§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Fallon.]
11.24 pm§ Mr. Richard Alexander (Newark)I am grateful for the opportunity to initiate an Adjournment debate that concerns tenant farmers. From inquiries that I have made and briefings that I have received, I know that the concerns of tenant farmers are shared by the National Farmers Union, the Tenant Farmers Association and the Country Landowners Association. These organisations have come together, especially over recent months. It is a sign of the concerns of all the organisations that represent tenant farmers that they are co-operating with one another on such a vital matter. For example, the Country Landowners Association is surveying some landowners to try to ascertain what, if anything, would bring new tenancies on to the market.
The tenanted sector represents 35 to 40 per cent. of all activity in agriculture. It is estimated that it represents one half of dairy production. It is, therefore, a significant part of the agriculture scene. That being so, it is important that, as far as possible, we as a nation ensure a fair working environment for the tenant farmer.
Additionally, the tenanted sector has offered a means of entry into the industry for those without considerable means. The landlord tends to be a business investor, and often a long-term one. We need both the tenant farmer and the landlord, yet the tenant has constraints on his activities which the freeholder does not face. The tenant has to work within the legal structure of the Agricultural Holdings Act 1986. His balance sheet cannot show a capital asset in the same way as a freeholder's. His income is greatly reduced by the rent that he has to pay.
If things go really bad, the freeholder can sell up and pay his liabilities. The tenant cannot do that. He has no collateral apart from his machinery, which is often not very much and which is usually depreciating. In addition, he has his livestock. The tenant cannot sell and restructure his operation.
If the tenant is not too highly geared, he may be in a better position than the owner-occupier, who may have recently taken on his farm with very high capital and interest repayment obligations. I would suggest to my hon. Friend the Parliamentary Secretary that not many tenant farmers are in that happy position. Most of them are highly geared, and their lack of collateral causes bank managers to monitor them carefully and constantly with a view to pulling in their loans. Therefore, in matters of finance the tenant has much less flexibility than the freeholder.
The Tenant Farmers Association has produced figures to suggest that the 1988 statistics show that the value of the tenant sector per acre has fallen from £590 in 1978–79 to £322 in 1987–88. They show, for example, that the farmer who is growing winter wheat that is sold for feed has a surplus of only £40 per acre. From that, he pays his rent, his tax and his personal drawings. With so may arable farmers paying more than £40 per acre in rent, the tenant farmers' base is weakening. His reliance on short-term bank borrowing, with an increase in financial charges, is increasing.
The Agricultural Holdings Act provides a framework that imposes obligations on tenant farmers' husbandry. If 781 a tenant looks after his farm he can generally be assured of lifetime security and even more than that if his tenancy was created before 1984, as close members of his family can succeed to the tenancy.
Tenant farmers believe that the present framework of law has served them well in the past, during a period of expanding production. However, in times of restraint and diversification, they face additional problems. Most tenancy agreements allow the landlord power to serve notice to quit on two or three months' notice if the landlord gets planning permission. In addition, a county council farm tenant may be prevented from taking on more land or from having another source of income.
Government schemes such as set-aside and the concept of environmentally sensitive areas were introduced to reduce overall agricultural output and attain certain environmental objectives, but in practice they are not available to all classes of farmers. Many diversification schemes involve proposals that fall outside the legal definition of agriculture, which means that they are subject to landlords' consent. There are many supportive landlords. but in some cases landlords have refused consent to otherwise reasonable propositions that would not have affected their long-term interests. The tenant has no power to challenge such a refusal. Some tenants feel too vulnerable even to consider such a scheme, and some landlords' agents have been known to send threatening letters when a tenant has gone only as far as registering his eligibility for set-aside.
I appreciate that a wise tenant will want to consult his landlord at an early stage and should first obtain a business study, for which a grant can be obtained under the farm diversification grant scheme. It is sensible and natural that a landlord should want to see a viable proposition that has been well thought out.
The Tenant Farmers Association has suggested that a tenant should have a right of appeal to the agricultural lands tribunal if the landlord does not agree to his diversification plans. As a lawyer, I appreciate that the difficulty is that the tribunal has no power to amend a tenancy agreement. If the tenancy agreement specifically prohibits non-agricultural activity, it would require quite fundamental change to the Agricultural Holdings Act if this route were to be followed, and it would be highly contentious.
In some ways, diversification can be a disaster for the tenant, for when planning permission is needed for a non-agricultural use the grant of such permission is a ground for an incontestable notice to quit. Most incontestable grounds in a notice to quit rely on something that the tenant has done wrongly or badly, but that is not so when planning permission has been granted, even if it were granted on an application by the tenant. Usually, planning permission and the notice to quit relate to the whole farm, and the notice must be between one and two years. I learn that many tenants are being offered agreements that allow landlords to serve a notice to quit on part of the farm only, which allows much shorter notice—usually two or three months only. This is another aspect of the vulnerability of the tenant that I draw to the House's attention. As the farmhouse is often the attraction for development, the tenant may be left with the prospect of losing some or all of his farm buildings, including his farmhouse.
That brings me to the problem that a tenant faces with compensation. When he loses his holding, the tenant is 782 entitled to the equivalent of five or six times the rent of the lost area, but where that area includes a farm or buildings, it is not adequate compensation for the destruction of one's life's work.
The Tenant Farmers Association is calling for compensation for loss of potential profits and the cost of replacement of fixed equipment, among other things, to be awarded to the tenant, by arbitration if necessary. The claim seems to be fair and equitable, and I suggest it to my hon. Friend the Minister. Even though it is an abuse of the notice to quit powers under the 1986 Act, there is nothing to stop a landlord obtaining planning permission without ever intending to implement it or actually implementing it, just to gain possession of the property. I suggest that if planning permission is to be used just as a device to end a tenancy, surely the tenant should in turn be awarded proper compensation for his loss.
Had my time to speak not been limited, I would have addressed the House at greater length on the problems arising out of the dairy quotas. I should like to stress to my hon. Friend the Parliamentary Secretary the difficulties with regard to arbitration. Usually new rents are negotiated between landlord and tenant, both sides using agents, and if an agreement cannot be reached, the 1986 Act lays down factors that an arbitrator should take into account.
The hazards of arbitration are now only too apparent. In a recent case in Lancashire five tenant farmers had to carry the landlord's entire cost of arbitration of £75,000 on some 700 acres. It was an astonishing award by any standards. The fact that it happened means that arbitration is not now to be considered lightly, even by some larger farmers. Many agents are reporting that tenants are instructing them to act in negotiations, but not to go to arbitration, with the result that higher rents than can be justified economically are often agreed to avoid this. At a time in the economy of agriculture when it would be an effective argument for a tenant to press for a reduction in the new rent claimed, arbitration is of itself generating unjustified rent increases.
The remedy is clear: each side should bear his own costs of an arbitration, unless an arbitrator makes a specific finding that one side or the other was unreasonably pursuing his case to arbitration. Arbitration should be simple and cheap and should be an acceptable outcome and procedure. Without that reform, it is rapidly ceasing to be any of those things. I believe that the problem is even worse in some cases for the county council tenant, where the approach is often confrontational rather than conciliatory, with arbitration almost the inevitable outcome. Once again, the smaller farmer is the one to suffer.
The tenant farmer has historically been of the greatest importance to agriculture. When farming faces declining incomes, the tenanted sector faces particular disadvantages and difficulties, especially as agriculture moves from a period of growth to one of restraint and diversification. I hope that in his reply my hon. Friend the Parliamentary Secretary will recognise the importance of the sector and its difficulties, that he will reaffirm his belief in a healthy tenanted sector and that he will pledge the Government to take action from time to time when difficulties such as those I have outlined are brought to his notice. Only in that way will the tenanted sector continue to be a healthy one in the agricultural scene.
§ The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mr. Richard Ryder)I congratulate my hon. Friend the Member for Newark (Mr. Alexander), who is a distinguished member of the Select Committee on Agriculture, on his success in the ballot. I do, of course, appreciate the concern about the future of the agricultural landlord-tenant system. It is an important issue and I am grateful to him for raising it.
As I see it, there are two interrelated issues which need to be considered. First, there is the continuing decline in the tenanted sector which affects potential new tenants and established tenants who, for one reason or another, need additional land. Secondly, there are the difficulties that some existing farmers face.
As my hon. Friend knows, at the end of the last century about 90 per cent. of the agricultural land was tenanted, but, according to the 1987 June census, the figure is now about 37 per cent. There have been a number of contributory factors, but an increase in the size of the owner-occupied sector was probably inevitable. It echoes the pattern in the residential sector. However, it is clear that some landowners who do not want to farm the land themselves have been disinclined to let and have opted for other forms of contractual arrangements to maintain value and income. If the tenanted sector is to be revitalised, we must find ways of making the letting of land more attractive to landowners. I shall return to this issue a little later. First, I shall refer to those farmers who already rent a holding.
In recent years, the movement in average farm incomes showed a similar pattern for all types of tenure with declines in 1985–86 followed by a recovery in 1986–87. However, in 1987–88, the latest year for which data are available, wholly tenanted farms in the farm business survey in England recorded a small increase—nearly 5 per cent.—in average income, while their owner-occupied and mixed tenure counterparts showed falls. Incomes on particular types of farm—for example, dairying—moved in the same direction for tenanted as for other farms. Figures are not yet available for 1988–89, the year in which the sharp fall in farm incomes has been the subject of concern in the farming community.
Assets tend to be lower on tenanted than on owner-occupied farms, but borrowings are also lower. On average, the borrowings of tenanted farms in 1987–88 were only about two thirds of those of owner-occupied farms and less than half those of mixed tenure farms. In addition, about 40 per cent. of tenanted farms in the survey recorded no bank borrowing at all at the close of 1987–88. For the small business size group, about half recorded no bank borrowings.
As I have said, our 1987–88 survey showed that tenanted farms in England recorded an increase in average income of nearly 5 per cent. The annual rent inquiry for 1988 showed that in all English farms in the inquiry due a rent review between 1987 and 1988 there was an average increase in rent of 3.5 per cent. On about half the farms due a rent review there was no change in the rent. In Wales on farms due a rent review there was an average increase of 7.75 per cent. On about one quarter of the farms due a rent review there was no change.
784 There is, therefore, no evidence to suggest that rents are not coming down as quickly as profits. On the contrary, it appears that the new rent formula introduced in 1984 is working satisfactorily.
My hon. Friend has drawn attention to some recent arbitrations in which tenants have been faced with high costs. Under the Agricultural Holdings Act 1986, the arbitrator determines who should pay the costs. He must take into consideration, first, the reasonableness or otherwise of the claim of either party; secondly, any unreasonable demand for particulars or refusal to supply particulars; and, thirdly, generally all the circumstances of the case.
The usual advice to arbitrators in legal text books, as my hon. Friend, as a lawyer, will know, is that they should follow the general working principle adopted by the courts that costs should follow the award unless the particular circumstances dictate otherwise. Therefore, each party must remember that the award may go against him, in which case he is likely to have to pay the costs. He should consider carefully with his professional adviser whether it is sensible to go to arbitration or whether it would be more prudent to reach an agreement.
Arbitration costs can, of course, be reduced if parties reach agreement on as many issues as possible before the hearing. If complex legal issues are raised or parties produce a mass of evidence, an arbitration can prove expensive.
The Royal Institute of Chartered Surveyors has published a booklet entitled "Minimising the Costs of Agricultural Arbitration". It is a step-by-step guide through the arbitration process, showing the correct procedures and how to avoid protracted proceedings and expensive consequences. We hope that parties to an arbitration will find it a useful guide.
I note my hon. Friend's suggestion that each party should bear his own costs, unless the arbitrator considers one side to have acted unreasonably, in which case he could be required to pay the other party's costs. The Tenant Farmers Association may wish to discuss that proposal with the Royal Institution of Chartered Surveyors and other organisations representing landlords and tenants. If it is felt that this approach is practical and it attracts a reasonable degree of support from the industry, we would be prepared to consider proposals for changing the legislation when an opportunity arises. We would, however, need to be satisfied that there is a genuine need for change which could not be met in some other way.
It is suggested that tenants may be unable to diversify into non-agricultural activities or to take up the opportunity of alternative land uses, but I am pleased to say that there are signs that landlords are allowing their tenants to do so. A tenant who wants to establish an enterprise must consider the terms of his tenancy agreement, and he may need to negotiate a variation with his landlord. For that reason, he will be wise to discuss his ideas with the landlord. A business study, for which a grant can be obtained under a farm diversification grant scheme, may prove invaluable in this context, as I would expect a landlord to be reluctant to give approval to a scheme of doubtful viability or which is ill conceived.
I understand that some tenancy agreements—particularly those of local authority tenants—prohibit the tenant from earning income from non-agricultural 785 sources. However, I believe that some local authorities are now being more flexible in their approach to diversification, and I find that encouraging.
More generally, I make it clear that, when we are devising new schemes, we take considerable trouble to ensure that tenants and owner-occupiers alike can participate. I am pleased to say that this is bearing fruit. For example, in the set-aside scheme nearly one third of all applications came from tenants.
My hon. Friend intimated that a tenant should be able to apply to the agricultural lands tribunal if his landlord will not agree to his diversification plans. However, in many cases an amendment to the tenancy agreement is required, and, at present, ALTs do not have the power to do that. Without fairly fundamental changes to the Agricultural Holdings Act 1986, it is doubtful whether a tribunal could give a tenant permission to engage in a non-agricultural activity if a clause in the tenancy agreement specifically prohibits the use of the land for non-agricultural purposes.
The agricultural holdings legislation aims to strike a fair balance between the often conflicting interests of landlords and tenants. The satisfactory tenant farmer is given security of tenure, but the legislation recognises that there are circumstances in which the landlord should he able to regain possession. They include the situation in which he has obtained planning permission to use the tenanted land for a non-agricultural purpose. It should be remembered that the landlord is the owner of the capital asset and should, in common with other owners of property, be entitled to any increase in value that may accrue from possible development. He has elected to enter the land market with all the risks that that involves, which, in some cases, can mean a low return and falling land values, where there is no development potential, or the land is of poor quality.
My hon. Friend said that some landlords are using the incontestable notice to quit provisions as a means of regaining vacant possession of the holdings and are not proceeding with the development for which they had obtained planning permission. I have not received any representations on this issue, and if my hon. Friend wishes me to examine this issue I would need to have further information on the scale of the problem.
The appropriate level of compensation to be paid to a tenant when his land is taken for development is clearly a contentious issue. No formula will satisfy everyone, but the current provisions in the legislation entitle the tenant to compensation for disturbance equal to up to six years' rent, plus compensation for improvements and tenant 786 right matters. The level of compensation for disturbance was last increased in 1968 at a time when loss of land to development was increasing. The rate of land lost to development—and this is not generally known—is now only about one third of what it was in the 1960s. A major difficulty noted in 1968, which is as valid today, is the shortage of land to rent. This often makes it difficult for tenant farmers who lose land to development to find other land to rent. Increasing the level of compensation paid to tenants for disturbance could be a further disincentive to landlords to let land.
That brings me back to a point that I made at the outset of my speech concerning the decline in the amount of tenanted land. Various interests in the industry are rightly considering ways of revitalising the tenanted sector. These include provision of fixed-term tenancies, retirement tenancies and complete freedom of contract. I welcome these initiatives and look forward to hearing the views of the Tenant Farmers Association on the way forward when I meet its representatives in the middle of May.
My right hon. Friend the Minister and I have made it clear that if the Government were presented with practical ways of making tenancies easier to create, we would be prepared to consider them. However, if we are to contemplate legislation—and I should stress that there are always difficulties in securing a slot in the legislative programme—there must be not only some signs of agreement in the industry but, even more important, a clear prospect of the legislation being of worthwhile practical effect.
Finally, my hon. Friend mentioned the attachment of milk quotas to land. The Government's position is clear. It would be in the industry's interest for the link between quotas and land to be broken. That would make it easier for normal structural development to take place. That requires changes in Community rules, so immediate action is in any event unlikely. The Government would certainly wish to protect the legitimate interest of landlords and tenants alike.
I thank my hon. Friend for initiating the debate and for setting out his case so clearly and cogently. If, for reasons of time, I have not been able to deal with each of his points, he can be sure that I will write to him later. This is an issue of great importance, as he stressed, and my hon. Friend has done a great service to the House and to tenant farmers by raising the subject so well.
Question put and agreed to.
Adjourned accordingly at seven minutes to Twelve o'clock.