Budget halts rent freeze

by Diane Barnes

It is expected that the Finance Bill, announced as part of the 2009 Budget on 22nd April, will close a legislative loop which could have resulted in the freezing of agricultural holdings rents for at least five years. 

A High Court decision late last year left DEFRA and the Treasury scrambling to introduce saving legislation in order to prevent that happening.  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 Agricultural Holdings Act 1986 (i.e. all tenancies which began before 1 September 1995) are protected tenancies.  A landlord’s ability to evict tenants is severely restricted under the 1986 Act provisions.  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.  Failure to comply with a notice to pay the rent is an incontestable ground for possession.  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 agreement.

The court held that VAT payable on rent is included within the definition of rent, and therefore can be counted as rent on a notice to pay rent.  Therefore, it followed 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 Agricultural Holdings Act (i.e. a tenancy which began before 1st September 1995) is bound by a statutory provision that rent can only be varied once every three years, unless the tenancy agreement provides otherwise.  In other words, once the rent has been varied, the tenancy cannot be subject to another rent review for a further 3 years.  Thus, the VAT change in December 2008 may have had the result of resetting of the rent review clock, so that no rent reviews could take place for another 3 years. 

There are certain exceptions included in the Act which do not trigger the resetting of the clock, which include the following:

1. Improvements made by the landlord, which increase the rental value of the property;
2. A reduction of rent due to the landlord resuming possession of part of the holding.

None of the exceptions, however, relate to a change in VAT or an election by the landlord to charge VAT on agricultural property 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.  Therefore, no provision was included in the 1994 Act or later legislation to prevent a change in VAT legislation inadvertently triggering a 3 year freeze on rent reviews.

The court ruling only affects those landlords and tenants who are a party to a tenancy agreement which falls under the 1986 Act and where VAT is payable under the agreement (i.e. the landlord has opted to tax).  However, the potential consequences are extremely detrimental to those affected.  It could mean that landlords and tenants are unable to review their rents until 2011, or further, until 2013 if the government revert the VAT level to 17.5% on 1 January 2010, as is proposed.  The second VAT change could restart the 3 year cycle again, extending the period over which the rent will remain fixed to potentially 2013.

Rental value is determined by an arbitrator according to factors such as the character and location of the holding, the earning capacity of the holding and the market rental value of comparable holdings.  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 market rental value of agricultural land were to fall, tenants may also be precluded from seeking a rent review for several years and, thereby, may be forced to continue to pay 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 agricultural bodies for immediate action, those affected are undoubtedly 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 landlords who fall into this legislative hole. 

However, the Finance Bill is yet to be approved by Parliament.  Until this takes place and the provisions come into force, the guidance set out under Mason v Boscawen may stand.  If a landlord and tenant under a 1986 agreement in which the landlord has opted to tax are in the midst of, or due, a rent review, consideration must be had as to the immediate effects of this judgment on the outcome of the process.  Unless, or until, the Finance Bill comes into play, a tenant will have a good argument to contest a rent review proposed by a landlord 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’ agricultural team on 01228 552222.

May '09