Splitting the Reversion : Enabling the service of a valid Case B Notice to Quit. What is the risk?

Posted by Tom Romecin on April 10 2017 in Agriculture, Commercial development , Real estate litigation

The government’s continued effort to stimulate economic growth and increase the supply of housing to meet a rising demand has resulted in local authorities granting development rights over farmland on the edges of many towns and villages.

Those development rights have been something of a windfall for many farming tenants who often, in an attempt to negotiate higher premiums for the surrender of their tenancies, attempt to frustrate the landlords attempts to recover possession of their farmland.

The bargaining power of the landlord and tenant depends almost entirely on the ease by which the landlord can terminate the tenant’s tenancy and recover possession of their land.

Tenancies granted under the Agricultural Holdings Act 1986 (“AHA”) can be particularly tricky to bring to an end. To recover possession, a landlord will have to serve a Case B Notice to Quit requesting possession of their land for non-agricultural purposes. Ensuring a compliant notice is served is not straight forward.

While, pursuant to section 27(3) of the AHA, a landlord will not have to obtain consent of the Tribunal to serve a Case B Notice to Quit, the tenant can challenge the validity of a Case B Notice to Quit by demanding arbitration.

Unfortunately, satisfying the statutory pre-requisites under the AHA is not the only obstacle the landlord will have to overcome to serve a valid Case B Notice to Quit.

Consider the following circumstances:

Derek is the freehold owner of 200 acres of farmland (“the Holding”) which forms part of Hill Farm. Simon has an AHA tenancy of the Holding recorded in a very basic written document.

Simon rotates barley, wheat and sugar beet on Hill Farm, which has been operating at a loss over recent years, particularly due to falling wheat prices.

Derek has successfully obtained planning permission for 16 residential properties over 10 acres of Hill Farm (“the Development Land”). Derek is aware that he cannot serve a valid Case B Notice to Quit on Simon, because he has not obtained planning permission of the entirety of the 200 acres over which Derek holds the reversion.

Derek wants to know if he can transfer to a limited company he owns, 190 acres of Hill Farm over which Derek has not obtained planning permission. Derek wants to do this because (a) Derek will only pay Corporation Tax, which is currently lower than Capital Gains Tax, on any disposal of the remainder of Hill Farm; and (b) Derek will be able to serve a valid Case B Notice to Quit in relation to the Development Land over which Derek has obtained planning permission.

The problem – ensuring the service of a valid notice

A Case B Notice may be served by a landlord on his AHA tenant in circumstances where the landlord requires possession of his land, pursuant to schedule 3 of the AHA, for “for use other than for agricultural”. In addition to the statutory pre-requisites, a Case B Notice to Quit must comply with common law principals, which is where Derek’s problems begin.

In common law, and unless there is an express provision to the contrary, a notice to quit part of a holding let by a tenancy is invalid. There are some minor exceptions under the AHA, however these do not permit a landlord to terminate part of a tenancy and resume possession for non-agricultural use.

Unless the landlord has expressly reserved a right to resume possession of part for non-agricultural purposes, the landlord will be prevented from terminating any part of his tenant’s tenancy, on obtaining development rights. There is no such right in Simon’s tenancy of Derek’s land.

A solution – splitting the reversion?

Some commentators have suggested that, to enable a landlord to serve a valid Case B Notice over part of their reversion, the landlord could transfer that part of their reversion over which they do not have planning permission to a third party. The result of the transfer would leave the landlord with the residue of an estate entirely subject to planning permission. In these circumstances, the landlord could in theory, serve valid Case B Notice.

In the decision of Persey v Bazley, a landlord with development rights over part of his reversion, put that part of his reversion without development rights into a bare trust for the benefit of himself. The landlord contended that the severance of the reversion was in accordance with section 140 of the Law of Property Act 1925 and entitled the landlord of the part with development rights, to serve a valid Case B Notice to Quit. The tenant served a counternotice referring the Case B Notice to Quit to arbitration.

Following the service of the counternotice, the landlord explained that the severed reversion was held on trust for his own benefit; so while the legal interest had been vested in a third party, the landlord continued to enjoy the beneficial interest of the reversion. The landlord admitted that the purpose of the transaction was to enable the service of a valid Case B Notice to Quit.

The Court of Appeal noted that the beneficial interest of the land remained vested in the landlord, notwithstanding the transfer. The Court held the view that section 140 of the Law of Property Act 1925 contemplated a “real severance of the reversionary estate as a matter of substance” and concluded that the transaction entered into by the landlord had not been a “real severance”; simply transferring the legal title was not sufficient. For this reason, the Court held that that the Case B Notice to Quit served was invalid.

The decision in Persey v Bazley suggests that it may be possible for a landlord to sever part of the reversion to enable the service of a valid Case B Notice which, in circumstances where there is no contractual right to resume possession of part, maybe the landlord’s only option to recover possession of part of their land. For such a transaction to be valid, the  transaction must “a real severance of the reversionary estate as a matter of substance”.

Advice to Derek

Derek should be advised that, any split in his reversion to enable the service of a valid Case B Notice, may be closely examined by an Arbitrator or the Courts. If that transaction has not been conducted “at arms’ length” of both the legal and beneficial interest, there is a risk that the transaction may be considered a sham and in those circumstances, the Case B Notice may be deemed invalid.

Even if Derek ensures the transaction is a “real severance” and conducted “at arms’ length”, Simon may still try to argue that the transaction is a sham.

Ultimately, the strength of Derek and Simon’s position will depend on whether the transaction to sever the reversion, was a real severance of both the legal and beneficial interest for consideration and for a reason other than to serve a valid Case B Notice to Quit.

Although Derek appears to have a genuine reason for wanting to transfer the reversion into a limited company Simon could argue that since Derek is the sole shareholder of the limited company, Derek will continue to enjoy, by way of dividend payments, a benefit from the reversion. This may be deeded contrary to the public policy which underpins the Court’s application of the AHA.

Derek should take expert advice on the status of Simon’s tenancy and his prospects of recovering possession given his development ambitions. Derek should ensure that any strategies are carefully considered to minimise any dispute raised by Simon. Conversely, Simon should take advice bearing in mind, that in matters such as this are rarely straight forward.

The tenants ability to make a nuisance of themselves and resist the landlord’s efforts to recover possession should not be underestimated.