Insolvent Agricultural Tenants

At a time when all farmers have money problems, what is a landlord to do when a tenant who has the protection of the Agricultural Holdings Act 1986 runs out of cash?

A landlord who has a farm tenant in difficulties will need, and in most cases will wish, to proceed with care and sensitivity, but there are special problems that apply where the tenant holds under the Agricultural Holdings Act 1986 ("the 1986 Act"). This can only arise if the present tenant either had a tenancy before September 1995 or has succeeded to someone who had such a tenancy. Although the tenancy is nominally from year to year, in practice the tenant has lifetime security and members of the family may have succession rights. Financial problems lead to two consequences. The first is a major problem for the tenant and his family who risk losing their home and business. The second is that land subject to an agricultural tenancy will be less valuable than vacant land, so that there may be a substantial gain if possession can be recovered. In the past, tenants have been in a position to charge large sums for surrendering their tenancies. In the present state of agriculture that is not always the case, but the uplift in value can give some scope for doing a deal that may be in the interests of both parties.

Insolvency does not usually come suddenly and unexpectedly, although the tenant may of course have closed his eyes to his deteriorating position. It will be evident that the holding has started to deteriorate, repairs are not being done and the rent is late in being paid. Perhaps employees’ wages may be late or employees are being dismissed and the tenant tries to replace them by working longer hours himself. Sometimes the tenant will try to raise funds from other sources, for example by management agreements or applying for other grants, or he may try to diversify without being able to invest money in the new venture. Landlords and their agents should be alert to any of these signs as an indication that the business is failing.

The landlord must take a clear decision on what he is trying to achieve. He may want possession either to sell, to take the land in hand or to put in a new tenant on a farm business tenancy. His main aim may be to recover the rent, particularly if arrears are substantial. He may wish to ensure the holding is put into good order. He may be concerned to help a long-standing tenant through a difficult patch in the hope that farming will improve. In every case, he will want to avoid expensive litigation and a long period of uncertainty.

Having decided on the priorities, and particularly if the tenant is not yet formally insolvent, it is helpful (where possible) to talk to the tenant. Many tenants are not prepared to discuss their finances and take an unrealistic view, but often a deal can be worked out. This might, for example, involve a surrender, perhaps with provision to pay off bank borrowings. The tenant, particularly if of retirement age, may be willing to give up the farm in return for re-housing for him- or herself and spouse for the rest of their lives. Alternatively the land may be surrendered and the tenant permitted to stay in the farmhouse either rent-free or on concessionary terms. Most tenants in these circumstances will need advice from a surveyor or a solicitor and, if money is short, the landlord may help by offering a contribution to costs.

If the position has deteriorated, then it will be necessary to take legal steps and advice should always be obtained. As failure to do repairs is often the first sign of financial problems, the landlord may want to serve a notice to do work. The law gives the tenant many opportunities to challenge such a notice. The notice itself must provide a period of not less than six months and often more, and the process can be long-drawn-out and expensive. Even if the tenant totally fails to do any works, once the period has passed the landlord still has to serve a clear year’s notice to quit, expiring on a term date of the tenancy (and so possibly up to two years), and during that time the position may deteriorate further

If the tenant has not paid the rent, then the landlord can serve a notice to pay and, if the tenant does not pay within two months, the landlord can then serve a notice to quit (even if the tenant does subsequently pay). Once again, however, the landlord has to give a clear year’s notice. If the tenant has gone bankrupt (and the landlord of course, like any other creditor, may be in a position to initiate a bankruptcy) then the landlord may be in a position to give shorter notice, but this partly depends on the terms of the tenancy agreement itself.

The landlord may be able to seek to forfeit without serving a notice under the 1986 Act, but this course is affected by technical rules of law and the courts will give a tenant the opportunity to claim relief

If what the landlord requires is payment, and the landlord is not interested in recovering possession, then it may be possible to distrain on the tenant’s goods. This remedy is ancient and there are many complications and special procedures (particularly in the case of agricultural holdings) but it remains a possibility especially as, if the bailiffs appear on the holding, the tenant may well be ready to pay the landlord if money is available. On the other hand, a tenant in financial difficulties may not have many goods worth distraining.

A tenant’s financial problems will normally not only concern a landlord and it may be necessary to negotiate with other people involved. The main other creditor will normally be the bank. The bank may have a charge, under the Agricultural Credits Act 1927, over the tenant’s live and dead stock and also over any claims to compensation under his tenancy. This charge can sometimes be avoided if the tenancy is terminated by notice to quit or forfeiture but, if the tenant surrenders the holding by agreement, the bank’s rights need to be dealt with. There may be equipment on the holding which is hired by the tenant and which therefore belongs to someone else. The landlord should therefore not assume that any equipment goes with the holding, or can be taken over, on a surrender. It is still normal for farmers to own their livestock, but again it is possible that a tenant in difficulties may have taken in animals belonging to third parties for grazing. A landlord who takes possession needs to be aware of such rights. The most important group of third parties is employees. They have priority rights in any insolvency but, quite apart from that, they also have rights under the Transfer of Undertakings (Protection of Employment) Regulations which may give them continuity of employment. This can mean that if the landlord serves notice to quit, for example for non-paymentof rent, and the tenant goes, the landlord may find that he is then treated as the employer of all existing farm hands who will have, as against him, the benefit of all their rights not to be made redundant and not to be unfairly dismissed (the law on this is developing at the moment).

Quite apart from the automatic requirements of the law, the tenant may seek to take advantage of some of the provisions for avoiding insolvency, for example by some form of voluntary arrangement or administration. Where these apply, the landlord can find his legal remedies are suspended and he has no effective rights either to get paid or to terminate the tenancy. The landlord will be invited to take part, along with all other creditors, in any arrangements. Any such request should be considered carefully and not rejected out of hand, even though it may involve waiting for matters to be sorted out and possibly increasing the loss of rent.

A landlord with a tenant in financial difficulty needs to watch the position carefully. If the landlord has clear priorities, and has patience to sort out what can be a very tangled situation, he will often be able to achieve his purpose. Obviously, if the money is not there, then the rent cannot be collected, but there may be other benefits such as recovering the farm with vacant possession. In present circumstances, most landlords would not wish to gain the reputation of behaving harshly to tenants with financial problems which are not of their own making. Equally, a landlord cannot wait while the condition of a farm deteriorates and the tenant plunges deeper into the red. Often, the main concern of a tenant in such a situation will be for a home for himself and his family and a landlord may be in a position to offer help at an early stage before the problems become insoluble.