8 CUMBRIA FARMER May 2009BusinessAdvice
Bill may close rent loop-hole
Diane Barnes,of Burnetts Solicitors in Carlisle, looks at the likelihood
of agricultural holdings'rents being frozen for at least the next five years
T
he Finance Bill,
announced as part of the
2009 Budget last month,
is expected to close a leg-
islative loop-hole that could
have resulted in the freezing of
rents on agricultural holdings
for at least five years.
A High Court decision late last
year left Defra and the Treasury
scrambling to introduce saving
legislation to prevent that happen-
ing. The case, Mason v Boscawen,
involved a tenant challenging the
validity of a notice to pay rent on
the grounds that the landlord
could not demand rent inclusive
of VAT.
Tenancies under the Agricul-
tural Holdings Act 1986 (ie all ten-
ancies which began before
September 1, 1995) are protected
tenancies. A landlord's ability to
evict tenants is severely restricted
under the Act. The most common
reason by which a landlord can
obtain possession under one of
these tenancies is that he intends
to use the land for development;
planning permission and funding
must be in place before possession
will be granted by a tribunal.
Another avenue for a landlord
to regain possession arises when a
tenant fails to pay the rent. Fail-
ure to comply with a notice to pay
is an incontestable ground for pos-
session. A tenant can only prevent
eviction for non-payment of rent
by claiming that the notice to pay
rent is invalidly drawn.
In this case, the tenant argued
that the notice was invalid
because it demanded payment of
an amount which included VAT,
not just the amount of rent
payable under the tenancy agree-
ment.
The court held that VAT
payable on rent is included within
the definition of rent, and there-
fore can be counted as rent on a
notice to pay. Therefore, it fol-
lowed that any variation in the
level of VAT payable was also a
variation of the rent payable.
A tenancy which falls under the
provisions of the 1986 Act is
bound by a statutory provision
that rent can be varied only once
every three years, unless the ten-
ancy agreement provides other-
wise. In other words, once the rent
has been varied, the tenancy can-
not be subject to another rent
review for a further three years.
The VAT change in December
2008 may therefore have reset the
rent review clock, so that no rent
reviews could take place for
another three years.
There are certain exceptions
included in the Act which do not
trigger the resetting of the clock,
which include the following:
Improvements made by the
landlord which increase the rental
value of the property; and
A reduction of rent due to the
landlord resuming possession of
part of the holding.
None of the exceptions, howev-
er, relates to a change in VAT or
an election by the landlord to
charge VAT on agricultural prop-
erty lets.
When the 1986 Act came into
force, there was no provision in
place to enable landlords to opt to
tax (VAT). That only came into
being in the Value Added Tax Act
1994. Unfortunately, Parliament
did not foresee the potential effect
that this could have on the 1986
Act rent review provisions. There-
fore, no provision was included in
the 1994 Act or later legislation to
prevent a change in VAT legisla-
tion inadvertently triggering a
three-year freeze on rent reviews.
The court ruling affects only
those landlords and tenants who
are a party to a tenancy agree-
ment which falls under the 1986
Act and where VAT is payable
under the agreement (ie the land-
lord has opted to tax). However,
the potential consequences are
detrimental to those affected. It
could mean that landlords and
tenants are unable to review their
rents until 2011 or even 2013 if the
government reverts to a VAT level
of 17.5 per cent on January 1,
2010, as is proposed. The second
VAT change could restart the
three-year cycle again, extending
the period over which the rent
will remain fixed � potentially to
2013.
Rental value is determined by
an arbitrator according to factors
such as the character and location
of the holding, the earning capac-
ity of the holding and the market
rental value of comparable hold-
ings. Due to the difficult times
which have been experienced by
the farming industry over the last
decade or so, most rents have
remained stable. If the ruling is
not counteracted, landlords may
find themselves unable to recover
rental values for a good while
longer as a result of the rent
freeze.
On the reverse side, if the mar-
ket rental value of agricultural
land were to fall, tenants may also
be precluded from seeking a rent
review for several years and may
be forced to continue paying an
inflated rent.
Thankfully, the Finance Bill
2009 includes a provision whereby
changes to the level of VAT will
not qualify as a rent change under
a 1986 Act tenancy.
After calls from numerous agri-
cultural bodies for immediate
action, those affected are undoubt-
edly relieved that the pressures of
the current economic climate
have not precluded the Treasury
from taking the action needed to
clarify the position and ensure
fairness to both tenants and land-
lords who fall into this legislative
hole.
However, the Finance Bill is yet
to be approved by Parliament.
Until this takes place and the pro-
visions come into force, the guid-
ance set out under Mason v
Boscawen may stand.
If a landlord and tenant under a
1986 agreement in which the land-
lord has opted to tax are in the
middle of, or are due, a rent
review, consideration must be
given as to the immediate effects
of this judgement.
Unless, or until, the Finance
Bill comes into play, a tenant will
have a good argument to contest a
rent review proposed by a land-
lord and vice versa. Professional
advice should be sought by both
parties accordingly.
Diane Barnes is a trainee
solicitor at Burnetts in Carlisle. To
find out more about agricultural
tenancies, contact Burnetts' agri-
cultural team on 01228 552222 or
visit www.burnetts.co.uk.
No change? All tenancies which began before September 1, 1995 are protected

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