Relinquishment & Assignation - 10 Take Aways from Experience

To quote the TFC again, "The aim of these provisions is to help existing tenants wishing to retire or quit the tenancy to do so and to help provide new opportunities for young people to enter the profession." The compensatory payment or proceeds of the relinquishment or the assignation can provide a pension pot for retiring tenants and the permitted assignations can help provide new opportunities for young people to enter the profession by facilitating access to land in the form of a secure lease which would not have been available to them otherwise.

We have been involved in transactions where these goals have been successfully achieved. As a result of the existence of the R&A provisions, there are secure agricultural leases which have been assigned by tenants who wanted to retire to new entrants or progressing farmers. It is well known in the industry that a key barrier to younger farmers entering the market is access to land and without the introduction of the R&A provisions, these new entrants and progressing farmers would not have the leases of the land that they do now.

There is a statutory process which must be followed and - notwithstanding some quite tight timescales in the process - in cases where outgoing tenants follow the process to the end and assign their lease to a third party for value, it may well feel like a long road to get to that end point. Outgoing tenants will incur expenses upfront, including the cost of a valuation report and legal expenses. An incoming tenant, who is effectively buying a secure lease from a third party, will also incur legal costs in dealing with the assignation. In some cases, incoming tenants are paying significant sums of money for the lease and as they will be stepping into the shoes of the outgoing tenant (therefore taking on the tenant's liabilities under the lease), so in addition to needing advice on the R&A process, they will want to have a suitable contract with the outgoing tenant for the purchase and carry out appropriate due diligence, which can be a significant amount of work given the nature of secure tenancies. Landlords may also incur costs for their involvement in the process, even if they decide that they do not wish to exercise the opportunity to buy out the tenancy.

It is advisable for tenants, prospective tenants and landlords to all obtain legal advice from an early stage. For an outgoing tenant, it would be prudent for them to approach their solicitor early on to ingather all the necessary paperwork and to take advice on the process as they will want to make sure they have everything in order prior to initiating the formal process. Landlords should also take advice early on, as there are strict timescales which apply during the process so they will want to be up to speed on the provisions in order that they are prepared to respond timeously. For example, if the landlord receives notice in writing of the tenant's intention to assign the lease, they only have 30 days to object to the assignation.

Outgoing tenants, incoming tenants and landlords should all take tax advice early on. Tax implications will be specific to the parties and the circumstances but one tax to be mindful of is Land and Building Transaction Tax ("LBTT"). Both a landlord exercising the right to buy out a lease and an incoming tenant being assigned a lease are likely to have to pay LBTT (notwithstanding the fact that the lease may not currently be caught by the tax regimes).

It is likely to be a good idea for a tenant who is looking to start the R&A process to discuss it with their landlord in the first instance to establish if the landlord is interested in buying out the tenancy. There are cases where the existence of the R&A process has formed the backdrop to discussions between parties and sometimes a deal has been reached between the landlord and the tenant without the need to follow the prescribed statutory process.

The Notice of Intention to Relinquish (the notice the tenant serves to initiate the formal process) provides that the tenant will quit the tenancy if the landlord pays to the tenant the amount of compensation calculated in accordance with a specific valuation methodology set out in the legislation. In the event that the landlord does not buy out the lease and the tenant continues the process in order to assign the lease for value to a qualifying third party, the price payable for that assignation is a matter of commercial negotiation – it is essentially what an incoming tenant is willing to pay and that may not coincide with the figure in the valuation report. It is likely to vary on a case-by-case basis, but we have seen cases where the price ultimately paid by incoming tenants has been significantly less than the amount determined by the valuation report, so it is worth parties being aware that an amount in the valuation report does not necessarily reflect the amount that an incoming tenant might be willing to pay.

The landlord can object to the person to whom the lease is to be assigned under R&A process if (i) they do not meet the new entrant or progressing farmer definitions, (ii) the person does not have the ability to pay the rent or (iii) if they do not have necessary skills or experience to manage and maintain the land in accordance with the rules of good husbandry (although this last objection can be overcome if it can be shown that the person is a new entrant and is engaged in, or is about to begin, a relevant training course in agriculture and has made arrangements to ensure that the farm is efficiently managed until the course has been completed, so it's unlikely that a landlord would seek to rely on it). 

Therefore, an outgoing tenant is looking for somebody who qualifies as a new entrant or progressing farmer - but also has sufficient finances to pay an acceptable purchase price for the assignation of the lease and meet the costs associated with the assignation in addition to having the ability to pay the rent and fund a farming venture on the property going forward. In most cases we have seen, incoming tenants have been local and found through existing contacts, but it will be interesting to see in the future if outgoing tenants are bold enough to advertise a lease assignation openly with an asking price, moving towards there being a more "open market" for R&A lease assignations.

The R&A process means that the landlords do not get to choose who their new tenant will be and they can only object to the tenant that is chosen for them on limited grounds. The priority for a landlord in this situation may be to try to establish that the proposed tenant is likely to be a good tenant – that they will pay the rent and look after the holding. Most landlords and incoming tenants will want to get off to a good start with their new landlord-tenant relationship as it should be the start of a very long-term relationship.

Notwithstanding the fact that the landlord does not need to consent to the assignation to an incoming tenant (if the landlord does not object to the notice in writing of the tenant's intention to assign the lease within 30 days they will be deemed to have consented to the proposed assignation), the tenants' preference is likely to be that the landlord consents anyway and there can be benefits to the parties if the landlord is party to the assignation document. For example, the assignation could confirm agreement by all the parties on the leased extent. As most secure leases have been around for a long time, it is common for the current extent of leased subjects to be quite different to the original leased extent, so it can advantageous for everyone to set out by reference to a plan what the current leased subjects are and as a plan of the leased subjects will already have been required earlier in the process (for the valuation report) it should already be available. Another example is that the document could also confirm agreement by the parties on what tenant's improvements are eligible for compensation at waygo.

It is not uncommon for tenants with a secure agricultural lease to let other land, often let to them by the same landlord, but under a different type of agricultural lease. This other land may well have been farmed by the same tenant for a long period of time (on a series of short term leases or a fixed term lease) and in the tenant's mind it is part of their farm - but it is worth remembering that the R&A process only applies to secure leases and the position in relation to the assignation of other types of leases will be different.