The purpose of this note is to assess the issues a landlord should consider before pursuing their tenant for compensation for dilapidations arising following the termination of an Agricultural Holdings Act 1986 (“1986 Act”) tenancy.
The circumstances which will lead to such a claim will be unusual. A tenant who is occupying land under a 1986 Act tenancy will often prefer to negotiate a surrender of their tenancy in return for a release of all their liabilities and usually in return for a surrender premium, rather than to unilaterally bring about a termination of their tenancy and expose themselves to a claim for disrepair. The former will often present a good deal to a landlord whose priority will usually be to recover possession of their land with a view to achieving higher rents letting their land under a Farm Business Tenancy or releasing their land for development.
The 1986 Act sought to impose a standardisation of repair that was common to all agricultural tenancies; that standard was recorded in a set of model clauses, which apportioned responsibility for repair and maintenance between the landlord and tenant. Those model clauses, relating to the tenant’s responsibility to keep the land in repair, can be found in Part 2 of the Agriculture (Model Clauses for Fixed Equipment) (England) Regulations 2015.
The model clauses, pursuant to section 7(3) of the 1986 Act are implied into all 1986 Act tenancies “except insofar as they would impose on one of the parties to an agreement in writing a liability which under the agreement is imposed on the other”. Therefore, the model clauses will apply to all oral tenancies or written tenancies in which the parties’ obligations to repair are unclear or silent.
The model clauses, unless the terms of the tenancy state otherwise, impose an obligation on the tenant to keep parts of the land, fences and ditches, in a “good an tenantable repair”. This obligation extends to certain parts of any farm cottages and buildings within the holding. The landlord has a similar obligation in relation to fixed machinery and the remaining parts of the farm buildings. The tenant’s obligation may be enforced by a landlord, during or following the expiry of the term of the tenancy.
If on quitting a tenant fails to return to their landlord, the land in the condition specified by the tenancy/model clauses, the tenant will be liable to their landlord to pay compensation for the disrepair.
Landlord’s claims against a 1986 Act tenant
On termination of a 1986 Act tenancy, and unless the landlord has waived or released their tenant from their repairing obligations, a landlord will have two claims against their outgoing tenant:
- a “Statutory Claim”, under section 71(1) of the 1986 Act; or a “Contractual Claim”, under section 71(3) of the 1986 Act, both of which allow for the recovery of compensation for breaches of the repairing, maintenance and redecoration covenants; and,
- a “Deterioration Claim” under section 72 of the 1986 Act, for compensation for general depreciation in the value of the holding caused by the disrepair.
- Claims under section 71 and 72 of the 1986 Act are drafted in such a way as to prevent there from being any overlap or “double claiming”.
The landlord’s right to pursue a Statutory Claim arises from “non-fulfilment by the tenant of his responsibilities to farm in accordance with the rules of good husbandry”. The Statutory Claim is based upon the tenant’s breaches of the model clauses, as varied by a tenancy agreement (if one exists). Such a claim is limited to “the cost, as at the date of the tenant’s quitting the holding, of making good the dilapidation, deterioration or damage”. The claim is further limited by section 71(5) of the 1986 Act to a sum, reflecting the diminution in value of the landlord’s reversion, which is explained in detail below.
The Contractual Claim arises solely from a breach of the written terms of the tenancy agreement. Such claims are limited by both section 71(5) of the 1986 Act, and by section 18(1) of the Landlord and Tenant Act 1927, both of which serve to impose a cap (commonly referred to as “the Statutory Cap”) on the value of the landlord’s claim arising from the disrepair to the diminution in value of the landlord’s reversion.
If the diminution in value of the landlord’s reversion is less than the costs of making good the repair/maintenance, only the lower sum will be recoverable.
What notices must be served on the tenant?
The above claims are subject to the landlord serving an appropriate statutory notice on the tenant of their intention to pursue one or both of the claims. A landlord, intending to pursue a Statutory Claim or Contractual Claim, must serve upon their tenant:
- One month before termination of the tenancy a section 72 notice confirming the landlord’s intention to seek compensation under that section; and,
- Within two months of termination of the tenancy a section 83 notice confirming the landlord’s intention to recover compensation following breaches under section 71 of the 1986 Act.
What can the landlord recover?
The measure of damages, as with all claims for dilapidations, is based upon the reasonable costs a landlord would have to incur to put the holding into the state of repair expected by the tenancy agreement. Examples of loss will include:
- repair of fencing;
- repair and clearing of ditches; and,
- replacement of the gates.
As explained above, the value of the landlord’s claim will be subject to the landlord: (a) evidencing their loss, and, (b) the “Statutory Cap” imposed by the landlord’s diminution in value described above.
How is a landlord’s claim quantified?
If works are carried out, the costs of those works will be the landlord’s primary evidence of the loss. It is common, therefore, to encourage a landlord to carry out those works in order to improve his position, since the value of the landlord’s loss will be easy to prove.
Some landlords will, however, be unable to carry out the works due to available cash flow; others will prefer to recover compensation from the outgoing tenant before spending money on the repairs. In these circumstances, the landlord will have to obtain a Section 18 valuation report based on the value of the landlord’s reversion: (a) in the state of repair expected by the tenancy agreement/model clauses; against, (b) its current condition. That valuation report will evidence the limit of the landlord’s claim.
It is worth noting that if, due to market conditions, the value of farm land is not price sensitive irrespective of the condition of the land, the diminution in value will be zero and the landlord’s claim will be capped at zero. This is a point worth investigating before a landlord invests in progressing such a claim, particularly, if the landlord’s intention is not to carry out the works.
A tenant may refer their landlord’s claims for compensation under section 71 of the 1986 Act to arbitration or, since the Deregulation Act 2015 has come into force, to third party determination.
The costs involved with arbitration are not automatically recoverable under the terms of the tenancy. Although arbitrators regularly order that a losing party should pay the winning party’s costs, in a claim for compensation such as this, it is possible that an arbitrator may exercise their discretion and apportion costs between the parties.
Landlords should, therefore, consider the risk that if their claim for compensation is referred to arbitration, an arbitrator may award that some proportion of the tenant’s costs should be paid by the landlord. If the matter is not referred to arbitration, the landlord’s costs will probably be unrecoverable.
Set off against tenant’s claims for compensation under the 1986 Act
The 1986 Act entitles tenants on quitting to claim from their landlord compensation for improvements and “tenant right” (i.e. the value of his work benefitting the land by cleaning, tilling and sowing the land). If the tenancy has been brought to an end by the landlord serving a notice to quit, the tenant will also be entitled to Statutory Compensation and Additional Compensation.
Depending on the condition of the land and any improvements made, a tenant may be entitled to set off some or the whole of their dilapidations liability against their entitlement to compensation for improvements and tenant right. This should be carefully considered in response to a landlord’s claim for disrepair.
The circumstances which may persuade a landlord to pursue a 1986 Act tenant for terminal dilapidations will be unusual. When those circumstances do arise, the landlord must ensure that their statutory notices are served within the timescales required by the 1986 Act.
The landlord should, as early as possible, establish the value of their loss. This is important because the professional costs arising from progressing such a claim may be disproportionate to the value of the claim, particularly once the statutory cap to the value of the landlord’s claim has been applied.
By establishing the value of their loss early on, a landlord can assess whether they should incur the costs of repair now and present a loss-based claim to their tenant, or alternatively, present their claim based on their anticipated loss. Which approach is most suitable, will depend on the extent of the landlord’s claim and the timescales by which the landlord requires the repairs to be completed.