to what extent do on-farm diversification … · the research discovered fbts are able to govern on...

TO WHAT EXTENT DO ON-FARM DIVERSIFICATION ACTIVITIES, ESTABLISHED UNDER A FARM BUSINESS

TENANCY STRUCTURE, REMAIN WITHIN THIS STRUCTURE ONCE ESTABLISHED?

by

CAROLINE LOUISE HORN

being an Honours Research Project submitted in partial fulfilment of the requirements for the BSc (Honours) Degree in

Rural Enterprise and Land Management

2015

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Table of Contents List of Figures ...................................................................................................... iii List of Tables ........................................................................................................ iv

Abbreviations ........................................................................................................ v

Acknowledgements ............................................................................................. vi Abstract ............................................................................................................... vii 1 INTRODUCTION ............................................................................................. 1

2 DIVERSIFICATION ......................................................................................... 2 2.1 Types of on farm diversification..................................................................... 2 2.2 Reasons to diversify ....................................................................................... 2 2.3 Diversification on tenanted farms .................................................................. 4 2.4 Landlords’ and tenant views of diversification ............................................. 4 2.5 Differences in diversification under AHAs to FBTs ...................................... 5

3 FARM BUSINESS TENANCY AGREEMENT ................................................. 6 3.1 What is an FBT? .............................................................................................. 6

3.1.1 Business criteria ............................................................................................ 6 3.1.2 Agricultural criteria ......................................................................................... 6 3.1.3 The notice conditions ..................................................................................... 6

3.2 Objectives of ATA 1995 ................................................................................... 6 3.3 Lease or Licence ............................................................................................. 6 3.4 Uptake of Farm Business Tenancies ............................................................. 7

4 THE REGULATORY REFORM (AGRICULTURAL TENANCIES) (ENGLAND AND WALES) ORDER 2006 ............................................................ 10

5 PART II LANDLORD & TENANT ACT 1954 ................................................. 11 5.1 History .............................................................................................................11 5.2 Contracting in and out ...................................................................................11 5.3 Link between LTA 1954 & ATA 1995 .............................................................11

6 RESEARCH GAP .......................................................................................... 17

7 METHOLDOLGY ........................................................................................... 19 7.1 Introduction ....................................................................................................19 7.2 Research Objectives ......................................................................................19 7.3 Research Methods .........................................................................................19

7.3.1 Philosophy ....................................................................................................20 7.3.2 Approach ......................................................................................................20 7.3.3 Research and Analysis Strategies ................................................................20 7.3.4 Choices ........................................................................................................21 7.3.5 Time Horizons ..............................................................................................21 7.3.6 Techniques and Procedures .........................................................................21

7.4 Semi- Structured Interviews ..........................................................................21 7.5 Telephone Interviews .....................................................................................21 7.6 Sampling .........................................................................................................21 7.7 Reliability ........................................................................................................22 7.8 Validity ............................................................................................................22 7.9 Ethics ..............................................................................................................23 7.10 Interview Strategy ..........................................................................................23 7.11 Limitations ......................................................................................................23

8 ANALYSIS ..................................................................................................... 24

9 DISCUSSION ................................................................................................ 25 9.1 OBJECTIVE ONE ............................................................................................25 9.2 OBJECTIVE TWO ............................................................................................28

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9.2.1 Reasons to allow diversification within an FBT .............................................28 9.2.2 Implications of leaving the diversification within an FBT ...............................28 9.2.3 Advantages of incorporating the diversification within the FBT .....................30 9.2.4 Disadvantages of incorporating the diversification within the FBT .................31

9.3 OBJECTIVE THREE ........................................................................................32 9.3.1 Reasons to put the diversification on a LTA tenancy ....................................32 9.3.2 Implications of the diversification being on a separate business lease ..........32 9.3.3 Advantages of the diversification being on a separate business lease ..........33 9.3.4 Disadvantages of the diversification being on a separate business lease .....33

9.4 OBJECTIVE FOUR ..........................................................................................34 9.4.1 Recommendations to encourage governing diversification within the FBT ....34

10 CONCLUSION ............................................................................................... 35 10.1 Further Research ............................................................................................36

REFERENCES ..................................................................................................... 37

BIBLIOGRPAHY .................................................................................................. 42

Appendices.......................................................................................................... 43

Appendix 1: Interview Questions ...................................................................... 43

Appendix 2: Transcripts ..................................................................................... 45

Appendix 3: Coding ............................................................................................ 75

Appendix 4: Interview Strategy ........................................................................ 103

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List of Figures Figure 1: Percentage of farms with diversified activities in England- 2006/07 to 2013/14………………………………………………………………………...................3 Figure 2: The total amount of hectares farmed under an FBT from 2009 to 2013...7 Figure 3: Average term length of FBTs………………………………………………...8 Figure 4: Percentage of land farmed under an FBT………………………................8 Figure 5: Possibilities available to landlord and agents to govern on farm diversifications…………………………………………………………………………...18 Figure 6: Research Onion demonstrating the research approaches that were adopted………….………………………………………………………………………..20 Figure 7: Research triangulation………………………………………………………22 Figure 8: Coding themes……………………………………………………………….24 Figure 9: A model to show the perceived tipping points of when an on farm diversification is governed by an FBT or a commercial lease……………………...26 Figure 10: A model to show the ability to draw separate rent review provisions into the same FBT for the farm holding and diversified business……………………….29 Figure 11: A model to assist with the governance of on farm diversification using risk levels……………………………………………………………………..................31

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List of Tables Table 1: Types of diversification………………………………………………………...2 Table 2: Comparison of terms between an FBT and a LTA agreement………..…13

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Abbreviations AHA Agricultural Holdings Act ATA Agricultural Tenancies Act DEFRA Department for Environment, Food and Rural Affairs FBT Farm Business Tenancy FRI Full Repairing and Insuring HMRC HM Revenue and Customs IFA Improved Finance Agreement LTA Landlord and Tenant Act TRIG Tenancy Reform Industry Group

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Acknowledgements I would like to thank Andrew Black for the support and guidance throughout this project. I would also like to thank my family not only for the continuous support through this research project but through my time at Harper Adams University. The participants of this research that kindly gave up their time, and the library staff that enabled me to complete my final year research project. Finally I would like to thank my friends for the support and enjoyment over the past four years.

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Abstract Reviewing literature highlighted there is a vast amount of information regarding on farm diversification within the tenanted sector. There is limited research detailing how diversifications on farms that are ruled by an Farm Business Tenancy (FBT) are currently governed. This project is being conducted to examine how diversifications on farms administered by an FBT are dealt with in terms of the tenancy agreement. The project uncovers whether it is practicable and legally permissible to manage the on farm diversification within the original FBT; or if a commercial lease is the more suited choice. This is of particular importance since one aim of introducing FBTs was to encourage diversification within the FBT. The research discovered FBTs are able to govern on farm diversification to a certain extent, however landlords and agents are unaware of the Agricultural Tenancies Act (ATA) flexibility to govern on farm diversifications. Due to a lack of industry guidance, and case law detailing the tipping point of when a farm becomes a commercial unit, agents are not as willing to govern the diversification under the original FBT. The main advantage of leaving the diversification within an FBT is it reduces costs and management time. Solicitors agreed FBTs can govern on farm diversifications, but as business tenancies enable them to earn a fee, they would always put the diversification on a business lease. If guidance was produced this would give agents confidence in their actions, and in turn could save landlords money in terms of solicitors fees and time.

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1 INTRODUCTION This research investigates whether it is possible for FBTs to govern on farm diversifications. Also whether landlords and agents keep the diversification within the FBT, or on a separate commercial agreement, even though FBTs were introduced to encourage on farm diversification within the existing agreement. DEFRA (2010) states the position of agriculture is now changing, households need to increase their disposable income through means other than conventional farming. Walley et al. (2011) agrees stating on farm diversification is held to improve the economic viability of farms especially tenanted farms. If the project discovers FBTs can legally govern on farm diversification but agents and landlords are not fully aware of this capability, this could influence landlords and agents to keep the diversification within the FBT. This will save landlords’ unnecessary solicitor’s fees. This study is based on a national scale. Semi-structured interviews will be conducted with industry professionals, landlords and tenants to gather as much detail as possible as to what currently happens, and views on what could happen in the future.

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2 DIVERSIFICATION From the literature reviewed it is agreed defining diversification is very subjective. The Centre of Rural Research (CRR) (2002) defined farm diversification as activities that are run on the farm that are dependent on land and farm capital assets. This is agreed with by Maye et al. (2009) and McNally (2001) as they state diversification can be classed as any activities that are run from the farm holding. In contrast in a later report Ilbery et al. (2010) state all non-agricultural income that is created on and off the farm, is classified as diversification. For the purposes of this research, the definition of diversification will be in line with CRR (2002). ‘Activities run on the farm that are dependent on land and farm capital

assets’

2.1 Types of on farm diversification Clark, (2009) surveyed 118 agricultural businesses and concluded the most common form of on farm diversification activities were;

x Agri-tourism x Recreational x Accommodation x Catering

In contrast CRR’s (2002) investigation was on a larger scale and Table one details the most common diversification activities:

Table 1: Types of diversification

Type of Diversification Most common activities Agricultural Services Agricultural contracting Trading Activities Hay/straw sales/ farm shop/

retail Accommodation Holiday Cottages/ rented

accommodation/ caravan park/B&B

Equine Livery yard Recreational Shooting/fishing activities

(Source: Adapted from: CRR, 2002)

2.2 Reasons to diversify From Clark’s (2009) survey, the main reasons to diversify were:

x Financial reasons x To exploit new market opportunities x Business survival x Business expansion

There has been a detailed amount of research uncovering the driving factors behind

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diversification. Maye et al. (2009) summaries them as being: x External Factors;

o Policy changes o Market opportunities o Location factors.

x Internal Factors;

o Farm size o Farm type o Entrepreneurial skills of the farmer.

Grande, (2011) and Hansson (2013) agrees with Maye et al. (2009) internal factors, stating success of on farm diversification is due to the age, succession, skills, and expertise of farmers. This is backed up further as Walley et al. (2011) state a decision to diversify must be based on an opportunity in the market that coincides with internal resources that are available. Alongside this the main driver of the diversification should be an entrepreneur who can identify the gap in the market. Walley et al. (2011) state diversification is a popular strategy for farmers wanting to survive due to a decline in farming profits and a changing economic environment. Whitehead et al. (2002) agree stating income from UK farming has fallen by 70% from 1995 to 2000 in which time saw a rise in diversification. In contrast CRR (2002) states diversification is not an option for failing farm holdings, which is agreed with by Prag (2002). From the literature reviewed it is agreed the most common reason to diversify is to attempt to increase income (Walley et al., 2011; Maye et al., 2009; Clark’s 2009). According to DEFRA (2015) farm business incomes are forecasted to fall or remain relatively similar across all types of farm. Although in the short-term, farm income has improved due to the low interest rate allowing investment, it is still one fifth less than farm income was in 1995; meaning diversification may continue to grow, especially on tenanted farms (DEFRA, 2014a). Figure 1 shows the percentage of farms that have diversified from 2006 to 2014, with a large proportion of the diversification being letting of agricultural buildings (DEFRA, 2014b).

(Source: DEFRA, 2014b)

Figure 1: Percentage of farms with diversified activities in England- 2006/07 to 2013/14

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2.3 Diversification on tenanted farms Restrictions preventing non-agricultural activities within the tenancy agreement is the main reason tenants are prevented from diversifying (Barr et al., 2013). This is supported by Maye et al. (2009) study which found through interviewing 52 tenant farmers, 52% thought their tenancy agreement restricted them from diversifying their farming enterprise, and 10% said their tenancy agreement prevented them from diversifying altogether. The main reason being the average term for an FBT was five years. This short-term lease makes it nearly impossible for the tenant to recover the start-up investment that is needed for the diversification (Ilbery et al., 2010). This is further backed up by DEFRA (2012a) as it is stated tenant farmers are less likely to diversify due to the lack of collateral, therefore their inability to finance the start-up of the diversification. In contrast CRR, (2002) state 66.4% of wholly tenanted farms have diversified compared to 54.5% of wholly owned farms. It should be noted the tenanted percentage does not distinguish between Agricultural Holdings Act (AHA) tenancies and FBTs. Whitehead et al. (2002) state from the various studies that have been carried out, 13% of farms have diversified under an FBT compared to 23% under an AHA, and 19% were wholly owner occupied. Whitehead et al. (2002) considers there is a lack of consensus on authors’ views whether FBTs do in fact promote diversification. He states some landlords, tenants and agents feel FBTs are flexible in terms of tenancy clauses, therefore accommodating farm businesses; however others feel the short average length of term and high rents are barriers to diversification. In response to the Tenancy Reform Industry Group (TRIG) encouraging on farm diversification the code of good practice for diversification within agricultural tenancies was produced (Bright, 2006). This sets out steps landlords and tenants should follow in order to encourage diversification rather than resisting diversification, or putting it onto a separate Landlord and Tenant Act (LTA) 1954 agreement (DEFRA, 2004). Some see this as a positive document to maintain good landlord tenant relationships (DEFRA, 2004), however others argue it does not encourage diversification on tenanted farms (Del Brioa et al., 2011). Reuvid (2003) states the ATA 1995 is flexible enough to allow on farm diversification, but landlords and professionals do not fully appreciate the flexibility of the ATA 1995, which limits the use. It was noted there was not any research evidence supporting this.

2.4 Landlords’ and tenant views of diversification According to Ilbery et al. (2010) 50% of landlords would allow tenants to diversify but only if the diversification activity was viable as a stand-alone business; does not damage the landscape, or compete with something the estate has already developed themselves. Pieraccini, (2009) examined diversification within National Trust properties, which highlighted that the National Trust’s stance is to encourage on farm diversification through FBTs, rather than commercial agreements. Pieraccini, (2009) stated farmers with AHA agreements are less likely to diversify and put the farming practice first, unlike the farms governed by FBTs, as they offer much more flexibility in terms of freedom of contract, therefore encouraging farmers to diversify. This research states the landlord is the one pressing for diversification as opposed to the tenants, this is further backed up by Whitehead et al.’s study (2002), as 90% of landlords felt they would allow diversification if a tenant approached them. This contrasts with the

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ideas that the tenant wants to diversify but is restricted by the landlord (Walley et al., 2011). Pieraccini’s (2009) research looks into diversification on National Trust Farms, therefore cannot be representative of all landlords. Whitehead et al.’s study (2002) showed five percent of landlords felt they would need further flexibility within an FBT to cover non-agricultural activities, instead of having to use the LTA 1954. According to Ilbery et al. (2010) tenants feel landlords will only allow the diversification if there is a significant rent increase. Many tenants stated the FBT structure was commonly made up of standard clauses therefore a barrier to diversification. In contrast, according to CRR, (2002) tenants stated it was the relationship between the landlord and tenant that restricted the diversified activity.

2.5 Differences in diversification under AHAs to FBTs Prior to the 1st September 1995, AHAs governed the letting of agricultural units. Ilbery et al. (2010) stated farmers were happier to diversify on owner-occupied land or long term secured tenancies, and prefer to rent bare land on FBTs. However, many farmers are unable to secure an owner occupied farm due to the continual rising land prices (Gibbard et al., 1999). An AHA requires the agricultural holding to be used for the purpose of trade or business. This means as long as a large proportion of the land is agricultural at all times, the tenancy will be governed by the AHA (S.1(1) AHA 1986). This meant the diversification would normally be removed from the AHA tenancy, as it would mean the whole farm holding would be put at risk of not being covered by the AHA (Dawson, 2000). In FBTs business conditions are set out in (S.1(2) ATA 1995), which is similar to those set out in (S.1(2)AHA 1986). Agriculture is defined in the same way in both the ATA 1995 and the AHA 1986, however the ATA uses the word ‘farming’ which gives a wider meaning than agriculture as it covers activities such as stewardship and set-aside (Barr et al., 2013). The agricultural condition or notice condition needs to be satisfied in FBTs, as discussed at point 3.1.2-3.1.3. It is best practice to always serve the notice conditions. If the notices are served correctly and there is a change in use balance it will still remain an FBT so long as the tenancy allows diversification (Barr et al., 2013). If the notices are not served correctly and there is an increase in commercial activity this will not be governed by the ATA 1995, therefore will be protected by Part II LTA 1954 meaning the tenant will have security of tenure, which is unfavorable to the landlord (Reuvid, 2003). This is illustrated by the case of Hickson and Welsh Ltd .v. Cann who traded in horses and bred, fattened and resold pigs under an AHA. It was held the agricultural use of the land had been abandoned due to horses not being agricultural, even though pigs were (Barr et al., 2013). If this case was governed by an FBT and the correct notices were served this theoretically would be covered by the ATA 1995 (Dawson, 2000).

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3 FARM BUSINESS TENANCY AGREEMENT

3.1 What is an FBT? Agricultural tenancies agreed since the 1st September 1995 are governed by the ATA 1995 and are known as FBTs (DEFRA, 2012b). FBTs allow the letting of farm holdings and agricultural land. The agreement will be covered by the ATA if the farm business meets the ATA criteria, as outlined below (Garner and Frith, 2013).

3.1.1 Business criteria All or part of the holding should be farmed for the purpose of trading or business, from the beginning of the tenancy (S.1(2) ATA 1995). In theory if the business condition ceases for one day, the FBT can be terminated (Dawson, 2000).

3.1.2 Agricultural criteria The holding must be wholly or partly agricultural (S.1(3) ATA 1995). Dawson (2000) and Barr et al., (2013) agree that the agricultural condition takes into account:

x Terms of tenancy x Use of the land x Nature of any commercial activities x Relevant circumstances

3.1.3 The notice conditions It is possible to waiver the agricultural condition by serving notice conditions (S.1(4) ATA 1995). This must be served on or before the beginning of the tenancy, and cannot be included in the tenancy agreement. The notice conditions do not have to be served, but this means the agricultural criteria must be met at all times to remain an FBT (Barr et al., 2013). The notice conditions do not allow the tenant to diversify without consent, as there may be a user clause prohibiting non-agricultural use (Barr et al., 2013).

3.2 Objectives of ATA 1995 The objectives of the ATA 1995 are:

x Increase letting of agricultural land x Allow new entrants into agriculture x Allow rented land to be more economical, flexible and responsive to market

forces (Whitehead et al., 2002) (Garner and Frith, 2013) The Regulatory Reform (Agricultural Tenancies)(England and Wales) Order 2006).

3.3 Lease or Licence For there to be a tenancy there needs to be:

x Exclusive possession x A definite term x A rent paid

This was illustrated by the case of Street v Mountford [1985]. This is a key case determining whether a person has a lease or a licence. Although the Court of Appeal held the intentions were clear from both parties, that it was merely a licence, the House of Lords held Mrs. Mountford did have a lease as the above criteria was present.

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3.4 Uptake of Farm Business Tenancies Gibbard et al. (1999) stated tenant farmers have declined since the beginning of the century due to there being limited incentives for landlords to rent out their land, and the ATA 1995 has not averted this trend. Gibbard et al. (1999) also stated in rural communities, tenant farmers are not held in high regard unlike owner-occupier farmers, and FBTs have become ‘add ons’ to owner occupied farms. This study was done fifteen years ago, therefore the trend and social views may have changed, as Munton (2009) stated there have been many changes in the agricultural industry. Brown & Co, (2014) and (DEFRA, 2014c) indicated the amount of FBTs have increased due to high demand from farmers, and increased supply from investors who are buying more agricultural land and letting it out (See figure 2). This is further backed up by RICS, (2014) as the land survey revealed strong land values are due to a rise in commercial and lifestyle buyers.

(Source: Adapted from DEFRA, 2014c) Figure 2: The total amount of hectares farmed under an FBT from 2009 to 2013

Ilbery et al. (2010) found FBTs were referred to as unsecure tenancies due to the average length of term, however this was only 8% of 52 tenant farmers interviewed, therefore a minority view. Figure 3 shows the average length of an FBT over the years.

1050

1060

1070

1080

1090

1100

1110

1120

1130

2009 2010 2011 2012 2013

Tota

l hec

tare

s fa

rmed

und

er a

n FB

T (T

hous

and

Ha)

Year

8

(Source: DEFRA, 2014c)

Figure 3: Average term length of FBTs Figure 3 shows the average length of term was 4.2 years in 2012, ranging from 4.1 to 4.4 years from 2007 to 2012 (DEFRA, 2014c). Due to the short term of the tenancy, landlords and their agents usually include a clause in the FBT preventing non- agricultural use, precluding diversification (Barr et al., 2013). Figure 4 illustrates FBTs are more common in the South than the North.

(Source: Maye et al., 2009)

Figure 4: Percentage of land farmed under an FBT

Year

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The obvious change from North to South could be because of the upland topography in the North, which is managed in other forms like sporting agreements, rather than FBTs (Maye et al., 2009).

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4 THE REGULATORY REFORM (AGRICULTURAL TENANCIES) (ENGLAND AND WALES) ORDER 2006

The Policy Commission of the Future of Farming and Food was established to create a diverse agricultural sector to mitigate large damaging shocks to the industry such as Foot and Mouth which occurred in 2001 whilst DEFRA was reviewing the ATA 1995 (The Regulatory Reform (Agricultural Tenancies)(England and Wales) Order 2006). As a consequence professional organisations came together and created TRIG. They published the final report in 2003 making recommendations to amend existing legislation (The Regulatory Reform (Agricultural Tenancies)(England and Wales) Order 2006). The main aim was to simplify and deregulate existing tenancy legislation. This aimed to allow flexible letting of land, and permitted tenants to diversify the farm holding away from agriculture. However, according to Whitehead et al. (2002) the majority of FBTs are signed with standard clauses with little variation in terms of on farm diversification. Munton (2009), Ilbery et al., (2007) agree with Whitehead et al. (2002) stating the main aim has not been met, as well as hoped. Whitehead et al. (2002) evaluation was done only two years after the legislation was introduced, therefore this may not be the case now, as the full effects had not had time to reveal themselves.

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5 PART II LANDLORD & TENANT ACT 1954 Part II of the LTA is a statutory code governing business tenancies. A person can have a business tenancy if they fulfill the following criteria:

x Have a tenancy x Have held that tenancy for a time certain period x The premises are occupied for the running of a business

(S.23 LTA 1954).

If there is not a business tenancy, the agreement will be a licence, which will not be protected by the LTA, as described by the case of Street v Moutford in point 3.3.

The LTA protects tenants whose agreements are not:

x Contracted out x Tenancies for less than six months x Tenancies at will x Another type of tenancy e.g. Agricultural or mining (Ross, 2011).

5.1 History In 1992 the British Parliament produced a periodic review of the LTA 1954 making a series of recommendations (GB. Parliament, 1992). The main recommendation was enabling the parties to contract out of renewal provisions by agreement rather than applying to the courts; however, originally the Government did not introduce this (GB. Parliament, 1992). On the 1st June 2004 the Regulatory Reform (Business Tenancies) (England & Wales) Order 2003 was created allowing landlords to give written notice to tenants to contract out of security of tenure. Currently the landlord can issue a notice on the tenant 14 days prior to the date of commencement, which contains the ‘health warning’ explaining the loss of protection (Garner and Frith, 2013).

5.2 Contracting in and out Under Part II of the LTA 1954 a tenant has the right to renew the tenancy at the end of the fixed term if the premises are in occupation, this is known as ‘contracted in’. The landlord and tenant can mutually agree to ‘contract out’ meaning the tenant will not have the statutory right to renew under S.24 (LTA 1954). If the tenancy is contracted in the tenant can serve a S.26 on the landlord at the end of the fixed term; stating the intended commencement date of the new tenancy. This must be served 6-12 months before the date of commencement. The landlord can serve a hostile S.25 on the tenant terminating the tenancy, stating any of the eight statutory grounds (LTA 1954). This makes it hard for the landlord to evict a tenant (Ross, 2011).

5.3 Link between LTA 1954 & ATA 1995 Prior to the 1st September 1995 the majority of agricultural holdings were governed by the AHA 1986. Reuvid (2003) stated land or buildings used for diversifications under AHAs would be surrendered from the AHA and granted a LTA tenancy (Reuvid, 2003).

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Dawson (2000) stated parliament’s intention when introducing FBTs was to ensure when a tenant was investing money in an on farm diversification activity, they achieved the security of tenure of the LTA 1954. As discussed in point 3.4 an FBT does not offer this security of tenure. Dawson further explores that the ATA 1995 could act as a ‘trial run’, which enables the diversification activity to run for a short period, allowing the landlord to assess the tenants’ suitability to operate the diversification effectively. If the diversification is successful a LTA lease would be granted. It is common practice for the security of tenure to be contracted out as discussed in point 5.3, therefore not offering the provisions as Dawson stated (Reuvid, 2003). Table 2 shows the comparison of terms between the LTA 1954 and ATA 1995.

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Table 2: Comparison of terms between an FBT and a LTA agreement

Terms ATA 1995 LTA 1954

If written If silent If written If silent

Rent Review Dates

As stated- free to agree. E.g. A certain amount over

a certain time, or by an agreed formula5

On the term date every three years to open market

rental value5

As stated- free to agree. E.g. Market value as

determined by comparables, upwards only provision4

On expiry unless apply to court for interim rent. If

tenancy continues under virtue of S.24, the court will decide on a suitable rent4

Rent Review Notice 12-24 months5 12-24 months5 6-12 months4 6-12 months4

Length of Term As stated1 Need a term to be a

tenancy. Could be how often rent is paid2

As stated- usually 3-5 years6

Depends if contracted in. Needs a term to be a

tenancy6

Length of Notice to Quit

12-24 months if tenancy is over two years. If tenancy is under two years no NTQ

technically needs to be served. Termination is on

the expiry date5

Same as if written5 As stated4 Landlord must give 6-12

months. The tenant must give three months4

Repairing Obligations As stated1

There is no default. It depends on the behavior of the parties, if the landlord undertakes repairs it may be

seen that the landlord is responsible1

As sated4

The courts decide. Behaviour’s of the parties are

normally assessed. The tenant does not normally

have to repair, as there are no statutory provisions. 4

Resolution of disagreements Arbitration5 Arbitration5 Court/arbitration4 Court4

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Break Clauses 12-24 months’ notice

needs to be given unless otherwise stated2.

No provision6

Common to see with new businesses. Usually three

years if complied with lease including pre conditions6

No provision6

Fixtures As stated3

Tenant can remove if theirs, unless in pursuance of

some obligations. Tenant can obtain compensation if it is agreed that the fixture is

not removed3

As stated6 No provision6

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Tenants Improvements

As stated- usually follow the statutory provisions.

Need to have written consent from the landlord3

Tenant has a statutory right to compensation unless

removed from holding. No obligation for landlord to

compensate tenant where no permission has been

granted. The amount shall be equal to the increase

attributable to the improvement in the value of

the holding at the termination. If the tenancy

was granted after 18th October 2006 it may be

subject to a maximum figure or the actual cost whichever is less3. Where the landlord refused to give consent or did not respond within two months of written request the tenant can refer it to

arbitration3.

As stated -usually three months’ notice to claim4

Tenant entitled to compensation unless it was an obligation. Tenant has

three months’ notice from the date of NTQ to claim

compensation. If the tenancy comes to the expiration date the tenant has between three

and six months before the end date to claim

compensation. Landlord cannot unreasonably withhold consent for a tenant wanting to create an improvement4. Amount equal to additional value or reasonable cost.

Court will decide if unable to agree.

Succession No statutory right to succession5

No statutory right to succession5



User As stated- mainly

agriculture as long as notice compliance5

Agricultural5 Business6 Business6

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Tenant Compensation As agreed in writing2 No provision2 As agreed in writing4

Tenant eligible for compensation if landlord

opposes renewal of tenancy under cases E, F, G.

Compensation is assessed at 1x the ratable value of the

property or where the tenant has been in occupation for 14 years or more, at two times

the ratable value4.

Insurance As stated2 What is being practiced3

As stated- usually landlord insures and recoups from tenant. Insurance may be included in the rent sum.

Rarely the tenant insures6

What is being practiced6

SFP Transfer back to landlord at end of tenancy1 No provision1 N/A6 N/A6

(Source: 1(CAAV, 2008) 2(CAAV, 2012) 3(CAAV, 2007) 4(LTA 1954) 5(Agricultural Tenancies Act 1995) 6(Edwards, 2015. Pers. Comm. Ms Edwards is a partner at Hatchers Solicitors)

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6 RESEARCH GAP After reviewing the literature it is clear there has been a considerable amount of research into what makes a successful diversification venture, how many tenant farmers diversify, and the drivers behind the diversification. It is observed from reviewing the literature there is limited research detailing how the diversified activity on a farm under an FBT is most commonly governed. Whether it is common practice to keep it within the original FBT or to remove it from the FBT and put it onto a LTA lease. There is limited literature looking at the explanations behind why landlords and agents remove the diversified activity from the FBT. This is important currently as diversification rates are continually increasing on tenanted farms. Figure 5 shows the possibilities agents and landlords have when governing an on farm diversification proposition.

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(Source: Authors own)

Figure 5: Possibilities available to landlord and agents to govern on farm diversifications

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7 METHOLDOLGY

7.1 Introduction The following chapter reviews the research methods that are used to collect data, which will meet the following research objectives with sufficient strength.

7.2 Research Objectives 1. To review the ATA 1995 in comparison to the LTA 1954, in particular the

perceived designed ability of the ATA to address the increasing level of on farm diversification.

2. To assess why landlords may decide to permit a diversified activity to remain

within the original FBT structure, the implications this may cause and any advantages and disadvantages for both the landlord and tenant.

3. To assess why landlords prefer to remove the diversified activity from an FBT

structure, and relocate it within one governed by the LTA 1954 on commencement of the diversification activity. This will examine any implications, advantages and disadvantages for both landlord and tenant.

4. Assess why landlords prefer to remove the diversified activity from an FBT

structure and relocate it to within one governed by the LTA 1954 once the activity has become established. This will examine any implications, advantages and disadvantages for both landlord and tenant.

7.3 Research Methods The Research Onion is a model devised by Saunders et al. (2012) which is a systematical aid helping establish which research method to adopt. (See Figure 6).

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(Source: Adapted from Saunders et al., 2012).

Figure 6: Research Onion demonstrating the research approaches that were adopted

7.3.1 Philosophy This refers to the underlying nature of the research, which justifies how the study will be carried out (Bryman, 2012). This research will take an interpretive approach, because the research is conducted on people as oppose to objects. This is appropriate as it is necessary to speak to landlords, agents, tenants and solicitors to gain an insight into their personal opinions and their actions in dealing with on farm diversification. This approach is also suited to in depth qualitative research (Saunders et al., 2012).

7.3.2 Approach This research will take an inductive approach because currently there is not an explanation of the research question. In this case observations are the starting point (Beiske, 2007). The literature review highlighted it was unknown if and why agents and landlords removed on farm diversifications from FBTs.

7.3.3 Research and Analysis Strategies The research strategy is how the researcher proposes to conduct the research (Saunders et al., 2012). There are seven strategies but this research will take a grounded theory approach as it aims to generate a theory. This will suit the research question, as the researcher is going to answer the research gap, and not proving an existing theory. Grounded theory allows the researcher to analyse the information by transcribing the interviews, and coding key common themes (See Appendix 3), which forms the basis of a theory (Flick, 2011).

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7.3.4 Choices This research will adopt a mono method exploratory study, as an in depth insight was needed focusing solely on the objectives. Bryman (2006) states using multiple methods of data collection overloads the researcher with some unnecessary data

7.3.5 Time Horizons This is a time frame that the project should to be completed in (Saunders et al., 2012). Due to the time restraints involved with the research project and a ‘snap-shop’ of the current issue was required. A cross- sectional method was adopted as oppose to a longitudinal approach. Interviews were carried out over one month; this limited chances of any significant events happening which would change the interviewee’s opinions regarding the research topic.

7.3.6 Techniques and Procedures As a grounded theory allows several techniques and procedures, and due to the exploratory nature of the work, face to face and telephone interviews were conducted lasting, approximately 20 minutes.

7.4 Semi- Structured Interviews Semi-structured interviews allow the flexibility for the interviewees to expand on their answers, which may lead to more discussion points, but also retains the main research objectives unlike case studies and questionnaires (Wills, 2007). Open-ended questions allows the interviewee to develop their answers in more detail, subsequently allowing the researcher to ask further questions to gain more detail, or omit certain questions (Saunders et al., 2012). This is particularly appropriate to this research, as personal views needed to be explored, therefore focus groups were not used as respondents could influence others answers (Wills, 2007). A copy of the questions, which were used in the interviews, can be seen in Appendix 1 and transcripts are at Appendix 2.

7.5 Telephone Interviews Leon et al. (2003) stated telephone interviews are much the same as in-person interviews. Response rates are lower than face-to-face interviews, but this was overcome by targeting certain professionals who were happy to be interviewed therefore the researcher was not relying on callbacks (Gillham 2001). Some interviewees will not want to take time to meet in the office, as there may be a perception office meetings could go on for some time (Gillham, 2001). Interviewees are happier to talk over the phone even out of office hours, therefore not disrupting their working day and can focus on the researchers questions (Gillham, 2001). A mix of telephone and face-to-face interviewees were conducted, giving a balance between response rates and costs.

7.6 Sampling A non-probability purposive sampling technique was used, allowing the interviewer to select interviewees based on their profession and experience of dealing with on farm diversifications (Struwig and Stead 2007). Interviewees were then selected from large and small surveyors and solicitors, resulting in a range of landlords and

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tenants being interviewed. This brought together views of 11 individuals, five were agents, two were landlords, two were tenants and two were solicitors. Patton (2014) states there may not be an exact number of interviewees that need to be carried out, but a starting figure should be identified. As the interviews begin this number may be adjusted, depending on discoveries. Although the larger the sample size, the more reliable the results are.

7.7 Reliability Interviews are susceptible to low reliability due to interview and participant bias if they are not carried out consistently (Saunders et al., 2012). To maintain reliability, the researcher asked questions free from interviewer bias and leading questions. The questions were asked in the same tone of voice in similar surroundings to reduce any influences (Saunders et al., 2012). Interviews were voice recorded and notes were taken to protect the data against any bias however it was felt interviewees gave more restrained responses knowing they were recorded.

7.8 Validity Validity is a measure of how accurate the findings are from the research (McNeill, 2005). Qualitative research will allow the author to gather thorough and detailed information, however it is recognised some interviewees may have biased opinions, and others may have a different view upon reflection. Although semi-structured interviews allow higher validity because areas of discussion can be clarified during the interview, and observer error is lessened, it should be noted statistical generalisations cannot be made (Saunders et al., 2012). Yin, (2011) stated the key control issue is the validity of qualitative research. Triangulation can be used to collect three different reference points, which in turn will strength the validity of the results (See figure 7). Patton, (2014) stated this could be expensive, therefore limits the amount of triangulation that can be carried out in this research.

(Source: Authors Own)

Figure 7: Research triangulation

Landlords/Agents

Tenants/AgentsSolicitors

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Before the research interviews took place, professionals were contacted to ascertain the general views and understanding of the research question. A pilot interview was conducted on a family friend (Blaxter et al., 2010). Interviews were then set up with landlords, agents, solicitors and tenants to get a fully informed answer on the research objectives. Figure 5 was shown to the interviewees to demonstrate the issue that is being researched. Broadly the same questions were asked to landlords, agents and solicitors and similar questions were asked to tenants, however some interviews explored different ideas, which lead to other questions being asked. More agents were interviewed, as these are the people dealing with the issues raised on a daily basis, therefore will have more knowledge of the issues. Dates and times were agreed between the interviewee and the researcher to gain the best time to talk free of distractions, as it was understood how busy the interviewees would be.

7.9 Ethics As third parties were involved with this research project, ethics needed to be taken into account (Blaxter et al., 2010). An evaluation form was completed before the research project began detailing the project and any considerations that needed to be taken into account. Ethics has always been at the forefront of the research project with interviewees remaining anonymous and transcripts typed as a true and correct record. Farmers and professionals talking about their farms and clients are not very willing to share data, therefore at the beginning of the interviews it was made clear to the interviewees that the interview would remain anonymous, also encouraging them to expand on their views (Saunders et al., 2012). If participants were not happy to be interviewed, no pressure was applied and they were not interviewed.

7.10 Interview Strategy The questions asked were intended to fulfill the research gap. Justifications of these questions can be seen in Appendix 4.

7.11 Limitations Some agents and solicitors gave very detailed responses; however, it would have been beneficial to speak to more parties. Due to the small sample size this increased the chance of the data being skewed, but because of time and cost limitations, a larger sample size could not have been achieved. Notes were taken along with audio recordings in the interviews to limit observer error (Blaxter et al., 2010), however reliability could have been improved by video recording the interviews, as these could have been used to assess the body language of the interviewee and interviewer (Blaxter et al., 2010).

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8 ANALYSIS Transcribed interviews were inputted into NVivo which is a qualitative analysis software program, whereby themes and sub themes were coded. (See Figure 8).

(Source: Authors Own)

Figure 8: Coding themes

FBTs designed ability to address the increasing level of on farm diversification

Keeping the activity within an FBT

Implications

Advantages of diversification

remaining within an FBT

Disadvantages of diversification

remaining within an FBT

Putting the activity within a business

lease on comencement

Implications

Advantages of diversification being

put on business lease

Disadvantages of diversification being put on a business

lease

Putting the activity onto a business

lease once established

Specific clauses involved with dealing

with the diversification

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9 DISCUSSION

9.1 OBJECTIVE ONE To review the ATA 1995, in particular its perceived designed ability to address the increasing level of on farm diversification. Although the literature review showed there were many barriers to diversification, it was shown FBTs attempted to encourage on farm diversification, especially compared to AHAs (Whitehead et al., 2002). Most respondents agree diversification rates have increased over the years and are continuing to rise due to the rising volatility of agricultural markets but many are concerned as to whether the ATA sufficiently covers the increasing levels of diversification, this is in line with Whitehead et al., (2002). Table two in point 5.4 demonstrated similar terms can be drawn up in an FBT to that in a commercial lease, therefore FBTs have the ability to govern on farm diversification. The main issue preventing agents confidently using the ATA when on farm diversification arises is because of the scale and the possibility of future growth of the diversification. This study revealed it is possible for an on farm diversification to be governed by the ATA through a well-drafted FBT as Respondent seven (a solicitor from a national firm) stated. Other agents acting for both landlords and tenants also stated diversification could be governed by the ATA but only to a certain extent. This is in agreement with point 2.4 of the literature review stating there is a lack of appreciation of the flexibility of the ATA. Some solicitors agreed with this, but due to the nature of their work they would put the diversification within a LTA agreement. Respondent nine (solicitor) stated “I am a trained property lawyer who specialises in agricultural business leases, so this is what I know and know works”. Although the solicitors stated it is possible for a farm diversification to be governed by an FBT, they would not turn clients away. The tenants (Respondents 10 and 11) did not have much knowledge of business leases, therefore did not have an input into the type of lease that was used. One agent from a national surveyors firm who acts for landlords and tenants said there are many uncertainties meaning the diversification activities are put on a business lease. The main issue revealed was the lack of understanding and knowledge of when a farm becomes a commercial unit, therefore if governed by the wrong tenancy, a judge would hold the unit to have protection under Part II LTA 1954, as discussed in the literature review. The tipping point of when a farm becomes a commercial unit was discussed through the interviews. Some agents stated achieving planning permission on the land or buildings was the tipping point, others suggested the tipping point was the turnover rent, however they were unsure of the amount this point would be. The suggested tipping points are illustrated in Figure 9. This raises the question of what a farm actually is today. A farm on the urban fringe may be very different to what a farm is in West Wales. This creates a problem, as one definition does not fit all cases.

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Figure 9: A model to show the perceived tipping points of when an on farm diversification is governed by an FBT or a commercial lease

Figure 9 shows a tipping table model for when a diversification remains within an FBT or placed within a LTA agreement. The further away the reason from the pivot indicates there is more weight in the agent/solicitor putting the activity on that particular agreement. The closer the factor is to the pivot means there is much more uncertainty as to which agreement should be used. Carrying out interviews highlighted the lack of confidence and uncertainty agents had when dealing with on farm diversifications on tenanted farms, with many respondents using words such as ‘cautious’, ‘vary’, and ‘uncertain’. Respondent eight (an agent from a large institutional firm) stated agents need to be made to feel more comfortable in their ability to use the ATA for on farm diversifications, whether this is legislation changes or guidance produced.

FBT LTA 1954

Complex business set

up

Diversification turnover is greater

than 50% of the whole holding

Planning permission

achieved

Good landlord tenant

relationship

Diversification turnover is 25-

50% of the whole holding

Diversification turnover is less than 25% of the whole holding

Adding value to farm produce

Potential for quick and

large growth of the

business

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One agent from a small firm of surveyors acting for landlords and tenants felt there was not enough diversification currently happening for the government to address this problem. Respondent one (an agent from a national surveyors firm who acts for landlords and tenants) raised the point whether the government looks at this issue soon, or in another 20 years when there is a higher level of diversification, and a larger issue. This relates back to the literature review as farm incomes are decreasing, diversifications may still be increasing (DEFRA, 2014b).

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9.2 OBJECTIVE TWO To assess why landlords may decide to permit a diversified activity to remain within the original FBT structure, the implications this may cause and any advantages and disadvantages for both the landlord and tenant.

9.2.1 Reasons to allow diversification within an FBT The main idea drawn out of the agents’ interviews was it depends on the scale of the diversification. One agent from a large institutional firm acting for landlords and tenants said ‘it is perfectly fine within an FBT, if it is a small scale diversified activity’. Common examples that respondents gave were;

x Liveries x Storage units x Small farm shops

Although all parties interviewed had contrasting views on what diversifications would be allowed under an FBT, the examples given are similar to the examples considered in point 2.2. An agent who is from a small firm of surveyors said as long as the diversified business related to the farming element, it would be suitable within an FBT. E.g. A farm shop where the tenant sells produce from the farm holding. The differentiating opinions links back to the difficulty in defining diversification as discussed in point 2.1. Another reason to re-grant an FBT incorporating the diversified activity was to include other family members. For example, a tenant’s wife wanted to run a B&B in the farmhouse; this remained within the FBT but extra clauses were added and the wife’s name was put on the tenancy agreement to avoid issues if they spilt up. Although respondents had different views of when a diversified activity could remain within an FBT, they all agreed it was on a case-by-case decision and the whole business had to be taken into account.

9.2.2 Implications of leaving the diversification within an FBT The interviews revealed agents were worried about the complexity of rent reviews if the diversification activity was included in the FBT. This is because there would be less comparables as stated by Respondent two (an agent from a large institutional firm acting for landlords and tenants). Due to the lack of suitable comparables, the risk increases of having a rent that does not fully justify the capability of profit that the whole farm could earn. Agents and solicitors agreed it is possible to have a different rent formula for the diversification, to the farming element drawn into the FBT, as demonstrated by Figure 10.

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Figure 10: A model to show the ability to draw separate rent review provisions into the same FBT for the farm holding and diversified business

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According to one agent (from a small firm of surveyors acting for landlords and tenants), another common issue with the diversification reaming within an FBT is how end of tenancy compensation is dealt with. The diversification activity will usually have required a financial investment, either by the landlord, tenant or both. This creates another reason for parties to disagree, especially agreeing what are the tenant’s improvements and what are classed as fixtures. This is a barrier to diversification on farms governed by an FBT because of the short terms as discussed in the literature review. It was discussed with respondents if terms are agreed from the outset, and drafted into the FBT problems should be limited.

9.2.3 Advantages of incorporating the diversification within the FBT Most respondents agreed the main advantage was the lower cost associated with an agent incorporating the diversification within an FBT, rather than instructing a solicitor to draw up a LTA lease. Agents would commonly instruct a solicitor to draw up a commercial lease. The turnaround of drawing up an FBT is much quicker than instructing a solicitor to draw up a business lease, therefore benefiting the client in terms of money and time. Cost and time was found to be the main driving force for agents to leave the diversification within an FBT. If agents explain to landlords that they can use the existing FBT to govern the diversification, it shows they are thinking of innovative ways to manage the estate cost efficiently, and proactively, increasing the chances of client retention. If this approach is used across each office of a national firm of surveyors on each estate, the solicitor’s fees may dramatically fall, therefore increasing the surveyor’s fees. This is especially the case when the existing FBTs can govern the most common types of on farm diversification. Although the solicitors agreed it was a cheaper option, they could not give any other advantages, as discussed in 9.1. Leaving the diversification within an FBT would mean there is more chance IHT relief could be claimed on the whole of the holding, presuming the diversification is de-minimus to the farming element, or it forms part of the agricultural element. As Respondent two (an agent from a large institutional firm acting for landlords and tenants) stated; it depends how HMRC evaluates the holding, but there is more chance it will gain APR, if the diversification is on an FBT as oppose to a separate business lease. It was agreed by all interviewees farmers understand FBTs more than business leases. Three respondents stated the ATA 1995 is more widely recognised than the LTA 1954. It was revealed although agents are more comfortable in dealing with FBTs, it does not mean all agents are good at drafting sound agreements, and this gives rise to tenancy disputes. Because of this, agents feel more comfortable in instructing a solicitor to deal with the diversification to avoid the liability being placed on them. Most landlords and agents stated having a separate business lease for the diversification meant more management and administration time needed to be allocated to each farm holding. This is because the agreements are likely to have different term dates, rent review provisions, break clauses and termination dates. This gives rise to more mistakes being made especially in terms of serving critical notices. If all were governed under one FBT this would mean one term date, break clauses etc. In terms of rent provisions different formulas can be used for the agricultural element and the diversification element, but both have the same rent review date meaning a single rent is negotiated (see figure 10).

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9.2.4 Disadvantages of incorporating the diversification within the FBT The main issue revealed from the interviews was the uncertainty of the growth of the diversification. If the diversified activity was successful and grew dramatically and a disagreement between parties occurred, the tenancy agreement would be inspected. It could be held a commercial business as oppose to an agricultural holding, therefore securing protection under the LTA 1954. This is unfavourable from the landlords’ point of view as discussed in point 2.6 of the literature review. Agents stated they have learnt from previous experience or colleagues experiences where there has being disagreements between parties, therefore are cautious with how they deal with the diversification due to the risk. Figure 11 shows a model that an agent could use to examine the risk level; therefore identifying a suitable solution.


Figure 11: A model to assist with the governance of on farm diversification using risk levels Respondent three (an agent form a small firm of surveyors) stated farmers are not typically the best entrepreneurs, which disagrees with point 2.3 in the literature review. Respondent three sated the farmer is unlikely to be the most suited person to manage the diversification. If the diversification was allowed within the FBT but the tenant farmer was putting more effort into the diversification, and neglecting the farm, the landlord would want to take the diversification back in hand. This would cause pressure on the landlord tenant relationship, which leads to further complications in the management of the holding.

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9.3 OBJECTIVE THREE To assess why landlords prefer to remove the diversified activity from an FBT structure, and relocate it to within one governed by the LTA 1954 on commencement of the diversification activity. This will examine any implications, advantages and disadvantages for both landlord and tenant.

9.3.1 Reasons to put the diversification on a LTA tenancy The most common reason to put the diversification on a LTA tenancy at commencement was the uncertainty of the growth of business and whether this would then become more predominant than the agricultural element on the farm. Landlords and their agents were very uncertain whether the tenant would achieve security under the LTA 1954 if there were a dispute and a judge had to rule. Respondent five (an agent from a large firm of surveyors mainly acting for landlords) stated instead of placing the diversification within an FBT or a business lease a license agreement could be used instead. This respondent uses an Improved Finance Agreement (IFA) to govern a loan from the landlord to the tenant, which allows the tenant to improve the farm holding, for example putting a building up. The landlord would pay for a large percentage of the building and the tenant would pay the landlord back over a certain time frame. This agreement runs with the tenancy agreement but the loan repayment is kept separate from the rent, therefore does not get merged in the rent figure (see figure 10). The agreement had its own terms that related to the loan. Respondent five stated this agreement has being used on diversifications such as Glamping. The IFA was used as the landlord and tenant did not want a business lease due to the cost and perceived complexity. The client was enthusiastic about the innovative and proactive idea and instructed Respondent five to manage the holding. In contrast other agents stated a licence may not be suitable due to the factors which distinguish a lease and a licence as discussed in point 3.3. Respondent seven and nine who are solicitors, stated that on farm diversifications on AHA tenancies have always being taken out of the AHA and governed by a separate business lease. It was highlighted that because this procedure has being practiced over many years, agents will continue to instruct solicitors to draw up a business lease. Some agents agreed with this as they stated their peers have dealt with the issue by drawing up a business lease, leading them to do the same. None of the agents had any guidance notes detailing how diversification should be dealt with across firm. Respondent eight (an agent from a large institutional firm) is producing a guidance note detailing what the institutional firm would like to see present in an on farm diversification. This firm was very proactive about governing on farm diversifications within FBTs.

9.3.2 Implications of the diversification being on a separate business lease One agent from a large institutional firm acting for landlords and tenants stated putting the diversified activity onto a business lease means the landlord can achieve Full Repairing and Insuring (FRI) terms, putting all the onerous on the tenant which is quite rare within an FBT. This disagrees with Table two as FRI terms can be achieved within an FBT, due to the freedom of contract. According to one solicitor, business rents are typically higher than agricultural rents and this means from a landlord’s point of view, depending on their estate objectives, a larger return on their assets can be achieved if the diversification activity is on a business lease.

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9.3.3 Advantages of the diversification being on a separate business lease The interviews revealed if the farm business setup is complex, agents did not feel comfortable in their skills to deal with this. Usually in this case a solicitor would be instructed anyway, and from the solicitors interviews it was established solicitors would always put the diversified activity onto a LTA tenancy. It was found due to the uncertainty of when a diversified farm holding becomes a commercial unit as discussed in point 9.1, protecting the client’s interest outweighed any benefits of leaving the diversification within the FBT. As discussed before, agents and solicitors know putting the activity on a LTA agreement is successful, therefore more inclined to carry on doing so to protect the clients’ interest.

9.3.4 Disadvantages of the diversification being on a separate business lease The most common disadvantage associated with putting the diversification within a business lease is the cost and time that is associated with instructing a solicitor, to draw up the lease, as discussed in point 9.2.3. The research showed the cost to instruct a solicitor to draw up a business lease ranges from £750 to £5,000. Solicitors and some agents stated this cost was value for money as it was protecting the client’s interests. However landlords and agents agreed that this cost is expensive, especially if the agent could draw up an FBT with the diversification included. From the landlords point of view this would be very beneficial as drawing up FBTs are normally included in the management fee. The tenants and their agents stated business leases are not very well known or user friendly. An agent highlighted if a business lease was given to a farmer, they may be concerned with what the landlord is requiring them to sign, therefore becoming mistrustful of both the agreement and the landlord. This will put pressure on the landlord-tenant relationship.

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9.4 OBJECTIVE FOUR Assess why landlords prefer to remove the diversified activity from an FBT structure and relocate it within one governed by the LTA 1954 once the activity has become established. This will examine any implications, advantages and disadvantages for both landlord and tenant. The research discovered both agents and solicitors thought due to the typical short-term length of an FBT as discussed in point 3.4, the diversification will be discussed and negotiated at the beginning of the tenancy. The tenants agreed with this, as it was decided at the outset that their diversification was going to remain within an FBT, or be put on a 54 Act. In contrast one agent stated most farm diversifications start off small as a side-line business, often without permission, therefore months or years later, it is decided how it will be governed. It was discussed that expertise, desire and financial investment generates large restrictions for starting a successful business straight away, this is in agreement with point 2.4 of the literature review. It is unlikely a tenant would invest a huge amount of money into a farm that has a term of less than five years. Similarly a landlord will not want to invest a large amount of money into a farm holding if the tenant isn’t going to be the right person to manage the commercial business, although point 2.5 of the literature review highlighted some landlords are encouraging diversifications. See Objective Three for implications, advantages and disadvantages.

9.4.1 Recommendations to encourage governing diversification within the FBT

Agents stated by removing the common user clause that prohibits non-agricultural use there would be a cost to the landlord. This is not an issue for landlords who encourage diversification, but seems to be a problem for larger private landlords, as it will have an effect on the holding, location, and the estate’s reputation. This factor needs to be overcome first. There needs to be a clearly defined tipping point for when a diversification activity can no longer remain within an FBT. This could be defined through the turnover of the diversified business, achieving planning permission, or a particular size. This would give agents confidence to leave the diversification within the FBT. The notice conditions could be adapted to clearly ensure that if the use changes, so the holding could be classed a commercial unit, it would not be protected by Part II of the LTA 1954, but would remain as an FBT or a commercial lease without the security of tenure. These points need to be published as formal guidance or legislation so landlords and agents can rely on it. This in turn may bring case law to the forefront, which will provide guidance on what is allowed. This will then possibly start to increase confidence levels of agents and landlords using FBTs to govern on farm diversification (Edwards, V, 2015. Pers. Comm. Mrs Edwards is a partner of Hatchers Solicitors LLP).

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10 CONCLUSION This research shows FBTs have the ability to govern on farm diversification, as the terms typically seen in a business lease can be written into an FBT. A key advantage that is often overlooked of FBTs is the suitability to govern on farm diversification. This is not due to the scope of the ATA 1995 but the lack of appreciation from professionals, tenants and landlords, which leads them to putting the diversification within a LTA tenancy. An advantage for leaving the diversification within an FBT is the cost saving potential through reduced solicitors fees and management time. Additionally both parties understand FBTs, and there are increased chances of achieving IHT relief over the whole holding. The main disadvantage uncovered is that professionals are uncertain as to when the diversification causes the farm holding to be classed as a commercial unit, therefore achieving security of tenure. The perceived implications of keeping the diversification within an FBT were that FRI terms would be harder to achieve, however the research showed FRI terms could be achieved within an FBT. The main advantage for putting the diversification within a business lease is that professionals are completely certain the landlord’s interests are protected. Subsequently there is potential for a large solicitors fee for putting the diversification onto a business lease. The implication of putting the diversification within a business lease is it would be easier to achieve higher rents due to business rents being greater than agricultural rents. However the report showed rents can be negotiated by mutual agreement, and the diversification activity rent can be kept separate and defined by a different formula. It was discovered solicitors would always put the diversified business onto a separate business lease because that is what they are trained for. It was revealed agents and solicitors had the same mentality that as diversifications were taken out of AHA agreements, this procedure is the accepted practice for diversification within FBTs. The tenants that were interviewed did not have any influence on how their diversification venture would be governed. They simply wanted to diversify, demonstrating trust in their agents and landlords. It was found to be uncommon for the diversified activity to be removed from an FBT once established, due to the short term of an FBT, as this would have been discussed at the beginning of the tenancy. This would not be the case if the tenant started the diversification without permission, as the FBT would need to be surrendered and re-granted to take into account the terms of the diversified activity. Overall professionals demonstrated uncertainty and contrasting views about what is legally acceptable, due to the lack of guidance and case law, but also the lack of knowledge of the flexibility of the ATA 1995. The main uncertainty was the tipping point of when a farm becomes a commercial unit, therefore when it was unacceptable for the diversification to remain within the FBT. It was discussed that this could be hard to define due to the major differences in farm holdings in geographical areas.

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10.1 Further Research The objectives of this report have being achieved through interviews; however, further studies could be carried out to quantify how many landlords and agents put the diversification onto a business lease. Also quantifying the size of these farms and the diversification activity in terms of turnover and scale, to see if there is an agreed definable tipping point. As discussed in the methodology it would be beneficial to carry out further interviews to strengthen this reports findings. Research could be carried out into the effectiveness of the ideas discussed in point 9.4.1, to encourage the diversification activity within the FBT. This would provide solid advice for landlord and agents on how to deal with on farm diversification, with a view on saving solicitors fees and maintaining landlord-tenant relationships.

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