to ensure any transfer goes through properly.

EmployeesWhere a farming business which employs staff and the business (or part of it) is transferred as part of the surrender, the Transfer of Undertakings (Protection of Employment) Regulations 2006 may apply. If so, the employment rights of the staff survive the surrender and the incoming tenant becomes the employer in the place of the outgoing tenant. There are obligations to inform and consult representatives of the employees and the employees have special protection against dismissal and changes to their terms of employment which arise out of the surrender. The landlord therefore needs to understand fully the terms of employment of any staff and the future use and needs of the farm.

OccupationsIn contrast with the position where a notice to quit is served, authorised underlettings generally survive a surrender. The tenant therefore needs to account for all occupiers and the basis of their occupation. Particular care needs to be taken with farm workers or ex-farm workers as, even if they have paid no rent to the tenant, they may have security of tenure under the Rent (Agriculture) Act 1976 or as assured agricultural occupants under the Housing Act 1988. Both these Acts carry succession rights and, whilst a landlord can at least charge an assured agricultural occupant a market rent, only a “fair” (ie less than market) rent can be demanded of a Rent (Agriculture) Act tenant.

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ChargesCertain farming assets, such as crops, livestock, tractors and even a tenant’s entitlement to compensation under the 1986 Act, can be secured by way of an agricultural charge under the Agricultural Credits Act 1928. If they are so charged and are left at the farm, the assets may not be freely disposable and have less value. The landlord’s solicitor will often carry out an agricultural credits search, but the landlord should also try to make enquiries with the tenant about charges.

TaxGiven that tax is as certain as death, readers will not be disappointed to read that tax raises its ugly head on surrenders as well. The tax position will obviously differ in each case (it can be complicated) and specialist advice should be sought as necessary. Some of the main considerations, however, are as follows.

• Income tax. This is an issue for the tenant. So long as the disturbance compensation paid to the tenant is pursuant to a notice to quit (and here it is important to refer to the relevant case under the 1986 Act) this compensation will not be liable to income tax in the hands of the tenant. The tax treatment of compensation for other matters is not so straightforward. Income tax (or corporation tax if relevant) may be payable if the subject matter of the compensation is deemed to be trading stock.

• Capital Gains Tax. Again, this is likely to be of concern to the tenant. It may be an issue if any compensation is paid in respect of capital items rather than trading stock. It might also be an issue if the tenant receives a premium in exchange for the surrender, over and above any compensation or reimbursement received for any end-of-tenancy matters. This is on account of the chargeable gain realised by

the tenant for the disposal of his interest (ie the tenancy). Where the tenant is retiring from farming, it may well be that he is able to claim entrepreneurs relief; where the farmer is to continue farming, however, he might be able to claim roll-over relief.

• VAT. There is no VAT charged on statutory compensation due to a farm tenant. The matter might, however, require closer scrutiny in terms of other sums payable to the tenant in case there is a deemed supply. VAT will only be payable by the landlord on a premium paid to the tenant for the surrender if the farm tenant has opted to tax on his leasehold interest. This is unlikely ever to be an issue.

• Stamp Duty Land Tax. As a surrender of a leasehold interest constitutes the acquisition by the landlord of a chargeable interest, SDLT will be payable on any premium paid by the landlord for the surrender. Again, this is unlikely to arise in the vast majority of cases, not least because much of the consideration due to the tenant is not in fact for the surrender but rather by way of compensation but also because of the threshold (currently £150,000) below which no SDLT is payable.

DeedTo be effective a surrender of land should be by deed. If not by deed, then a surrender can be effected by operation of law (ie where the tenant has vacated, handed back the keys and, if he has it, the tenancy agreement). If the surrender is being documented, however, then it should be drafted as a deed.

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Surrender of PartWhere only some of the tenancy is being surrendered, the landlord should give careful thought as to what rights over the land remaining within the tenancy should be consented to by the tenant in the deed of surrender. Often land is surrendered for development and, if the site is going to require rights over adjoining land (for drainage, for example) then these rights should be expressly documented. Otherwise a landlord might be left having to try and rely on general exceptions and reservations in the tenancy agreement (which might turn out not to be there).

Agreement for SurrenderAn agreement for surrender is often used where the surrender will take place at a future date but the landlord wants to know that the tenant is bound. However, it is not possible to contract out of the 1986 Act (and the requirement for the landlord to serve a notice to quit etc) and it is therefore at least arguable that agreements for surrender which anticipate a formal surrender at a future date are unenforceable.

In reality most tenants stick to the bargain struck but, for greater peace of mind in the most important cases, a landlord should perhaps insist that the tenant seeks independent legal advice to reduce the risk of the terms of an agreement for surrender being overturned.

CAPThe new rules on the Basic Payment Scheme will require careful scrutiny as and when there is a surrender, not least in terms of who is to receive the payment for the year, the need for cross-indemnities on cross-compliance and the ramifications of the surrender (especially of part) on the greening obligations.

A surrender of a field is rather different to the bringing to an end of 50 years of a tenant’s farming activity involving workers and cottages, but in all cases there are traps for the unwary and the 1986 Act is not easy to navigate. One should not underestimate the time it can take to co-ordinate a surrender and, as ever, it can save time and money to take professional advice at an early stage.

Paul Krafft and Henry Goulding

A surrender of a field is rather different to the bringing to an end of 50 years of a tenant’s farming activity involving workers and cottages.

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The Landed Estates GroupXI

Farrer & Co has advised many of the country’s major landed estates for generations. From tax planning to manorial rights to Old Masters and sculpture parks, our experience and expertise is unrivalled. We are the UK’s leading London law firm for agricultural estates in both the Legal 500 and Chambers directories.

Whilst seeking to preserve the best of the past, the modern landed estate must always look to the future in order to flourish. Like any business it must think innovatively about how to generate revenue and manage assets efficiently. We can help. By drawing together expertise from throughout the firm we can provide all the services needed by the 21st century landed estate, including:

• Tax and succession planning

• Art, chattels and conditional exemption

• Business and ownership structures for families

• Events and public access

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• Renewable energy

• Mineral and sporting rights

• Planning, development and construction

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We pride ourselves on the personal attention we give our clients. Each client has a dedicated partner to be an accessible first point of contact with the firm. As every family and each estate is different, we visit our clients regularly to gain an understanding of an estate’s individual challenges and opportunities. We develop long-term relationships with our clients which are characterised by genuine affection and trust.

Whatever the situation, our advice will be clear, authoritative and driven by the need to provide you with a practical solution.

If you require further information on anything covered in this Newsletter please contact

James Carleton, Head of the Landed Estates Group ([email protected]; 020 3375 7405),James Maxwell, Editor ([email protected]; 020 3375 7364)or your usual contact at the firm on 020 3375 7000.

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Farrer & Co LLP66 Lincoln’s Inn Fields London WC2A 3LHTelephone +44 (0)20 3375 7000 Facsimile +44 (0)20 3375 7001Email [email protected]

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