Rural Landlords and Land Letting: Reform

Baroness Rock Excerpts

Thursday 21st January 2021 Grand Committee

Asked by

[Baroness Rock]

To ask Her Majesty’s Government, further to their discussions with the Tenancy Reform Industry Group, what plans they have to reform (1) legislation, and (2) taxation, related to rural landlords and the letting of land.

[Baroness Rock (Con) [V]]

My Lords, I declare my interests as set out in the register as a director of Wrackleford Farms, a tenanted farming business. I thank all noble Lords taking part in this important debate today, and greatly look forward to their contributions. I also thank my noble friend the Minister, who so recently took the then Agriculture Bill through this House. I was most encouraged by his supportive comments on the vital importance of agricultural tenants.

The tenanted sector of agriculture brings together those with assets—landowners—and those with entrepreneurial flair—tenants—to create sustainable and profitable businesses while providing landowners with a return through the payment of rent. The landlord and tenant system also provides liquidity to the most fixed factor of production in agriculture: land. Farm businesses looking to expand or contract can use the flexibility of the landlord and tenant system to meet those objectives. Also, agricultural tenancies remain the only viable route for many aspiring farmers to enter the sector.

It is disappointing that this important sector is adversely affected by short-term thinking. The introduction of the Agricultural Tenancies Act 1995 represented a major deregulation of the legislative framework within which agricultural tenancies operate. A key change was to lengths of term. Prior to 1995, new tenancies could be let only for the lifetime of the tenant, whereas under the new legislation there was no minimum term. A major problem before 1995 was that landlords were reluctant to let farms, knowing that they would be let for a generation. As a result, the size of the tenanted sector was in decline. However, this legislation has allowed the pendulum to swing too far in the opposite direction and now the average length of term on new tenancies is, remarkably, under four years. This means that farm tenants cannot plan for the long term, either in relation to their agricultural activities or in their desire to take part in diversification and new agri-environment schemes such as the proposed ELM schemes.

The Tenant Farmers Association has long asserted that the best way to address this is through amendments to the taxation environment within which landlords make decisions about land use. To do this, it has proposed the following sensible changes to taxation: first, restricting the generous 100% relief from inheritance tax, currently available to all landlords regardless of the length of time they are prepared to let land, only to those prepared to let land for 10 years or more; secondly, restricting those landowners that use share farming, contract farming, share partnerships and grazing licences as thin facades of trading activity to gain tax advantage when in practice they take no risk, have no entrepreneurial input and lack any management control; thirdly, offering landlords who are prepared to let for 10 years or more the ability to declare their income as if it was trading income for taxation purposes; and finally, reforming stamp duty land tax to end the discrimination against longer tenancies. This is an area where there appears to be a consensus between those organisations representing landlords and those representing tenants. It seems odd that government policy is to encourage longer farm business tenancies on the one hand and then to penalise those long-term tenancies through the way that they are taxed through SDLT. I seek an assurance from the Government that this issue is reviewed. On taxation, while I appreciate that the Minister does not speak for Her Majesty’s Treasury, it would be instructive to hear whether his department supports these measures and whether he will discuss these matters with his Treasury colleagues.

I thank the Government for bringing into effect certain agricultural tenancy reforms through Schedule 3 to the Agriculture Act 2020. These changes followed a Defra consultation which covered a very much wider agenda of issues than were introduced. That consultation was a distillation of yet wider changes proposed by the Tenancy Reform Industry Group, TRIG, which provided very detailed reports covering AHA tenancies, 1995 tenancies, taxation, county council smallholdings and issues around new entrants and retirement.

In its briefing for this debate, the Country Land and Business Association states that

“tenancy reform must be developed through consensus within TRIG.”

I consider this to be too narrow, but it does give this Government the green light to bring forward a Bill encompassing the full array of changes which TRIG proposed in its reports to Defra in 2017. However, the Government must not find themselves completely unable to make progress on wider areas of tenancy reform when a consensus cannot be found within TRIG due to the competing interests represented within it. This group should of course be a place to which the Government go for expert advice, but it should not decide policy. It is for the Government to decide how best to promote resilience and sustainability within the tenanted sector. During the debates on the various stages of the then Agriculture Bill in your Lordships’ House, we heard from many noble Lords from all quarters that we needed a specific piece of legislation for agricultural tenancies. When might we see a government Bill which picks up the issues identified by TRIG and the department’s own consultation?

One of the welcome changes in the Agriculture Act was the expansion of the franchise of organisations that can be used for the appointment of arbitrators for dispute resolution beyond RICS. Now we have the Central Association of Agricultural Valuers and the Agricultural Law Association. This is good news, as RICS had too much of a monopoly in this area, and its own governance issues. However, we must go much further on reforms to arbitration.

Here, I have to admit to first-hand experience of what an archaic process arbitration can be. My family has recently had to go through a difficult, lengthy and expensive arbitration process for the review of our farm rent. It is not a process that I would welcome having to repeat, although, sadly, it is the principal mechanism for resolving disputes that cannot otherwise be settled by agreement. Arbitration was intended to be a relatively straightforward and inexpensive process for resolving disputes. I can attest to the fact that it is anything but. As a family, we were disappointed with the way in which our case was handled in a number of ways.

Being able to learn lessons from this process is massively hampered by the fact that arbitration awards are required to be kept confidential between the parties. I contend that they should be publicly available and open to scrutiny, so that arbitrators can be held to account for the way in which they resolve cases. At the moment, there is little precedent or case law in this area. In addition, parties are left with an incredibly short period of time within which to appeal. A period of only 28 days is insufficient, particularly where the appeal has to be mounted in the majority of cases by a tenant farmer who can be daunted by the prospect of having to take matters to court. Overturning bad arbitration decisions is difficult and expensive and I believe that the whole process of dispute resolution needs to be fundamentally reviewed.

The CLA calls for a balance in landlord-tenant relationships and I wholeheartedly endorse this. However, it is patently obvious to any informed observer of the landlord-tenant system in agriculture that it favours the landlord. Short lengths of agreement, restrictive tenancy terms and high rents provide maximum benefit and flexibility to landlords and place additional burdens on existing and prospective tenants. The system needs to be levelled up. With more individuals looking for opportunities to take on tenancies in comparison to those offering land, it is clear that there is a market failure, which the Government need to step in to correct, both by considering sensible changes to legislation and the beneficial taxation environment within which landlords operate. It is obvious that the financial incentives are driving perverse behaviours that are in direct conflict with the good intentions of current legislation.

Agricultural tenancies are crucial to our farming industry, our farmed environment and our farming future. Reforms are vital. A specific agricultural tenancy Bill is essential and I hope that the Minister will respond positively to that call.