Sunday, 25 August 2013

Tenants' improvements - Part 2: rent review

Picture credit James Allan

“You get rented on your own improvements” is something you often hear from unhappy agricultural tenants.

At its crudest, the claim is that the tenant carries out an improvement to the farm at his expense and then, at the next rent review, the landlord turns round and says “my farm is now more valuable as a result of what you’ve done so I am entitled to more rent.”

Legally speaking, that is simply not true.

If a tenant doesn’t agree to his landlord’s demand for an increased rent, he has the right to go to arbitration (by the Land Court since 2003). Ever since statutory rent reviews were introduced in 1948 (as the counterpart of leases being prolonged by statutory security of tenure), the legislation has directed that the arbiter (LC post-03):-

“… shall not take into account any increase in the rental value of the holding which is due to improvements which have been executed thereon in so far as they were executed wholly or partly at the expense of the tenant …”

The Land Court has since decided that the fact a tenant’s improvement wouldn’t be eligible for compensation at termination of the lease (e.g. because was carried out before 1883 or was post-1883 but no prior notice or there’s an expired WDA: see previous blog for what I mean by that) does not mean it can be rented.

So the intention of the law seems pretty clear: a tenant is not to be rented on his improvements. But are there loop-holes a landlord can exploit to get round the default position?

The only one I can think of is where a tenant carries out improvements and then later takes a new lease of the same farm. That sometimes happens when a lease gets so old and out of date and/or has been amended so often that the parties decide to start with a clean slate. (It also happened, as I recall, when 100% agricultural property relief from Inheritance Tax was extended to land let under a lease granted after 1995 and the Inland Revenue appeared to accept that a new (post-95) lease granted to an existing (pre-95) tenant counted.) Section 35(5) of the Agricultural Holdings (Scotland) Act 1991  specifically protects the right of a tenant under a new lease to compensation for improvements he carried out under a previous lease but crucially only when the tenant under the old and new leases is exactly the same person. It often happens when a new lease is being arranged that the opportunity is taken to update the identity of the tenant, typically by substituting a younger generation of a family for an older. In that case, s.35(5) doesn't apply so the new lease must specifically record that some improvements belong to the (new) tenant. But that's a subtlety of agricultural law that sometimes gets overlooked if the tenant’s advisors aren't sufficiently clued up and, if it is, the new tenant will not be eligible for compensation for improvements carried out during the previous lease and will also be liable to be rented on them at the first statutory rent review. The fact the previous tenant hadn’t in fact been compensated for his improvements under the previous lease and the starting rent under the new lease reflects that doesn’t alter the fact.

 No doubt there must be some tenants who’ve been caught in the new lease trap but I don’t believe it’s a common enough syndrome to render the general proposition that you can’t legally be rented on your own improvements untrue. But, of course, these general propositions assume that people don’t take liberties and in that regard I was very struck by one of the submissions to the Land Reform Review Group from an anonymous tenant farmer. He (or she) reported:-

“I decided to improve a boggy part of the farm, about 30 acres of unusable ground … . Arterial ditches were opened up and drainage pipes with gravel were laid across the whole area. It was ploughed, limed fertilised and re-seeded. This is now good grazing pasture … [H]owever at the next rent review the factor insisted that my rent should go up to reflect the bit of ground that is no longer a useless bog but now good fields. I said “But I did all the work, and paid for all the materials. I did all the improvements in it’s entirety” The factors response was that I had “merely unlocked the potential of the ground” So, my rent increase was greater than expected, I really wish I hadn’t bothered, I won’t be improving any more land unless I could own it.”

The argument that the tenant’s work had merely “unlocked the potential of the ground” is an example of what lawyers encapsulate in that venerable legal maximum habens ridetis. The tenant should never have agreed to that rent increase. The Land Court would have dismissed it out of hand but no doubt the tenant felt he/she couldn’t afford the risk of the fees and general grief associated with a LC case and acceded to the landlord’s demand.

This syndrome draws us into the area (not by any means unique to agricultural tenants) known as “access to justice”. It used to be summarised by the (rather dated) adage: “the law courts are open to anyone, rich or poor. Just like the Ritz Hotel.” I’m digressing here but it’s a dreadful irony that, in other areas of the law, the great panacea is arbitration to keep things out of the courts: in agricultural law, arbitration had been compulsory for decades until, due to the mounting costs involved, disputes were in moved in 2003 to the courts! Giving the Land Court jurisdiction has not solved the problem. I know that the Scottish Agricultural Arbiters and Valuers Association (SAAVA) and Tenant Farming Forum have been involved in trying to address this problem. I have to admit I’ve not engaged with any of these moves but as I type it occurs to me the way I would deal with rent demands with no legal basis would be that a rent review could only be initiated by service of a statutory form in which the landlord (or tenant) was required to justify a proposed new rent according to the criteria and methodology laid down by the agricultural holdings legislation. Crucially, the form would require to be certified by a lawyer (probably not the landlord’s usual lawyer) that the proposals were reasonable in law. It would be a bit like auditors signing off company accounts – they’re not guaranteeing they’re right or wrong, just that they’re in the ball-park and nobody’s assumensque michaelem.

No comments:

Post a Comment