5 Express Leasehold Covenants
6.36 Certain covenants will commonly be encountered in agricultural tenancies. The following considerations are of relevance in considering the legal effect of common leasehold covenants.
(a)Good husbandry clause
6.37 The tenancy agreement may include a covenant whereby the tenant expressly agrees to observe the rules of good husbandry, as set out in Agriculture Act 1947, s 11.50 Observance of the latter will thereby become a term of the tenancy itself. The chief significance of a clause in this form is to make Case D (breach of tenancy) available to the landlord, should he wish to take subsequent possession proceedings for bad husbandry. In the absence of a clause incorporating the rules into the tenancy, the landlord’s only remedy is Case C viz. to obtain a certificate of bad husbandry from the agricultural land tribunal, and then to take Case C proceedings based upon it.
(b)Short notice clause
6.38 Sch 3 Case B to the 1986 Act entitles the landlord to repossess a holding (or part) where land is required for a non-agricultural use for which planning permission has been obtained, or is not needed. By virtue of s 25(2) (b) ibid., notice to quit of less than the statutory minimum period can be given in such cases, but only if the notice is given in pursuance of a provision in the contract of tenancy authorising the resumption of possession of the holding for a specified non-agricultural use. A ‘specified’ non-agricultural purpose has been held to include a power to repossess for all non-agricultural purposes.51
6.39 A short notice clause should allow for at least one month’s notice of repossession. The tenant has a statutory right to claim additional compensation for disturbance and high farming (as well as improvements), but in both cases it is a prerequisite that he serve notice of intention to claim at least one month prior to the termination of the tenancy.52 In Coates v Diment53 and Re Disraeli’s Agreement54 it was held that a short notice clause which enables the landlord to resume possession without giving at least one month’s notice to the tenant will be void, as it prevents the latter serving notice to claim compensation, and thus infringes the rule against ‘contracting-out’ of compensation under the Act.55
(c)Covenant against Alienation
6.40 As we have seen, s 6 of and Sch 1 to the 1986 Act enable the landlord to have a covenant against alienation inserted into the agreement if none exists.
The covenant in statutory form prevents the tenant assigning, sub-letting or parting with possession of the whole or any part of the holding. Assignment in contravention will be an irremediable breach of tenancy entitling the landlord to take possession proceedings under Case E to the Act.56 Note, however, that the landlord can in appropriate circumstances be estopped by convention from relying on the covenant. So, in Troop v Gibson,57 the landlord failed where the tenancy agreement containing the alienation clause had been lost. The parties had subsequently acted on the common assumption that no restraint on assignment existed, and engaged in rent arbitration proceedings on this basis. The landlord could not enforce the covenant because both parties at all material times did not believe it existed, and this common assumption was to the detriment of the tenant – for the absence of a restriction on alienation would increase the holding’s rental value.58 Note, conversely, that a tenant will be estopped from denying the existence of a contract of sale or assignment if he allows the assignee to act to his detriment in reliance thereon (for instance by selling his own farm), even if the contract was entered into by an agent acting without authority.596.41 The statutory covenant prevents the tenant parting with possession of the holding (or part of it). ‘Possession’ is not synonymous with ‘occupation’. Allowing a licensee or contractor to share occupation will not breach the covenant, as long as the tenant retains exclusive possession.60 The distinction between the two is elusive, but a tenant will only be held to have parted with legal possession if he is excluded from the premises, or cedes effective control of them, having granted the right to exclusive possession to a third party (for example a sub lessee or assignee).61 The statutoary covenant does not, however, prevent him sharing possession (for instance pursuant to a share farming contract62) with another, although many agreed covenants in fact seek to do so.
An issue which commonly arises where there is a covenant not to share possession is the extent to which farming contractors can be employed without infringing the alienation covenant. This issue was considered in Wallace v Brian Barrett & Sons Ltd 63 It was there held that if the contractor comes onto the land as an agent of the farming tenant solely to carry out farming operations authorised by the tenant, there is not a sharing of occupation in contravention of the covenant. As long as the contractor has a defined remit, and comes onto the land solely to carry out defined operations under the tenants guidance, or with his authorisation, it would therefore seem that employing a contractor will not necessarily breach this form of alienation covenant. If the contractor has a wider remit, however, the position might be otherwise – especially if he has been given rights to enter for purposes other than the carrying out of the farming operations authorised by the tenant.6.42 If the parties include a covenant (not in statutory form) not to assign or sublet the whole of the demised property, this will not be breached by an assignment or sublease of part.64 If, however, by express covenant the tenant agrees ‘not to assign or underlet any part of the premises’, the covenant on its true construction will prohibit the tenant assigning etc. the whole or any part of the property. A covenant against assigning or underletting ‘any part’ of the premises embraces the assignment or underletting of every part.65 Allowing a licensee or contractor to share occupation does not, however, breach the covenant as long as the tenant retains exclusive possession.
(d)Proviso for re-entry
6.43 The landlord has a statutory right to ‘forfeit’ for breach of tenancy, by serving notice to quit under Cases D or E to Sch 3 of the 1986 Act. The latter are, however, subject to challenge by arbitration under the 1986 Act and (in the case of Case D) the possible requirement of tribunal consent.
The 1986 Act in no way limits the landlord’s right to forfeit a lease under the general law, pursuant to a proviso for re-entry. The landlord’s remedies under the 1986 Act exist alongside the general law governing forfeiture for breach of covenant. Because of the procedural complexities associated with Case D, it may prove beneficial in some cases to proceed instead by way of forfeiture proceedings based upon a proviso for re-entry in the lease. The quid pro quo, of course, is that the tenant’s right to relief from forfeiture under the general law66 is not available if proceedings are based instead on Cases D or E to the 1986 Act.6.44 For a forfeiture clause in an agricultural tenancy to be valid, it is essential that it should include provision for the right to forfeit to be exercisable on the expiry of some period of notice of more than one month. In Parry v Million Pigs Ltd67 it was held that a forfeiture clause which provides for no notice of re-entry, or notice of less than one month, will be void as in breach of the principle in Coates v Diment68 ie it will prevent the tenant serving notice to claim compensation under ss 60(6) and 70(2), and will therefore infringe the contracting out rule (now s 78(1) of the 1986 Act).69
(e)Conservation covenant
6.45 The pursuit of conservation objectives, for instance pursuant to a management agreement, could result in a tenant being in breach of the rules of Good Husbandry (above). By virtue of Sch 3, para 9(2) to the 1986 Act the tenant will be protected in proceedings for a certificate of bad husbandry if the practice complained of is adopted pursuant to a provision in the tenancy, or any other agreement with the landlord, which indicates (in whatever form) that its object is the furtherance of one or more stated conservation objectives viz. the conservation of flora or fauna, the protection of buildings of archaeological/historical interest, and the conservation or enhancement of the natural beauty of the countryside.
The tribunal must disregard the practice alleged only if it is sanctioned by a provision in the tenancy. It follows that a suitably drafted conservation covenant should be inserted if the tenant and/or landlord envisage entering into management agreements,70 or otherwise wish to temper efficient farming methods with conservation objectives. Semble, also, if the rules of good husbandry have themselves been incorporated as a term of the tenancy, the inclusion of a conservation covenant would remove the possibility of proceedings under Case D or Case E.71 Without a conservation clause, however, proceedings under Case D (as well as Case C) would otherwise be available to the landlord to enforce the rules of good husbandry.(f)Residence clause
6.46 Modern agricultural leases commonly include a covenant by the tenant to reside constantly at the farmhouse on the holding. The object of this clause is to procure such continuity of personal residence as will enable the tenant to supervise personally the farming operation on the holding, and to prevent the farming of the holding by an absentee tenant who lives elsewhere and farms through someone else.72 It creates an obligation not simply to make the farmhouse the usual place of residence of the tenant, but to live at the farmhouse with sufficient continuity to supervise personally the performance of all the tenant’s leasehold obligations, and particularly those relating to good husbandry.73 The obligation does not require unbroken residence at the farmhouse, eg it is assumed to be in the contemplation of the parties that the tenant may die, and suspension of personal occupation for a reasonable period consequent upon the death of the tenant will not be a breach of covenant.74 Absence for more than a temporary period will, however, constitute a breach eg where the tenant is in prison.75 Note, however, that breach of a residence covenant is remediable, and not an irremediable breach entitling the landlord to invoke Case E.
The proper remedy therefore lies in service of a notice to remedy and proceedings under Case D.76(g)Fixed equipment: repair and maintenance
6.47 ‘Model clauses’ specifying in detail the parties’ obligations with regard to fixed equipment are implied into the tenancy agreement, in so far as it does not provide to the contrary, by s 7 of the 1986 Act. The clauses currently in force in England are set out in the Agriculture (Model Clauses for Fixed Equipment) (England) Regulations 2015.77 These updated and amended the model clauses previously in force, the Agriculture (Maintenance and Repair etc.) of Fixed Equipment Regs 1973.78 The 1973 Regulations remain in force for the time being in Wales.
6.48 The process by which the model clauses are implied into tenancy agreements is by no means, straightforward.79 The parties may wish, for the avoidance of doubt, to expressly incorporate the model clauses by the inclusion of an appropriate covenant. Their obligations as to fixed equipment will then be covered in toto by the statutory code, and not by a mixture of express leasehold covenants and statutory model clauses (with attendant problems of interpretation). The model clauses are from time to time modified and reissued, however, and this needs to be reflected in the express terms as to repair and maintenance agreed in the tenancy agreement. Those originally in force prior to 1973 were the Agriculture (Maintenance Repair and Insurance of Fixed Equipment) Regs 1948.80 These were superseded by the Agriculture (Maintenance and Repair etc.) of Fixed Equipment Regs 1973;81 these in turn have now been replaced in England by the Agriculture (Model Clauses for Fixed Equipment) (England) Regulations 2015.82 The basic principle on which the model clauses have always been based in that the tenant should be responsible for the routine maintenance and repair of fixed equipment and for its operational maintenance, while the landlord should be responsible for its structural integrity. Importantly, successive changes to the model clauses have altered the financial thresholds for claims that can be made by landlord and tenant, and the 2015 model clauses have also shifted some responsibilities between landlord and tenant. These are discussed below.
6.49 If the parties have agreed express clauses in the tenancy agreement and wish to have the benefit of the subsequent upgrading of the regulations, then the tenancy agreement should provide for express incorporation of the relevant regulations in force from time to time, and ‘of any subsequent modification and/or variation thereof’. Without this qualification, or one of similar effect, the tenancy will incorporate those regulations in force at the date it was concluded, without modification. This could be significant given the variation in the obligations of the parties, and the variation in the allowances claimable by the tenant or landlord towards the cost of repair that have been upgraded in the 2015 Regulations.83 It should also be remembered that if the tenancy contains ‘substantial modifications’ to the model clauses currently in force it can be referred to arbitration by the tenant under s 8 of the 1986 Act.84 In this event, if s/he finds the terms are not justifiable, the arbitrator can vary the terms of the tenancy in such manner as appears just and reasonable between landlord and tenant (a question of fact).
(h)Quota clauses
6.50 The presence or absence of payment entitlements under the EU Common Agricultural Policy, and production quotas registered for a holding, can substantially influence the value of the landlord’s reversion. They are ‘assets’ of the farming business, and many agricultural tenancies will include clauses seeking to protect the landlord’s position and retain the ‘value added’ that the entitlements bring to the land let. This is not a matter included in the Schedule 1 statutory terms (above) and so any such clause in a 1986 Act tenancy agreement will have been freely negotiated by landlord and tenant.
6.51 It is not uncommon to find quota clauses in 1986 Act tenancies, dealing in particular with dairy quota and seeking to prevent its transfer away from the holding by the tenant. Dairy quotas were abolished in 2015, under the terms of the Agriculture 2020 reform process.85 The issues are therefore largely of historic interest. Dairy quota was registered in the name of the registered producer (often the tenant), and this could give rise to problems where the tenancy contained no provision prohibiting dealings in quota by the tenant or requiring the keeping of adequate records (as was often the case in older pre-1984 tenancy agreements). Quota attached to ‘areas of land used for dairy production’ within a holding, and this was given a wide interpretation by the English courts.86 The Dairy Produce Quotas Regs 200587 provided for transfer and re-registration where there was a change of occupation of a holding (or part), other than one pursuant to a variety of short term arrangements, eg a grazing let for less than 10 months or a licence. Any transfer by way of a Gladstone v Bower let, farm business tenancy, sub tenancy, grazing let for 10 months or more, or assignment, could carry with it quota if the land concerned had been used for dairy production in the past 5 years.
6.52 If the tenancy agreement contains the statutory non-assignment clause, any transfer of quota by the methods recognised by the 2005 regulations would have constituted an irremediable breach of tenancy.88 A subtler problem arose, however, where the ‘holding’ (defined for these purposes in the European law sense) contained both leasehold and freehold land. The tenant could, over a period of years, switch dairy production to freehold land within his agricultural unit, the effect of which would have been to ‘move’ registered quota onto freehold land over which the landlord had no control. To prevent this, and to ensure the tenant retained registered quota on the tenanted land to which it was originally allocated, many tenancy agreements contain suitably drafted clauses restraining the tenant from selling, leasing, or otherwise dealing in quota without the landlord’s consent, and obliging him to retain dairy production at an agreed level. The tenancy may also identify areas used for dairy production, and prohibit the tenant from either ceasing dairy production on the land in question or moving production to other land. It was also advisable to oblige the tenant to keep detailed records of inputs to the dairy unit, of land used for grazing or production of silage etc., and other usages related to the dairy herd.
6.53 A quota clause in any (or all) of these forms had to be taken ab initio in the tenancy agreement itself, or secured by negotiation. It was not obtainable by arbitration pursuant to s 6 of and Sch 1 to the 1986 Act. Neither would cessation of dairy production amount, normally, to bad husbandry within the meaning of the 1986 Act. An express clause requiring the tenant to maintain production records etc. as detailed above would, however, be enforceable by notice to quit.89 There was a question whether covenants taken to prevent dealings in quota under agricultural marketing schemes (eg under the potato marketing scheme) were also effective to prevent dealings in dairy quota. In Lee v Heaton90 it was held that a covenant ‘not to dispose of the whole or any part of any basic quota under a marketing scheme’ did not apply to prevent disposition of milk quota. Given the complexity and difficulty of the law, there was a substantial specialist literature on milk quotas.91
6.54 Although dairy quotas have been abolished from March 2015, clauses of the type outlined above may still have some relevance to restrain dealings with other kinds of production entitlement – for example entitlements for the basic scheme payment. Payment entitlements held by a tenant must be ‘matched’ to eligible land in order to unlock payments under the basic payment scheme.92 It follows that two separate issues must be considered when drafting suitable clauses to protect the landlords reversionary interest: (i) retaining land within the tenants control to ensure it is available to him in order to unlock payments; and (ii) ensuring that the land that is subject to the tenancy (and not land elsewhere) is used to match the tenant’s entitlements and unlock the payment. The clause may also wish to address how any division of the income stream that is unlocked by the payment scheme is to be effected. It follows that a covenant against alienation (as discussed above) will be necessary to ensure that land capable of unlocking payments is retained by the tenant and is under his/her ‘control’ for the purposes of the payment scheme. The statutory covenant will do this, and can be obtained by arbitration under the 1986 Act if necessary. The interaction of quota clauses with the second issue – how the tenants entitlements are used – is however altogether more difficult.
6.55 The basic payment scheme differs in one fundamental respect from CAP support regimes prior to the 2003 Mid Term Review, and also from production quotas, in that it is a form of direct income support. The English courts have construed quota clauses strictly,93 and a quota protection clause is unlikely to be interpreted so as to restrain a tenant from dealing with payment entitlements (as opposed to dealing with the land itself). In National Trust v Birden94 a share farming contract included a quota protection clause that provided that ‘any production grants or subsidies paid to either party in respect of livestock or other agricultural production or cessation of production on all or part of the land or otherwise’ was to be shared between the landlord and the farmer in fixed proportions. The landlords failed to establish their claim that the clause applied to require a sharing of payments unlocked by single payment entitlements subsequently awarded to the tenant. The court stressed that the single payment scheme was wholly different from earlier subsidy schemes, and construed the clause strictly in favour of the tenant. The single farm payment was a form of income support and not caught by the terms of the quota clause.
6.56 It follows that a production quota clause that refers to ‘successor’ schemes as within its scope, may also be ineffective to refrain dealing with entitlements or to require a sharing of the income that they unlock. Any clause restraining dealings with single payment entitlements will therefore have to be carefully drafted. It cannot be obtained by arbitration under s 6 of the 1986 Act and will have to be freely negotiated by the parties.