Agricultural Tenancies Bill [H.L.]

HL Deb 12 December 1994 vol 559 cc1166-92

House again in Committee.

The Earl of Kinnoullmoved Amendment No. 30:

After Clause 5, insert the following new clause:

("Tenancies for less than two years: termination

. A written agreement for a farm business tenancy for less than two years shall terminate by the effluxion of time alone.").

The noble Earl said: I suggest that this is a cheerful amendment to which to return after the dinner break, following the technical morass in which we have been struggling.

This proposal was made to me last week by an experienced practitioner and I then tabled the amendment. Under Clause 5 the Bill proposes that notices of termination of leases for periods longer than two years should be at least 12 months. It is silent on leases of two years and under. The amendment seeks to spell out what I think is intended because, having looked at the helpful Notes on Clauses which my noble friend has given to me, they reaffirm the proposal by using almost the very words of the amendment. Therefore, the issue is whether the termination of short leases should be spelt out or whether it should be left for lawyers to tell us later that silence is golden. I beg to move.

Lord Carter

One is inclined to support an amendment on the grounds that it would be nice to have an Act of Parliament which refers to the "effluxion of time". I wonder whether it is the intention of the Conservative Party that this Parliament should terminate by the effluxion of time. That seems to be what it has in mind.

The noble Earl has made an interesting point. I rather wondered about the amendment when I saw it on the Marshalled List, but I see the point which is being made. It will be interesting to hear the Minister's reply.

Earl Howe

I believe that I can help my noble friend and the Committee. It is already the case that farm business tenancy agreements for fixed terms of less than two years will indeed end by effluxion of time. Tenancies from year to year will be subject to a minimum of a year's notice, as is the case under the Agricultural Holdings Act 1986. Shorter periodic tenancies, however, such as quarterly or monthly tenancies, will be subject to common law and will require the appropriate period of notice to end them; for example, a month's notice to end a monthly tenancy. I hope that my noble friend will be sufficiently reassured to withdraw his amendment.

The Earl of Kinnoull

I am grateful to my noble friend. I merely wonder whether something should be put into the Bill for those who perhaps do not understand what is either common law or previous law. However, I am happy to accept my noble friend's assurances. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 agreed to.

Clause 7 [Notice required for exercise of option to terminate tenancy or resume possession of part]:

Lord Gallachermoved Amendment No. 31:

Page 4, line 21, leave out subsection (3).

The noble Lord said: The effect of Amendment No. 31 would be to deal with Clauses 5, 6 and 7, which are concerned with ensuring that tenants will have at least 12 months' notice before a tenancy ends. Given the nature of farming, that period is clearly very important in allowing a satisfactory arrangement of affairs.

However, Clause 7(3) disapplies that policy in relation to leases attached to a person's life, whether landlord or tenant. Under the subsection, the Law of Property Act 1925 would operate in relation to that type of lease by converting it into a lease for 90 years on the death of the person in question, but subject to a notice period of just one month.

It is contended that it is not desirable to permit a situation to arise where a tenant could be obliged to quit a holding with only one-twelth of the minimum period applying to other agricultural tenants and dependent on what may be a sudden and unforeseeable death. While in practice it does not seem likely that there will be many leases tied to the lifetime of a person in that way, the Bill should provide protection against that unfortunate set of circumstances occurring. I beg to move.

Lord Middleton

I suppose that there may be farm tenancies which take the form of leases for a person's life. If that person dies, the lease would convert to a 90-year lease under the Law of Property Act 1925 unless one month's notice is given. That is far too short a period and quite out of line, as the noble Lord, Lord Gallacher, said, with the provision for 12 months' notice contained in the Bill. I support the amendment.

The Earl of Kinnoull

Before my noble friend replies, perhaps I may ask him what happens if the tenancy is not tied to the life but the tenant dies.

Earl Howe

This is a very technical amendment and, I have to say, relates to a hypothetical situation which may not in practice be encountered. Nevertheless, I thank the noble Lord, Lord Gallacher, for explaining the issues so clearly. The aim of the amendment is to ensure that in cases where a tenancy is subject to Section 149(6) of the Law of Property Act 1925, and the tenancy is terminated by either party following the death or marriage of the tenant, at least 12 months' notice must be given.

I am advised that at present it is very rare for agricultural tenancies to be granted under the provisions of Section 149(6) of the 1925 Act, but it is, I suppose, possible that it may be used in the future. In those circumstances, where the parties were entering into a tenancy which one at least would hope to be of fairly long duration, it must be assumed that they would take proper legal advice. A lawyer would be able to advise them that if they opt for a tenancy for life, it would be converted by Section 149(6) of the Act to a fixed term tenancy of 90 years, as my noble friend pointed out, determinable on death by a very short notice period, whereas if the landowner granted a long tenancy with a break clause which could be triggered by the tenant's death, the normal period of at least 12 months would have to be given. The parties would then be able to make an informed choice.

There seem to me to be two reasons for allowing those arrangements to apply, without overriding them. First, it may suit the parties to arrange for a tenancy to terminate as rapidly as possible following the death of the lessee, rather than requiring a further 12 months to elapse. Secondly, that section of the Law of Property Act 1925 applies to all types of tenancies when they are drafted in those terms, not just to agricultural ones, and there seems no particularly compelling reason to make an exception, given that such agreements are apparently very rare.

I thank the noble Lord, Lord Gallacher, for raising this issue. In the light of my explanation perhaps he will reflect on the matter and withdraw his amendment.

Lord Gallacher

I am grateful to the Minister for his response. I am equally grateful for the support expressed by the noble Lord, Lord Middleton, and for the query raised by the noble Earl, Lord Kinnoull. As has been suggested, I shall reflect on the matter. Proper legal advice from the country lawyer is, I suppose, obtainable at a price. Nevertheless, I believe that we have at least aired the question. I shall read carefully what the Minister said and also ask those who advise me whether, in the light of that advice, they wish to pursue the matter either in its present form or in another form at the Report stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 agreed to.

Clause 8 [Tenant's right to remove fixtures and buildings]:

The Deputy Chairman of Committees (Viscount Allenby of Megiddo)

It may be for the convenience of the Committee if I inform those present that, if Amendment No. 32 be called and agreed, I cannot call Amendment No. 33.

Lord Gallachermoved Amendment No. 32:

Page 4, line 33, leave out from ("time") to ("and") in line 34 and insert ("before the expiry of two months from its termination").

The noble Lord said: The amendment seeks to have the right to remove exercisable only while the tenant is in possession and to have an exception relating to fixtures in respect of which he has, according to Clause 8(2)(c), "obtained compensation". The date of termination and his departure from the holding may predate the agreement with the landlord on the level of compensation or its payment. The situation would be made more critical if the matter had to be referred to arbitration.

Further, the building or fixture may be in use right up to the last day of his occupation of the farm, possibly in connection with the care of livestock. The tenant should be given a reasonable period after the date of his departure to another farm, to which he is able to transfer the building or fixture in one operation. That is the substance of what I wish to say in support of the amendment. I beg to move.

The Earl of Kinnoull

I should like to express my support for the amendment. I believe that a two-month period is perfectly reasonable. It follows on from the 1986 Act. Therefore, it would be most reasonable. I hope that my noble friend will feel able to give the amendment a warm response.

8.15 p.m.

Earl Howe

The common law provisions regarding tenant's fixtures are complex and of little assistance to tenants of agricultural holdings. That is why Section 10 of the 1986 Act provided specific rules to deal with their needs. However, even those rules have not proved entirely satisfactory where one tenancy ends and another one is granted between the same parties.

Clause 8(1) of the Bill, therefore, gives a right to a tenant in possession to remove any fixture affixed by him, as well as any building erected by him, on the holding irrespective of whether the affixing or erecting were done during a previous tenancy agreement between the parties. Although the idea of providing a time limit after the end of a tenancy during which a tenant may remove his fixtures has some superficial attraction, it would in fact considerably narrow down the rights given by Clause 8, which are not time limited, where the tenant remains in possession as tenant. Clause 8(1) reflects the position at common law that a tenant continues to have the right to remove non-agricultural trade fixtures and ornamental fixtures so long as he is in possession of the holding as tenant. At common law he retains that right either by remaining in occupation as a tenant, whether or not the landlord has specifically agreed—that is known as "hold over"—or as a tenant with a new lease. Accordingly, the clause reflects our understanding of that position.

The Committee should bear in mind the fact that the notice provisions of the Bill ensure that both parties know at least a year in advance that a tenancy is due to end. I believe that that period of time gives every opportunity to settle arrangements over fixtures and buildings which a departing tenant wishes to remove. Therefore, a further two months from the end of the tenancy is, I suggest, simply not necessary in those circumstances. With that explanation, I hope that the noble Lord will be content to withdraw the amendment.

The Earl of Kinnoull

Before the noble Lord responds, can my noble friend say whether the landlord has the right to acquire a fixture which is under valuation, as I believe is the case under the 1986 Act?

Earl Howe

The Bill as drafted will ensure that, where a tenant has carried out an improvement at his own expense on the holding and has obtained the landlord's consent in doing so, the tenant will be entitled to compensation at the end of the tenancy at a value to be determined which will reflect the value of such improvement. However, that is slightly different from the question posed by my noble friend.

Where, for example, an improvement has been carried out and no consent was granted then in normal circumstances the tenant would be allowed to take that asset away with him at the end of the tenancy. I suggest that in most cases there will be an agreement between the landlord and the tenant as to what should happen to the asset; in other words, whether it should stay on the holding or whether the tenant takes it away. If it stays on the holding, the tenant will seek to ensure that he obtains consent from the landlord so that he is entitled to compensation at the end of the day. There are various permutations involved. I believe that the Bill ensures that there is fair redress for the tenant and, indeed, fairness also for the landlord.

Lord Carter

I believe that the noble Earl asked whether the landlord had the right to acquire. We are talking about tenants' fixtures and not tenants' improvements. I do not believe that the landlord has the right to acquire in the sense that the two parties would have to come to an agreement if the landlord wished the fixture—not the improvement—to be left behind. I do not think that the landlord has the right to ask for it. I believe that the tenant and the landlord would have to agree with each other. If the tenant does not agree, I suspect that he can take the fixture away.

Earl Howe

As I said, Clause 8(1) of the Bill gives a right to a tenant in possession to remove any fixture affixed by him, as well as any building erected by him, on the holding irrespective of whether the affixing or erecting were done during the tenancy just passed or during a previous tenancy. I believe that I have covered my noble friend's point, although I was seeking to elaborate slightly on the matter by referring to improvements. I am sorry if I confused the issue by so doing.

Lord Gallacher

I am grateful to the noble Earl for the information that he has given the Committee on such an important matter. I am also grateful for the questions that have been asked arising from my moving of the amendment. I accept what the Minister said about the complexity of common law and also his criticism that the 1986 Act is not particularly satisfactory as regards the matter, so that any reliance upon it is unlikely to give the consolation that I was seeking.

I also noted what the noble Earl said about Clause 8(1) of the Bill which refers to the, Tenant's right to remove fixtures and buildings". By some miracle that I cannot explain, even before the noble Earl drew my attention to them, I underlined the vital words in Clause 8(1), after the termination of the tenancy when he remains in possession as tenant (whether or not under a new tenancy)", and so on. I believe that that is germane to what the noble Earl said. However, all I can do at this stage is to ask leave to withdraw the amendment. I shall take it away and try to understand it in the context of what I now know. If I fail to do so, which is highly probable, I shall seek again the advice of my unpaid legal adviser. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cartermoved Amendment No. 33:

Page 4, line 34, leave out ("(whether or not under a new tenancy)").

The noble Lord said: The amendment deals with a phrase which appears in brackets in Clause 8(1)(b); namely, (whether or not under a new tenancy)". We are advised that those words are unnecessary. To use a word that the Minister often uses when responding to my amendments, we believe that they are otiose. It would be helpful if the Minister could explain why they have been included. As I said, we have been told that they are not needed. I beg to move.

Earl Howe

This amendment would delete words which are intended to do no more than clarify the scope of a tenant's right to remove fixtures and buildings after the end of a farm business tenancy. In this respect, Clause 8(1) reflects the existing position at common law as regards the removal of non-agricultural trade fixtures and ornamental fixtures after the end of a tenancy.

The circumstances in which a tenant remains in possession as tenant may vary. He may remain in possession after the end of the tenancy for a short period on sufferance (that is, without the landlord's assent or dissent) without paying rent. This has been called an "excrescence on the term". He may remain with the landlord's agreement if there has been an unavoidable delay in moving to another holding. A new tenancy may be granted under other legislation—for example, if the holding was no longer primarily or wholly agricultural in character at the time the farm business tenancy ended, so that a new tenancy could not pass the essential tests prescribed by Clause 1 of the Bill. And, of course, parties may have agreed to a further farm business tenancy immediately after the previous tenancy ended. The omission of the words in brackets in Clause 8, page 4, line 34 would not alter the effect of the clause in any way, but would arguably make the provision less clear. That is why the words are there. With that explanation, I hope that the noble Lord will feel able to withdraw the amendment.

Lord Carter

I think the reply of the Minister means that the words are fairly otiose instead of actually otiose. I shall treasure the phrase "excresence on the term" and look forward to using it on a number of parts in the Bill which have been drafted by the Government. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cartermoved Amendment No. 34:

Page 4, line 39, leave out paragraph (b).

The noble Lord said: This amendment seeks to clarify the situation where there has been a fixture fixed or a building erected instead of some fixture or building belonging to the landlord which the tenant does not have the right to take away but where that fixture or building—I believe this is a fairly rare case—would have a greater value to the tenant than the original. The only example I can think of quickly—it is not a very good one—is in Wiltshire, where a milking parlour is now being used as a "tele cottage", believe it or not. That is not a very good example because one can hardly take a "tele cottage" away. However, I believe the point that has been made to us is that there will be cases under this subsection where a tenant is not allowed to remove the fixture or building because it replaces a fixture which belonged to the landlord. Nevertheless the fixture or building that the tenant leaves behind will be of greater value to the landlord than the building or fixture it replaced, if the Minister can follow me.

This is not a major point but it has been suggested that paragraph (b) should be omitted. This is a probing measure to determine what the argument is. I do not think there is a right to compensation for fixtures or buildings, only for tenants' improvements. I am talking about a tenant's fixture. I know that the Government would like to see the back of the 1986 Act. Under that Act one can make a deal with the incoming tenant for the value of the fixture. This matter is a little unclear and I suspect it is fairly rare that a fixture or building will have a greater value to the landlord than the original, but the tenant may not receive the compensation he should receive for the greater value of his replacement fixture or building. I beg to move.

The Earl of Kinnoull

I suspect that these kinds of cases, particularly that of the "tele cottage" would be rare. However, I suspect my noble friend might say that the common law, dated 1830, comes into this. I believe it would be exceptional for a tenant not to reach agreement with a landlord on this matter. I thought the noble Lord was thinking of a case where an agreement had been made between a landlord and a tenant, for example, as regards altering the rent, if there were some benefit to the landlord. However, I am not happy about that.

Lord Carter

Perhaps this matter I am discussing is not so rare. Perhaps a tenant might replace an old cart shed with a modern tractor shed and the landlord knows that he could turn that building into a building for use by rural industries and it could be used for light industry after the tenant has left. That would not be a rare situation. I am concerned about whether the tenant gets a fair return in that situation. He cannot take the building away and as it is not a tenancy improvement I do not believe it will be caught by the compensation rules in the Bill. In those circumstances the landlord will obtain some value from the fixture or building that is left behind and it will increase the value of his holding. However, the tenant may not receive the compensation that he should receive.

Earl Howe

There is a common law rule in property law that, where a tenant substitutes a non-agricultural trade fixture for one belonging to a landlord, that fixture cannot be removed by the tenant as of right. I am advised that this point of law was decided in 1830 and still holds good today, as my noble friend was kind enough to point out.

Clause 8(2)(b) follows the same common law rule. The central point is that the replaced asset belongs to the landlord and not the tenant. Parties might well provide in their tenancy agreement a clear division of responsibilities for these matters. The simpler rules on a tenant's fixtures and buildings set out in the Bill in effect give a tenant the choice of removal of a fixture which is his, or receiving compensation for it at the end of the tenancy, assuming that written consent to a tenant's improvements has been given. It is clearly equitable to limit that choice only to the tenant's own assets. Nor would it be desirable to enable a tenant to, let us say, demolish a landlord's fixtures or buildings—perhaps as many as he liked—replace them and then have a right to remove those replacements at the end of the tenancy. I do not think that that would be equitable. I hope that that explanation will satisfy the noble Lord as to why this provision is in the Bill.

Lord Carter

I am grateful to the Minister for his response but I believe we may have to return to this matter. He said that it is the non-agricultural fixtures which are picked up by the common law. I gave an example, which I do not believe is unusual, of a tenant who replaces a fairly elderly building —we all have them on our farms—and he erects a pretty good new building as a replacement for that landlord's building. There has been no written consent for this and therefore it is not an improvement. The tenant has just replaced the building. The landlord knows that he can then obtain the planning permission to convert the building for use for light industry, for example. It seems a little unfair that the tenant—if I understand the Bill correctly —will have to leave the building behind and not receive any compensation. I am not talking about an improvement but a tenant's fixture. It seems a little hard that the tenant cannot receive any compensation for replacing a landlord's building. We may have to return to this matter.

Earl Howe

There could well be an improvement where, let us say, a dilapidated building is replaced by a new building. It need not necessarily be regarded as a repair, although I dare say that, if it were, that would be covered in the tenancy agreement as regards how it should be treated. If the tenant obtained the landlord's consent, he would be entitled to compensation, assuming that there were a difference in value between one asset and the other. The trap that he should not fall into—if I understand the clause correctly —is replacing the landlord's asset with a new one and failing to get the landlord's consent, because then he renders himself liable to be out of pocket if he is not careful enough with the expenditure that he incurs.

Lord Carter

I am not sure that he needs the landlord's consent for a tenant's fixture. However, I believe we have explored the point enough. I should like to read what the noble Earl has said, and perhaps take some advice on this. Perhaps this is a slightly wider point than I suspected when I first raised it. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

8.30 p.m.

Lord Gallachermoved Amendment No. 35:

After Clause 8, insert the following new clause:

Assignment of a farm business tenancy

(". Where a farm business tenancy is assigned by the tenant in accordance with the terms of his lease the assignee shall assume all of the rights and obligations of the tenant under the lease in relation to the landlord and no claim may be made by the landlord against the tenant for any cause of action arising in respect of the tenancy after the date of the assignment.").

The noble Lord said: The noble Earl will recall that, in speaking on the Second Reading of the Bill, I raised with him the question of privity of contract, pointing out at that time that, although this was a matter much talked about by government, there was no promise in the gracious Speech as regards a Bill dealing with privity of contract, although the pressures for such a Bill are building all the while. The Government have stated that they are sympathetic towards such a Bill, but so far they have not been able to find time to introduce one.

My noble friend Lady Nicol recently received a Written Answer to a Question on the subject which referred only to what we already know: the Government agree that a Bill is desirable and would like to introduce one, but do not know when they will be in a position to do so.

In the light of that situation I decided to table the proposed new clause which appears before the Committee this evening and which I suggest should be inserted after Clause 8 of the Bill. Although I do not anticipate that the Minister will tell me that a Bill is under way, it may be of value in the exploratory examination of this Bill if we expose for the benefit of the Committee and the readers of Hansard the state of play as regards privity of contract.

Under the law as it stands, a lease is a contract dealing with property. A landlord enters into a contract with a tenant at the beginning of a lease, granting him certain benefits over the land and requiring the tenant to give certain undertakings in respect of the property (called covenants). The contract between the landlord and the tenant is not terminated by the tenant assigning his benefits to an assignee, subject to similar undertakings to those he has made to the landlord. The contractual relationship between himself and the landlord continues and he remains potentially liable for any breach of the covenants, including a failure on the part of the assignee to pay rent.

In legal terms, privity of contract is a relationship which exists between the immediate parties to a contract which is necessary to enable one person to sue the other for a breach or non-performance.

Privity of estate exists between lessor and lessee, lessor and assignee (but not lessor and sub-lessee), tenant for life and a remainderman or reversioner.

An original lessee is always liable under privity of contract to the lessor on the convenants of a lease, but under the privity of estate an assignee is only liable and entitled to the benefit of the covenants so long as he holds and until he further assigns the lease, because at the moment of assignment there ceases to be any privity of estate between him and the lessor.

The present law leads to injustice in so far as the tenant is responsible for the actions of the assignee and subsequent assignees with whom he has no legal relationship and of whom he possibly has no knowledge. From the point of view of the landlord wanting to claim his right against the original tenant, there are all the practical problems of tracing and notification to him of the death of the tenant.

This is a live issue for retailers, as I know. The Government have taken soundings, and a Private Member's Bill was introduced in another place but failed because it ran into stiff opposition from what I would describe as property interests. In placing this particular Bill on the statute book I believe that it is important that privity of contract should be given an airing in this Chamber in order that those who may be affected by it are aware of it and that in practice it raises new complications which are perhaps less well known in the world of agriculture. For that reason, I beg to move.

The Earl of Kinnoull

The noble Lord, Lord Gallacher, always raises interesting points. Privity of contract is a live issue. Certainly in my experience in commercial property it is a live issue. It would be difficult to judge where one could possibly start in order to be fair to both sides when so much has been lost in times of recession.

I believe that its application to farm business tenancies is slender. I should like the assurance of my noble friend that if an agreement is couched in terms providing that there should be non-assignment of a lease the tenant could in no circumstances apply to an arbitrator or court to have that changed.

Lord Stanley of Alderley

I should like to follow those remarks with a simple point that I hope my noble friend will be able to answer.

As I understand it, one could enter into a 10 year tenancy, for example. Perhaps for health reasons one might wish to surrender that tenancy after, say five years. I want to know what happens then. Would I, as the tenant, be obliged to continue paying rent and fulfilling the terms of the contract I had entered into until the end of the 10 years? I hope that that ties in with the idea of privity. Could I get out of that agreement with my landlord if he did not want me to? It might well be that he would be only too glad to see the back of me, but if he wanted to keep me as tenant could he make me continue to pay the rent and, what is more, continue to farm when I might not be capable of doing so?

Lord Carter

Another point arises, which occurred to me as my noble friend moved the amendment. I believe I am right in saying that unwritten agreements have the power of assignment under the 1986 Act, and when they are reduced to writing that power of assignment is usually removed. I believe that that is the case. I have known situations where an unwritten agreement under the existing law assumed the power of assignment which was removed when the tenancy was reduced to writing.

That may not be a correct point in law. However, I believe that the Government have said that they accept unwritten agreements as coming within the farm business tenancy. Would the same rules concerning assignment apply to unwritten agreements under the farm business tenancy as I believe apply under the existing law? If that is the case then privity of contract with assignment could be important.

Earl Howe

I should like to thank the noble Lord, Lord Gallacher, for introducing this complex subject so clearly. It is an underlying principle of the law of landlord and tenant generally that, unless the parties to a lease agree otherwise, when they enter into covenants under a lease such as the covenant to pay rent they are undertaking to perform those covenants for the whole term of the lease and may therefore be called upon to do so in the event of default by an assignee. That principle applies to all tenants who assign their tenancies, whether those are agricultural, commercial or residential.

We have all heard of unfortunate cases where elderly people find themselves responsible for the rent which the current tenant, some way down the chain of assignment, has failed to pay. However, while I sympathise with the motives behind the amendment, and I believe that it is good that we should air the subject, I do not consider it appropriate to try to tackle a highly technical subject in legislation dealing with just one type of tenancy. The Government intend to introduce reforms in relation to privity of contract and estate but in doing so would wish to cover all tenancies.

There are also some difficulties with the noble Lord's amendment in respect of policy and technical detail. As it stands, the amendment does not reflect the policy of the Law Commission accepted by the Government; namely, that the parties to a lease should, in general, cease to have any rights of liabilities under the lease once they have parted with their respective interests except where it is objectively reasonable for some degree of liability to continue.

In particular, the Law Commission recommended that it should be possible for a condition of assignment that the assigning tenant should guarantee performance of the lease covenants by his assignee. With all due respect to the noble Lord, the amendment does not address that issue. Nor does it recognise that landlords also may be bound by privity of contract in the event of assignment of the reversion.

On a technical point, the amendment makes no provision for the consequential effects of abolishing the privity doctrine on the wider law of property; for example, the far from simple issue of its interface with the Law of Property Act 1925.

I should also stress that continuing liability under the privity doctrine is not inevitable. Tenancies under this Bill will, of course, be new tenancies whose terms will be open to negotiation. It will be open to any prospective tenant to seek to exclude the effect of the privity doctrine by express provision in the lease, or to include provisions such as break clauses to allow flexibility to terminate the tenancy early and with it any continuing liability, although that will require at least 12 months notice. It will also be open to tenants to sublet rather than assign, and thereby retain control should the subtenant run into difficulties, or to negotiate surrender of the lease rather than assignment when the time comes to part company with the landlord. A number of those ideas might be helpful to my noble friend in the context of the question that he put to me. I hope that, in the light of that explanation, the noble Lord will agree to withdraw the amendment.

To be absolutely clear, as drafted, the Bill leaves the question of assignment to the tenancy agreement. The tenant has the right to assign unless the tenancy agreement forbids that. Therefore an arbitrator would not be expected to override such a prohibition unless there were a provision that consent should not be unreasonably withheld, as is proposed in Amendment No. 91.

If that is not too complex an explanation, I hope that the noble Lord will be content.

Lord Carter

I should be grateful if the noble Earl will write to me on the point that I raised, as it were on the hoof, about the unwritten agreement with an implied right to assign; and how that will be caught.

Earl Howe

Yes, I shall gladly do so.

Lord Gallacher

I am grateful to the noble Earl for his reply. It offers some consolation to the wary and a warning to the unwary. That was one of the considerations that I had in mind when I tabled the amendment.

With a Law Commission Bill available for legislation, it is a great pity that the Government cannot find time to take that Bill on to the statute book in what is a relatively uncrowded parliamentary Session. Quite apart from the immediate farming interests, as the noble Earl said, there is a strong property interest. The noble Earl, Lord Kinnoull, confirmed that with regard to retailing in a recessionary situation. While we are not over the moon, as the noble Earl has observed, as to what the Bill will do for agriculture, we have no wish to see it producing casualties on a grand scale, with even more serious situations developing because tenants had not been wary enough when first agreeing to a lease to make appropriate provision in the event of difficult times being encountered.

As the noble Earl would expect me to say, I shall study carefully what he said. I shall bring it to the attention of the parties which have been in touch with us on the point. Although we may not return to it, I am not without hope, given the undoubted influence of the four industry organisations which are behind the Bill, that additional pressures may be placed on Her Majesty's Government to take in hand the Law Commission Bill on the subject. The sooner that legislation is on the statute book, the better it will be for traders everywhere. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 [Application of Part II]:

8.45 p.m.

Lord Gallachermoved Amendment No. 36:

Page 5, line 24, after ("which") insert ("does not preclude a reduction and which").

The noble Lord said: The amendment provides unequivocally that agreed variations of rent in a farm business tenancy may not incorporate formulae which produce upward only changes in rent. It was agreed in the joint industry agreement that it should not be possible to insert upward only rent reviews into farm business tenancies under the legislation. The amendment ensures that downward variations in rent could not be precluded from farm business tenancies. For example, a formula which linked rent to an objective index of costs would be admissible, since costs and prices may fall as well as rise. However, a formula which determined that any variation of rent will be based on the existing rent plus a charge upwards would not be permissible.

The amendment helps to achieve the industry's objective of market realities and that those market realities should be more faithfully reflected in future tenancy arrangements. I am sure that that step towards market realities will commend itself without reserve to the noble Earl. I hasten to sit down in order to hear what he says in response. I beg to move.

Lord Middleton

As the noble Lord, Lord Gallacher, reminded us, the industry is agreed that under a farm business tenancy rents should be able to be lowered as well as raised at a rent review. That can occur under current legislation and by Clause 13(1) of the Bill, which gives the right of an appeal to an arbitrator who can decrease as well as increase a proposed rent review.

If I have worked the matter out correctly, the amendment works like this. As the Bill stands, arbitration can be sought under Clause 10 unless the provisions of Clause 9 apply. Clause 9(b) (ii) provides for agreement where rent can be varied by a specific formula. That would preclude reference to an arbitrator because Clause 10 could not apply. The noble Lord's amendment seeks to ensure that such a formula can provide for a reduction and that there must not be an upwards only review. If such a review provides for increase only, then Clause 10 would apply and arbitration could be sought.

I agree with what the noble Lord seeks to do. If the amendment achieves that objective, as I believe it does, I support it, even though to some extent it limits the freedom of choice enshrined in the Bill.

Lord Stanley of Alderley

Since we are referring to rents, perhaps I may raise a parallel problem. It is a matter that I warned my noble friend I would raise.

I am concerned that, under the 1986 Act and the provisions of the Bill, rentals could be artificially inflated. With regard to the debate on Clause 1 stand part and Amendment No. 15, the noble Lord, Lord Carter, stated that the playing field is not level. It is not level; God knows why. More people wish to farm than there is land for them to farm. Perhaps when they reach my age they will realise the folly of their ways. But that is the situation: it is not a level playing field. The reasons why rentals could be inflated relate to the scarcity of land compared with the number of applicants, existing farmers being able to tender high rents for nearby land, and existing farmers being able to tender high rents in order to make economies of scale. Indeed, I have done so.

Those factors have shown themselves in particular in agistment rents and must influence the landlord in asking for, and the tenant in having to accept, higher rents when negotiating rentals under the 1986 Act. With regard to the 1986 Act, I accept that a tenant may take his landlord to arbitration. However, most tenants prefer not to do so and are inclined to accept a higher rent than they can economically justify over the whole holding. Even if the case goes to arbitration, the arbitrator must be guided by Schedule 2 to the 1986 Act. I do not think that I need spell out all the provisions, although my noble friend may do so when replying. However, I do not believe that those provisions have the effect of keeping those artificial rents down to a common economic rent over the whole holding. I hope that I have explained the position clearly.

I hope my noble friend will assure me that my fears are unfounded. I believe that we shall have high rents. I can see my son and myself, being existing farmers, tendering very high rents if it is an area that we specifically want and for all the other reasons that I have outlined. I hope that those high rents that we might be able to afford on a limited piece of land will not have an artificial knock-on effect on further rents under 1995 legislation. But, more important, I hope that they will not encourage even higher pre-1995 rents—that is, 1986 rents—which might have a knock-on effect on the 1986 rents in an arbitration. I do not for one minute grudge the landlord the high rents for extra people. Good luck to him if he can get them. But I do not wish to see them reflected across the whole industry because it would not be possible to withstand that.

Lord Carter

A second point arises on this, but before I deal with it I wish to reflect on the remarks of the noble Lord, Lord Stanley. It would be interesting if arbitration were applied to farm business tenancies. We know that there has to be the open market rent which the arbitrator looks at, and we shall come to amendments on it. Will the open market rent which the arbitrator considers include the market in reviews under the 1986 Act? That is a different class of tenant. It is an interesting point to which we may return when we come to rent reviews.

There is another point. We moved the amendment to Clause 9(b) (ii) which concerns the specified formula, but Clause 9(b) (i) refers to, by or to a specified amount", and if it is greater than the rent for the ingoing tenant, then it is an upwards only review. That is not what people want, and for once we can call in aid the industry agreement.

Earl Howe

Clause 9 provides an option for the parties to agree on a fixed rent, with no reviews during the tenancy, or to agree to adjust the rent by or to a specified amount, or by applying an objective formula to adjust the rent. So the clause in effect implements the provisions of the industry agreement of last year.

The idea behind the provision is that the parties should be free to agree on the level of rent and a method of adjustment, provided it is clear to both sides what they are signing up to. Some people may prefer a fixed rent, just as some house purchasers opt for a fixed mortgage interest rate. Others may favour a stepped rent, for example, with certainty as to what the level of rent will be in any given year. Others may wish to fix the rent by reference to a percentage of turnover of the farm business. These are adjustments which give an unambiguous result by applying the terms of the tenancy agreement.

As I said, the clause effectively implements the industry agreement. As the noble Lord, Lord Gallacher, explained, the industry organisations now wish to clarify the provision in order to ensure that downward variations in rent could not be precluded by whatever formula was used to adjust the rent. They argue that this would help to achieve the underlying objective: namely, that market realities should be better reflected in rents paid under farm business tenancies.

I am sympathetic to the arguments and the Government are willing in principle to give effect to the industry's wishes on the point. However, we should like to consider whether we can improve on the wording proposed in order to achieve that result and, if we can, to table an amendment at Report stage. I hope, therefore, that the noble Lord will be happy with that and will agree to withdraw his amendment in a moment.

My noble friend Lord Stanley raised a general question about rent. I am grateful to him for giving me notice of the points he wished to make. It is, I suppose, inevitable that the laws of supply and demand will always be of some significance in agriculture, as elsewhere in the commercial business world. Agriculture continues to be an attractive way of life for many people, despite my noble friend's doubts. The capital costs of buying a farm make that means of entry impractical for all but a few people. Those who get the rare chance of a tenancy under the 1986 Act will bid high to secure the opening, with the knowledge that at worst they will have three years before a rent review pegs back the rent to a realistic level.

When the Bill is enacted, scarcity value will not be a factor with tenancies under the 1986 Act because, save for the few exceptions dealt with in Clause 4, no new tenancies can be granted under it. An arbitrator proceeding under Schedule 2 to the 1986 Act is required to disregard any element of rent which is due to scarcity. Further, he may only consider evidence as to comparable rents from 1986 tenancies alone. To that extent, I do not think that there will be knock-on effects arising from the Bill for rent reviews determined at arbitration.

My noble friend's anxiety lies, I think, with the related earnings capacity aspects of rent where a tenant wishes to acquire nearby land which will be run with his own farm. Paragraph 2(b) of Schedule 2 to the 1986 Act defines the term "related earnings capacity" in respect of paragraph 1 of the schedule. What is being decided is the actual farming potential of the holding and the amount of income that can then be gained from it. Where a tenant acquires land nearby to his holding, paragraph 3(b) of the schedule requires the arbitrator to disregard any element of rent attributable to that factor. So I do not believe that paragraph 2 of the rent schedule has the meaning which my noble friend may fear that it has. The thrust of the second schedule to the Act is to narrow down, so far as possible, the rent which is fair for the actual land comprising the holding itself, setting to one side associated but not directly relevant factors. I hope that those remarks will be helpful to my noble friend.

Lord Gallacher

First, I thank those Members of the Committee who have spoken in favour of the amendment and most of all the noble Earl for what he said about it. In the light of his statement and his willingness to look at the principle underlying the amendment and perhaps bring forward an amendment of his own which may implement that principle in accordance with the representations made to him by the industry organisations, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cartermoved Amendment No. 37:

Page 5, line 28, after ("is") insert ("stated").

The noble Lord said: We can deal with this amendment extremely briefly. I am advised that for the avoidance of doubt and for clarity the word "stated" should be introduced into the last line of Clause 9 so that it would read, but otherwise is stated to remain fixed", rather than the words in the Bill. Having moved a previous amendment on the ground that something was otiose, I now wish to introduce this amendment for the avoidance of doubt and for clarity. I beg to move.

Earl Howe

I can deal with this briefly. The amendment is unnecessary. Clause 9(b) begins with the words "provides that". If one follows the grammar through, that achieves the result which the amendment seeks. What the amendment would do is to create an ungrammatical sentence because it would effectively state: provides that the rent is … but otherwise is stated to remain fixed". The sense of the clause is that it provides that the rent is to remain fixed, not that it is stated to remain fixed. I hope that when the noble Lord comes to read Hansard he will see that the grammar is correct as the Bill stands and does not need to be elaborated.

Lord Carter

It makes a change, instead of being accused of being otiose, to be accused of being ungrammatical. I shall have to refer this to those who thought the point was important and shall repeat to them clearly what the Minister said. Now that I read the wording, I believe he is correct, so I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 agreed to.

Clauses 10 and 11 agreed to.

Clause 12 [Appointment of arbitrator]:

Lord Gallachermoved Amendment No. 38:

Page 7, line 2, at end insert: ("(2) The list of arbitrators from which the President of the RICS makes his selection under subsection (I) above shall not include land agents in the full time employment of land-owning persons, corporations and trusts.").

The noble Lord said: I hasten to say that the amendment is not intended to reflect on the impartiality of the professionals. It is meant to ensure that no suggestion of professional experience or interest could cloud or cast doubt on the fairness of any award. We see that as something which is worthy of consideration in such a Bill and I look forward to hearing what the Minister has to say about a limitation of the kind which is included in Amendment No. 38. I beg to move.

The Earl of Kinnoull

The noble Lord, Lord Gallacher, is always so charming in the way that he puts amendments. When I first read it, I thought that it was possibly a serious slur on the fairness of arbitrators. As a surveyor, I spring immediately to the defence of the President of the Royal Institution of Chartered Surveyors. The system under which arbitrators are chosen is very careful. The president produces his list, which is approved by the Lord Chancellor. Each year the arbitrators go through training courses. There is no question but that they are very well qualified. I have never known a case that has been referred either to the Lands Tribunal or the courts for judicial review on the basis that an arbitrator has been incompetent. I believe that arbitrators do a tremendous job, which is very technical, for farming and agriculture and for landlord and tenant. I for one am proud of what they have been able to do. I believe that to put in this provision, even with the gentle wording of the noble Lord, Lord Gallacher, is bound to cause an awful upset within the profession. It is a slur on those who act for one side of farming and who apparently will not be able to detach themselves in the appropriate manner as they do.

The Earl of Courtown

I agree with what my noble friend has just said. One could just as easily say that agents who acted only for tenants should not be included.

Earl Howe

I should like to associate myself with the remarks of both my noble friends. I too am tempted to be beguiled by the way that the noble Lord, Lord Gallacher, moved this amendment. But the way it reads suggests that there are those who are under the misconception that land agents, particularly those employed by landowners, corporations and similar bodies, are bound to be landlords' men in some sense. That is not the case. No doubt many of them are experienced members of their profession, and that is likely to be a very good qualification for an arbitrator. Anyone who accepts an appointment as arbitrator is well aware that he must act impartially. If he fails to do so not only will he be guilty of professional misconduct but his award can be set aside by order of the court.

If this amendment were to be pursued, it would bar from acting as arbitrators a number of experienced and well qualified people who might be members of the Lord Chancellor's panel. I do not believe that that is in the interests of landlords or tenants, and I hope that the noble Lord will feel able to withdraw the amendment.

Lord Gallacher

I note what has been said about the amendment. I accept that it is a somewhat difficult amendment to table, and perhaps an even more difficult amendment to move. At times I have been an arbitrator, and I hope that in spite of a professional qualification I have always discharged my duties in the interests of both parties. I cannot say that they have always felt that, but nevertheless I have tried to do it. In the light of what has been said, I accept the assurances that have been given. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9 p.m.

Clause 12 agreed to.

Clause 13 [Amount of rent]:

Lord Cartermoved Amendment No. 39:

Page 7, line 10, leave out from ("let") to ("taking") in line 11 and insert ("by a prudent and willing landlord to a prudent and willing tenant").

The noble Lord said: In moving Amendment No. 39, I wish to speak also to Amendments Nos. 40 and 41. On reading the amendments, your Lordships will appreciate that they deal with the fixing of rent. I do not think that the noble Earl will be enthusiastic about them, and I expect the industry agreement to be quoted at me. The wording has been adapted from Schedule 2 to the 1986 Act. We have omitted the more precise definitions. It seems that the Government and industry organisations in agreeing the package are firmly committed to the open market principle. I believe that we should take a little time to see why they have reached that conclusion, what they mean by the open market and what is likely to happen.

We feel that neither the Government nor the industry group should be able to push this through without having to justify their position to Parliament and to the many farmers outside Parliament who will be interested in our deliberations. The wording of Clause 13 of the Bill has been taken from Section 2 of the Agriculture Act 1958. The main purpose of that section was to place a sitting tenant in exactly the same bargaining position vis-à-vis the level of rent determined in arbitration as a new tenant of the holding, with account being taken of the sitting tenant's improvements. We know that after only a few years of operation the open market approach was totally discredited and rejected by both landowners and tenants. We understand that the industry group argue that the circumstances are now different from those that applied after the 1958 Act. For the life of me, I cannot see why. I wonder whether this is another of the trade-offs that we have already seen. We shall be coming to the trade-offs on tenant compensation. Perhaps this is the other trade-off, which is a return to the open market concept.

For many years landowners have complained that they are not getting a fair return on capital and that rents have not risen in line with increases in farm profits. It is not entirely clear how they arrive at that conclusion or how a fair return may be estimated. In the past the shortcomings of the notion of a fair return have been analysed by, for example, the NFU, who have used the following arguments. Owners of farmland here and in Europe expect to receive a lower return on their capital than for an equivalent amount of money invested elsewhere in the economy. That is partly because history has shown that agricultural land is a useful hedge against inflation, and the analogy often used is that of gilt-edged securities. The dividend paid is low but the investor has the security and the prospect of future gains on sale. Another argument advanced in the past by the NFU and others is that the ownership of rural land is seen to carry a social prestige. Rural landowning is a bundle of human attributes, including the amenity value of a house in the country and a role and recognition in the rural community.

It is also well known that substantial capital gains are to be made if a development value can be realised. Often hope value is built into the investment. This is particularly strong in the purchase of farmland on the urban fringe. Another argument advanced by the NFU for the low return on agricultural land is that valuable sporting, timber and mineral rights are attached to many purchases of farmland. Therefore, income is not purely a matter of what can be extracted from agricultural letting.

These factors account for the difference between the capitalisation value of farmland and the higher value that that land will achieve on the open market. I suppose that, when the rental return is described as unfair, the question to ask is: unfair in relation to what? Other investments do not seem to bring with them the same range of benefits.

During the passage through Parliament of the 1958 Act, the CLA was far from happy about the use of the "open market" test without the discounting of "scarcity value", as referred to in earlier amendments. This practice was first advocated by the CLA in a booklet on agricultural rents published in 1957. The effect of the 1958 Act was to give rise to a steep increase in rents demanded.

The farming organizations—not the CLA, but the others—were then united behind the principle that rents should relate to the amount that a reasonably efficient farmer, making full use of the land and fixed equipment, could be expected to pay—that is, that the rent should be an economic one. It is interesting to know why there has been a change, and what are the trade-offs which have been achieved to make it worthwhile. It is important that those outside this Chamber who, if they do not read Hansard, will read reports in the agricultural press, should be clear exactly why the industry group reached its conclusion and accepted the "open market" yardstick which in the past it deplored.

We know that there is not an open market in tenanted farms. We know about the level playing field or its absence between landlord and tenant and we do not need to repeat it. We know the way in which the scales are weighted. As I said before, there is a curiosity in the market in farmland: if a commercial property is let on a good covenant to a substantial tenant over a long period of years, it has a higher value than a vacant property. Exactly the reverse happens with agricultural land: land which is let on the long term will have a lower value. The famous vacant possession premium has a lower value than the vacant land. That is partly a factor of legislation and taxation.

As I said at Second Reading, I understand why the landowning interests in the group are interested in the Bill. It will mean an increase in the value of the land which they let. I can understand why the Government are interested in the open market. It is a part of their ideology and it is understandable that they want to apply it. In fact, I do not believe that there is an open market. The tenants who apply for farms will quickly find that out. The demand will exceed the supply and rents will go up. We are not talking about shirts and socks or office buildings; we are talking about our rural landmass and the way in which it is handled; we are talking about people's homes and livings which are attached to farm tenancies.

For all those reasons, we feel that it is important that when the rent is considered by the arbitrator—we have put together a number of amendments and if the Government were minded to accept them I should be happy for them to redraft them, although I do not believe that they will accept them —there should be emphasis on the prudent and willing landlord and the prudent and willing tenant, as opposed to the willing landlord and the willing tenant. I do not believe that anyone could object to the insertion of the word "prudent", unless the Minister will tell me that it is otiose. We have emphasised the character and the situation of the holding, including the locality in which it is situated; the productive capacity and all the things which one would expect to be taken into account, such as its related earning capacity; and the current level of rents for comparable lettings, excluding any consideration of scarcity; also, the earning capacity of the holding—this is the crucial point—to ensure that the rent payable is one which can be generated from the farming of the holding in question.

We are coming to the end of today's proceedings, and I do not wish to detain the Committee. But this is a crucial debate, which goes to the heart of the system that the Government propose. I entirely understand why the Government take the line that they are pursuing. They have persuaded the industry group that the open market is the way to deal with the matter. I am surprised that the three members of the group have fallen for that approach. I wonder whether those members realise what they have agreed to, just to have an Agricultural Tenancies Bill in front of Parliament with the provisions that it contains. We shall have to think about this matter very hard.

To save the Minister time, let me say that I expect him to reject these amendments. I should be surprised if he did not do so. We shall certainly wish to return to the matter and make it absolutely clear outside this Chamber what "open market" means. It means higher rents—I am quite certain of that, because of the situation; the landlords will not mind that. It means under this Bill that let land will start to claw back on the vacant possession premium; the landlords will not mind that, either. I want to be absolutely sure that everyone understands the meaning of those simple words "a willing landlord to a willing tenant" in the "open market" (which I do not believe exists) and what the effect will be on farm rents. Everyone must understand the cost to farmers who are facing the policies that we all support in relation to the reform of the CAP and who wish to bring the farm gate prices down to more realistic levels related to world prices. If that happens, we are told that there will be a knock-on effect, with pressure on farm costs. Working against that will be the results of this Bill, which will drive up that most crucial cost for the farmer; namely, the rent of the land that he hires from the landlord.

For all those reasons, this is an important subject. We shall wish to return to it both inside and outside this Chamber. I beg to move.

The Earl of Kinnoull

This is an important debate and the noble Lord, Lord Carter, is very experienced in this field. However, I am not sure that he recognises one point. He seems automatically to assume that the open market system will increase rents dramatically, irrespective of the returns in farming. I am not sure whether that is realistic. I am sure we all hope that the Bill will work because it has many very good points. Fundamentally, it is good for farming. If the Bill works, then under the arbitration system there will be open market rents. There will be plenty of examples which the arbitrator can use. It will not be artificial; it will be real. Whatever one might say, farmers are not fools. Young farmers, particularly, are not fools. They will not bid for something in the open market in order to start on the ladder knowing that they are buying real trouble. I do not share the noble Lord's automatic fear. I respect it, but I do not share it.

9.15 p.m.

Lord Carter

It may be helpful if I respond to that point immediately. Let us look at what happens when one is preparing a budget to help someone to tender for a farm. I have prepared many such budgets as I am sure have other Members of the Committee. One works out what the applicant can afford to pay and then one asks him how much more he is prepared to pay in order to get the farm. Often the figure will be perhaps one-third above what one has shown on the budget is the economic rent for the farm. I can see noble Lords opposite nodding. They know what goes on. That is exactly what happens. Under the 1986 Act at least there are these other factors to be taken into account. But that will not happen under the Bill. The open market will be the open market. I ask the noble Earl whether he knows of a market where demand exceeds supply and the price goes down.

Lord Stanley of Alderley

I wonder whether my noble friend can answer one question on this amendment. It is a simple point. Perhaps I should know the answer. Will the open market take into account variation in land? I can see a situation whereby land is let in an area for X rent and then another piece of lower quality land becomes available. Will the fact that it is not of the same quality be taken into account? I am not sure whether that point is taken into account.

Earl Howe

I have listened very carefully to the noble Lord, Lord Carter, on all three of the amendments. Amendment No. 39 would in its main effect require an arbitrator to determine rent on a basis very little different from that set out in the 1986 Act. At the risk of boring the noble Lord, I would remind him that the industry agreement on tenancy law reform is quite clear that the arbitrator must assess the rent on the basis of the open market value which would be agreed between willing parties. That is what we have given effect to in the Bill.

Clause 13 requires the arbitrator to assume a willing landlord and a willing tenant. It is true that the word "prudent" is omitted. However, the vital test in determining the rent at which a holding might reasonably be expected to be let is that all relevant factors must be taken into account. The Bill quite rightly leaves it to professional judgment as to which factors are relevant to a particular rent review and to what extent a holding can generate sufficient income to enable the rent to be met. Prudence is a great virtue; virtue is a grace; and I am confident that arbitrators are fully seized of the need for prudence in running a sustainable business. Equally—I think this answers the noble Lord's anxiety on the amendment —Clause 13(2) already implicitly provides the means for prudence to be a relevant factor, among many others, in the arbitrator's task.

Many of the same arguments apply to Amendment No. 40 with all the various factors that it lists. It is professional judgment which should determine what factors are relevant to a particular rent review, not a predetermined list such as this one. The Government have sought to put the prescriptive approach of the 1986 Act into the past and to provide leaner, fitter legislation which will best serve the long-term interests of the agricultural industry. Noble Lords opposite sometimes appear determined to change only a few words in the 1986 Act and call that the Agricultural Tenancies Bill. Such an over-prescriptive approach will simply not do. How can any professional arbitrator fail to take account of the character and situation of a holding or its productive capacity if required by Clause 13(2) to take into account all relevant factors? The simpler, deregulatory provisions of Clause 13 provide what the industry itself has told us that it wants to have as regards rent. The professional interests clearly support the Bill's approach to rent and see no particular difficulty in carrying out their responsibilities under it.

Finally, turning to Amendment No. 41, Members of the Committee will not be surprised to hear me say once again that rent arbitration should not be subject to prescription. Again, there is nothing in this amendment which is not covered by the requirement in Clause 13(2) that all relevant factors must be taken into account, including in every case the terms of the tenancy agreement. The clause as drafted reinforces the point that in every rent review the arbitrator must take into account the terms of the tenancy, with the exception of any terms about the manner in which the rent is determined as these are over-ridden by Part II of the Bill.

Amendment No. 41, tabled by the noble Lord, in fact has the effect of restricting rather than extending the list of factors to be taken into account because the amendment requires rent to be generated by the farming of the holding and omits any reference to non-farming activities. To take an obvious example, the noble Lord's amendment would not allow the arbitrator to take into account any revenue generated by a caravan site, by a pony trekking enterprise, or by something of that sort. Clause 13 as drafted does do that. One of the advantages of the clause, as drafted, is that it gives an arbitrator the flexibility to take into account both the earning potential of farming and also of any non-agricultural activities which the tenant is permitted to carry out and on which he is engaged at the time of the rent review.

With that, I hope that the noble Lord will recognise that Amendment No. 41 is inherently unsatisfactory, quite apart from its broader demerits, and that these amendments will not find favour on this side of the Committee.

The Earl of Kinnoull

Before the noble Lord responds, perhaps I may refer to his question about advising a young farmer to go into a farm, work out all the calculations and then add another third in order to get the farm. That may be so for someone coming into the industry, but here we are dealing with an arbitrator with a landlord and tenant in an existing place. With all his experience, I do not believe that the noble Lord can point to an example where a farm had gone for an extraordinary price in order for that young farmer to get into the farm and that an arbitrator would be swayed by that. That would not really be the open market price, but an exceptional one. Arbitrators are very experienced people.

Lord Carter

I am extremely grateful to the Minister and other Members of the Committee. I am reminded of a remark which was made, when I was on the Northfield Committee, by the senior partner in a well-known firm of land agents. He pointed out that the arbitrator is extremely sophisticated, expensive, and has the ability to divide by two.

I expected the response which I received and I was grateful for it. The Minister has a point about all the relevant factors. It will be interesting to read Hansard because we know from the Minister what all departments say in the course of the Bill, which can be looked at. I believe that arbitrators and those who advise, will be looking to see what the Government believe are relevant factors such as earning capacity and the local situation.

I still remain of the view that there will be plenty of willing landlords because there usually are if Christmas comes early. I am still concerned that arbitrators will be looking at what is described as the "open market rent". What they regard as a relevant factor would be a matter of argument between the two sides, between the landlord and the tenant and the arbitrator.

I believe that there will be upward pressure on rents, as there is already, in regard to farming in certain sectors. That may well change. I still believe that the scarcity of farms will be such that it will mean that the need for some form of prescription will be necessary if the tenant is to be protected.

I am not surprised that the Government do not like this approach. All their concern is for simplification and I am a little anxious that the tenant is being thrown out with the bath water. We shall read with care what the Minister has said and we may wish to return to this in a different way at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 40 and 41 not moved. ]

Lord Gallachermoved Amendment No. 42:

Page 7, line 18, at end insert ("and did not amount to a premium or equivalent,").

The noble Lord said: One of the intentions of the industry agreement in relation to rent-setting is to ensure that any premium that may have been paid by the tenant, whether as a straightforward payment or by some other means of investment and improvement, should not lead to an increase in the rent. In other words, the tenant should not be subject to double taxation, which means paying a premium for an improvement to the holding and subsequently having to pay a higher rent which reflects the increased rental value which the improved holding commands.

It is essential for tenants' confidence in the new law that they should be safeguarded on this point. It is in order to give tenants that confidence that we have tabled the amendment. I beg to move.

Lord Middleton

I understand and sympathise with the concern that the tenant should not have to pay a premium or provide a fixed equivalent for a tenancy and then pay a higher rent because of its effect on the value of the holding. I should have thought that this is another case where the point is covered in Clause 13(2) which states that "all relevant factors" are to be taken into account.

Earl Howe

I am grateful to the noble Lord for moving this amendment and to my noble friend for his remarks.

I agree that, where a tenant has been obliged to make improvements to the holding under the tenancy agreement and has received no benefit in return, this amounts to the equivalent of a premium. As many noble Lords will know, the industry agreement stated that any premium or equivalent would be taken into account when an arbitrator determined the open market rent at a rent review. I take this to mean that where a tenant had paid a premium or equivalent to obtain a tenancy, he would not then be penalised throughout the tenancy by having to pay a higher rent.

The desired result is achieved by the requirement in subsection (2) of the clause that the arbitrator should take into account all relevant factors, as my noble friend pointed out. Where the tenant has paid an actual premium—in money terms—the arbitrator will have to inquire into what benefit the tenant received on account of the premium. It may be that the tenant received benefits such as grazing rights on other land which account for the premium; or it may be that some, or possibly all, of the premium was reflected in a reduced rent. So where the tenant does not receive a benefit, the arbitrator applying the rent provisions as drafted here will have to determine such a rent as might be expected to be paid at the review date by a tenant paying a premium. He would need to assume that that premium was the equivalent at the review date of whatever premium was in fact paid by the tenant at the outset of the tenancy.

Where, instead of paying a premium in money terms, the tenant undertakes to make an improvement—say, the building of a barn—the same principles will apply. The tenant will in effect be let the land and the barn, but he will be out-of-pocket for the cost of the barn just as if he had paid a premium. At the review date the arbitrator will have to determine what benefits, other than the use of the barn, the tenant received for his outlay. If he can find none, he must assume that the burden of the cost of the barn was reflected in a reduced rent. In such a case the arbitrator will determine a new rent for the land, including the barn, likely to be paid by a tenant taking a lease on terms which include an obligation by him to make these improvements. Again, the arbitrator would take equivalent cost at the review date of whatever the cost of the barn was when it was erected. So by looking at all relevant factors the arbitrator will have arrived at the result that is sought by this amendment.

I trust that that somewhat complicated explanation will satisfy the noble Lord that this amendment is not needed in order to achieve the desired result in accordance with the industry agreement.

9.30 p.m.

Lord Gallacher

The Minister said that the matter was somewhat complicated. That is the truest statement he has made this evening. I shall study carefully in the sober cold of morning what he has had to tell me. I shall take what he has had to tell me to those who asked me to put down the amendment. I shall ask them whether they are satisfied, in view of the unstinted testimonial paid to arbitrators by other speakers this evening. If they are, the Minister will hear no more from me. If, on the other hand, they are not, I shall be back to speak to him on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cartermoved Amendment No. 43:

Page 7. line 31, at end insert: ("() On any reference made in pursuance of a statutory review notice, the costs payable by the tenant to the arbitrator shall not exceed 20 per cent of the annual rent due under the tenancy.").

The noble Lord said: The amendment deals with the vexed question of the costs of arbitration. We all know that as professionals we often have to advise tenants, although they might appear to have a good case, not to go to arbitration because the costs of arbitration will swallow up any benefit they might achieve from the results of the arbitration. There has been a case recently in the North West where the costs of the arbitration were £150,000. That may be exceptional, but I have been involved in arbitrations and it is an expensive business. In some cases it tends to be a bit of a threat in the landlord's hand to imply, "Of course you can go to arbitration, if you like. I can stand the cost, can you?".

That is not fair. The amendment is not perfect by any means. It is an attempt to flush out the point about the cost of arbitration and to ask the Government whether they are happy with the situation. I suppose that the Minister will tell me that there is an open market in arbitration as there is with anything else. That is not the case. Arbitrators are appointed. They work to a fixed scale fee. The arbitration often drags on and the tenant may find himself in for a pretty big bill. Most tenants are poorer than most landlords. That does not apply in every case, but in most.

We suggest that one way around the difficulty—it is not the only one—would be to say that, if the reference is made in pursuance of a statutory review notice, the cost to the tenant should be limited to 20 per cent. of the annual rent. One could perhaps find other ways of doing it. I should like to get on record the Government's view about the costs of arbitration and whether they agree that on the whole the tenant, in terms of costs, is at a disadvantage, and whether they are prepared to take any steps to see whether the cost to the tenant could be limited. I beg to move.

Earl Howe

I find what the noble Lord said very interesting. I was rather surprised when I saw the amendment. It seems to stem from the assumption that, where there is a dispute about rent, the tenant is always right and the landlord always wrong. I have to say that I find that implausible.

Everyone knows that arbitration is relatively expensive. It is bound to be, because arbitrators are experienced members of their profession and they have to be paid for the time they spend on a case. Parties, knowing that, should go to arbitration only if it is absolutely necessary. They should always try to reach agreement first. They should also take steps to limit the costs so far as they can. I understand that the RICS has produced guidance on that point.

In an arbitration, the usual practice is for the costs to follow the award. The amendment would not change that. But it may be that the noble Lord intends such a change, so there is a likelihood that whatever the outcome the landlord would have to pay the greater share of the arbitrator's costs. I consider that to be unacceptable. I do not find any attraction in that idea. It would be inherently unfair. I hope that the noble Lord will feel able to withdraw the amendment without further ado.

Lord Carter

I am not surprised that a member of the Conservative Party has to defend the rights of impecunious landlords. It is an important point. As I said, there are weaknesses in the amendment but it was tabled in order to draw attention to the problem. We will look again at the matter to see whether there is another way. Of course, I do not accept that the tenant is always right and I agree with the Minister in that respect. We are anxious to find a way to restrict the costs of arbitration, but perhaps we cannot do that in this Bill. I argue that as regards arbitration the landlord is in a stronger position than the tenant. Normally, his pockets are deeper but perhaps we can think of another way to resolve the issue. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 agreed to.

Clause 14 agreed to.

Lord Inglewood

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.