Farm business tenancies: Give us a break… but can you?

Arbitration is a private process. Disclosure is only permissible in limited circumstances including:

• With the express or implied consent of the parties.
• If there is an Order of the Court.
• If it is reasonably necessary for the protection of the legitimate interests of an arbitrating party.
• Where the interests of justice require disclosure.

Accordingly, the parties should ensure that what takes place within this Arbitration is treated confidentially.

Despite this, confidentiality in relation to agricultural arbitrations is often honoured in the breach. Part of the reason for that is entirely understandable because, in respect of rent reviews, the Agricultural Holdings Act 1986 provides for the discrete arbitration process to make reference to comparables. What happened in other arbitrations therefore does become common knowledge, despite the fact that it is strictly speaking confidential and also inadmissible as evidence: see Land Securities Plc v Westminster City Council [1993].

One of the other side effects of confidentiality is that many of the most interesting points are determined in that forum. It is only if there is an appeal that the case is then reported and becomes common currency.  Davies v AHP Land Limited [2014], an interesting case in relation to what constitutes a tenancy under the AHA 1986 and the operation of a Section 6 Notice, is an example which has previously appeared in these pages.

What is even more frustrating about interesting points before an arbitrator is that sometimes they settle, so that the point remains undetermined. This happened in an arbitration where Michelmores represented the tenant under a farm business tenancy, on instructions from Simon Lush of Henry Adams LLP.

Disputes under FBTs are themselves relatively rare, but the point which arose in this case is of some interest.  It is the question as to whether notice given pursuant to a break clause must determine on the term date of the tenancy or whether it can terminate at any time.

The case

The facts are that the parties entered into a tenancy agreement creating a term of 8 years from 25 March 2012 until and including 25 March 2020 in relation to some 110 acres.

Not unusually, the tenancy agreement contained various provisions for “break dates”. Clause 10.7 of the Tenancy Agreement provided:-

“(a)      The Landlord may (subject to the provisions of this clause) determine this Lease by service of at least twelve months written notice on the Tenant:

1. Following the death of the Landlord
2. In the event of the Landlord wishing to sell Home Park the date any such notice takes effect shall be a Break Date for the Lease

(b)       If either party duly serves notice under this clause the Tenant shall be obliged to yield up the Property in accordance with Clause 9 with the benefit of vacant possession.

(c)        If a notice is duly served this Lease shall determine without prejudice to any rights or remedies which may have accrued to either party in respect of any breach of any of the covenants or obligations under this Clause which shall continue to bind the parties.“

On 20 June 2014, the landlord gave notice to terminate the tenancy pursuant to clause 10.7 (a) (ii) “on the first date on which the tenancy can lawfully be terminated, being at least 12 months after service of this notice”.  Subsequently, the landlord transferred the freehold of the holding to an independent company.

In correspondence from the company’s solicitor, sent to the tenant’s agent, it was asserted that the notice was effective to terminate the tenancy “in June 2015”, being 12 months after its service, and not on the term date of the tenancy, namely 25 March 2016.

The tenancy agreement contained a standard provision that any dispute arising under the terms of the tenancy agreement would be determined by arbitration by a single arbitrator, in default of agreement, appointed by the President of the Central Association of Agricultural Valuers.  An arbitrator was duly appointed.

The Law

The statutory framework relating to the termination of a FBT, governed by the Agricultural Tenancies Act 1995, is contained in Sections 5 and 7.  Section 5 interferes with the common law position in relation to FBTs for a fixed term of more than 2 years by providing that:-

1. such a tenancy will not automatically terminate by effluxion of time on its term date; and
2. if a landlord and a tenant want to end the tenancy on the term date, one must take positive action to do so by serving a written notice on the other of his intention to terminate the tenancy on that date; and
3. the notice must be served at least 12 months before the term date.

As regards “break clauses”, Section 7 overrides and supplements the agreement between the parties in respect of a FBT of more than 2 years duration.  Section 7 provides that any notice to quit in respect of the whole or part of a holding served pursuant to a term of the tenancy, i.e. a break clause, will be invalid unless:-

1. it is in writing and
2. it is given at least 12 months before the date on which it is to take effect.

Section 7 applies “notwithstanding any provision to the contrary in the tenancy agreement”.

The Tenant’s case

The case advanced on behalf of the tenant was that the notice did not terminate the tenancy of the holding in June 2015, as the landlord contended, for two reasons, namely:-

• The construction of the break clause contained in the tenancy agreement did not exclude the operation of the common law, whereby a notice is required to expire on the term date, unless the parties expressly contract otherwise.
• There was evidence to support the fact that the original landlord had indeed contemplated that the tenancy would only terminate on the term date.

The case on behalf of the tenant was advanced in the alternative in reliance upon the equitable doctrine of estoppel.

The point of law was not ultimately determined as to the presumption of the common law rule applying in relation to Section 7 of the ATA 1995 in the absence of an express contract.  When it became clear that the landlord’s case on the evidence was untenable, the company conceded that the tenant was right and that the break clause would take effect on 25 March 2016.

The arbitration was not without its final twist.  Although the arbitrator made an award the FBT would terminate on 25 March 2016, the company’s last stand was in relation to costs.  It was argued on behalf of the landlord that, although the case was conceded on the facts, the landlord did not accept the tenant’s argument on the law.  On behalf of the tenant, we suggested that the position was not only untenable, but that the company should pay part of the tenant’s costs on the indemnity basis.

Costs – indemnity basis

Ordinarily, pursuant to Section 61 of the Arbitration Act 1996, an Arbitrator will order costs against the unsuccessful party.  As the section describes it, the costs “should follow the event”.  That is “except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs”.  The Arbitrator accepted that the event in this instance was the concession by the company that the notice took effect on 25 March 2016.

Ordinarily an arbitrator awards ‘reasonable’ costs.  By analogy with court proceedings, the assessment of those costs will ordinarily be approached on what is known as the standard basis.  However, the arbitrator can award costs on the indemnity basis.  The differences in practice are:-

1. Proportionality has no place in indemnity costs.  On the standard basis, claimed costs are recoverable only if they are reasonable and proportionate.  On the indemnity basis, costs are recoverable if they are simply reasonable.
2. As regards the burden of proof, on the standard basis, the burden of proof of showing the claim to costs are reasonable and proportionate lies on the receiving party.  On the indemnity basis, the burden of showing the claim to costs are not reasonable generally falls upon the paying party.

Amongst the examples of cases where indemnity costs may be ordered is where a party maintains a claim which it knew or ought to have known was doomed to fail on the facts or on the law: see Reid v Minty v Taylor [2001].

Outcome

In this arbitration, the arbitrator accepted the submission that indemnity costs should apply in relation to a period when the company maintained an untenable case.