Switching from an AHA to FBT: What tenants should consider

It is unusual for a tenant to give up an Agricultural Holdings Act (AHA) agreement for a farm business tenancy (FBT) but not unknown.

The Tenant Farmers Association (TFA) adviser and rural surveyor Caroline Squire says it might even be the tenant – not the landlord – who suggests making that switch.

“It is wise for a tenant to be open-minded about the possibility of changing agreements if it could provide them with a better outcome for their specific circumstances,” she says.

See also: How a written tenancy agreement can give certainty

So when might this switch work for a tenant, and what are the considerations?

Security for a spouse or child

An AHA with lifetime security in the tenant’s sole name offers no succession rights.

Moving to an FBT in joint name with a spouse or child provides some of that security, says Ms Squire.

“If anything were to happen to the original sole tenant, the FBT would continue for the rest of the fixed term for as long as the other joint tenants were living,” she says.

This would not be the case for family members on a holding with an AHA lifetime tenancy in a tenant’s sole name.

They would have no rights to the tenancy on the death of the tenant, and the landlord would have the right to serve notice to quit – giving at least 12 months to vacate the farm, Ms Squire advises.

After the term of the FBT expires, it would be up to the landlord and tenant to agree a way forward with a new agreement in the names of family members who wished to continue farming.

“The landlord is certainly not obliged to offer an FBT to allow them to continue farming the holding – it is all a matter for negotiation and there is no way to force the matter,’’ says Ms Squire.

Rent could be based on AHA formula

FBT rents are renowned for being high, but it is up to the parties to agree on a sum and the rent review period.

If both parties are willing, it is possible to agree for the rent to be based on the AHA rent formula, says Ms Squire.

“This would be linked to the holding’s productive and related earning capacity, rather than the rent being based on the open market rental value, which is often unsustainably high.”

Growing the business with additional land

It could also be possible to negotiate extra land to be taken on and included in a new FBT, in addition to what is already being farmed under an AHA.

Ms Squire says it has been known for landlords to offer extra land as an incentive for tenants to move from an AHA to an FBT.

Relinquishing liabilities

Negotiating for certain items to be removed from the tenancy might be possible – for example, traditional, old buildings that the tenant feels are a liability in terms of repairs and are no use to modern farming.

“The landlord might be pleased to take these back in hand to develop for alternative uses,” Ms Squire points out.

But if the tenant did not want to switch agreements, it would be equally possible to agree to surrender buildings from an AHA tenancy.

Similarly, it could be possible to negotiate landlord’s consent for a diversification activity not permitted under the terms of an AHA, in return for moving to an FBT.

Tax considerations

Moving from an AHA to an FBT is a major tax advantage for a landlord, potentially saving big sums in inheritance tax liability.

This can be good leverage for a tenant to negotiate favourable terms in an FBT.

When to proceed with caution with FBTs

There are downsides to FBTs – an AHA provides lifetime security to the named tenants, but a FBTs only run for fixed terms of a limited number of years.

Once the fixed term expires, either party can end the agreement without needing a reason, via a notice to quit, and the tenant will have no automatic right to stay.

“It will all be a matter for negotiation, for which landlords often have a strong hand as they can threaten to let the farm on the open market unless the tenant agrees to the rent and terms being sought,” says Ms Squire.

FBTs don’t offer the statutory protections of AHAs. For example, AHA tenants have a right to claim compensation for damage caused by game that is reserved to the landlord, but under an FBT, a tenant would only have this right if it was a term of the tenancy agreement, Ms Squire explains.

“Similarly, if a landlord gains planning permission on the farm for a non-agricultural use and takes that land back, an AHA tenant has a statutory right to compensation for the land taken and a proportionate reduction in rent,” she says.

“Under an FBT, provided the tenancy allowed the landlord to take land back, a tenant would only have a right to compensation and a proportionate reduction in rent if this is written into the tenancy agreement.”

Seek advice before making the switch

Ms Squire stresses that it is very important that tenants seek professional advice before making these decisions, either through the TFA, or a suitably qualified chartered surveyor or solicitor.