Partner and Head of the Rural Sector team at Lodders Solicitors, James Spreckley, was a speaker at the UK200Group Agriculture and Land Conference 2018 at Harper Adams University last month (26th June 2018). At a time when farming incomes continue to be challenged, he took delegates through the main legislative regimes that apply to occupying land for farmers diversifying their operations in a bid to provide some additional income.

When I was asked to speak about occupational arrangements for the diversified farmer, I thought it would be relatively straightforward. However, like so many issues in the agricultural sector, this is not really the case. Encouraging clients fully to understand the nature of what they own and by whom it is actually occupied, is a sensible starting point, particularly where third parties are involved. Reviewing this as things evolve and as family members come and go from within the farming business is important too, as is being alive to the involvement of funders and the restrictions in their security.

One thing is for certain, farming businesses are going to rely increasingly on income from sources other than basic food production. Certainly any prudent business will be looking to find income not wholly reliant upon existing markets and support.

How those new business lines are set up and their occupations recorded, is something which needs careful consideration and is just one issue to be considered. As with the tax, the danger is that without prior thought, there may be unexpected consequences if enough thought is not invested upfront.

Diversification does offer our clients real opportunities to secure the futures of their businesses and to engage the younger generation, but they do need to engage with all their professional advisers to set things up in a way which works best.

Why Diversification?
Recent years have seen the ability to rely solely on the production of food as a basis for generating sufficient income to support what is usually the farming family, diminish. There are few for whom the income from agricultural production alone is sufficient these days.

The support received under the CAP has produced an additional income stream but it cannot be relied upon long term, and increasingly, we see farming businesses relying upon a diverse range of incomes to supplement this.

The focus of the diversification will differ for each farming enterprise. It may be a question of merely generating additional income to support the farming business, but equally could be part of a strategic redirection of the business or a planned succession structure.

Sometimes it is even needed to keep family members apart, yet the farm together.

Occupational arrangements matter because how land is occupied can be of critical importance due to the rules imposed by the different occupational regimes. These can bring with them implied terms, individual rights and benefits or risks in terms of security of tenure, tax implications, and affect the ability to secure control of the land or buildings in question.

What does an Occupational Arrangement look like?
By their nature, occupational arrangements imply some relationship between a property owner and occupier. In general, occupational arrangements are tenancy arrangements between a landlord and a tenant. In essence, for a tenancy to arise there needs to be the payment of some sort of consideration as a rent (not necessarily cash) and a degree of exclusive occupation of premises. They don’t however have to be in writing which can lead to confusion particularly where a ‘short term’ informal arrangement remains in place and evolves over time.

Often formal arrangements are only put in place at key moments such as because of the need to make a significant capital investment, or to offer the land as security to a lender, and sometimes as part of overall succession planning encouraging individual family members to have their own business.

What is Diversification?
A sample definition defines it as: “The process of a company enlarging or varying its range of products or field of operation.” This could be a commercial, leisure, equine, property, or renewables enterprise, and specifically for an agricultural business, means generating income from a source other than the core farming business.

The more frequent diversified businesses and income streams which we see are:
• farm shops
• conversion of premises for commercial uses – quite often offices but also things like barn storage
• wedding businesses,
• holiday lets and glamping
• residential lets
• horse related arrangements –livery but even cross-country businesses
• leisure activities – wake boarding or individual events such as mud runs, motocross
• renewable energy projects telecommunications masts

What drives Diversification?
Farming businesses are frequently family businesses. One of the hallmarks of farming family businesses is that they generally remain in the same family control for several generations, regardless of the structural vehicle through which the business operates. Like all businesses, generating adequate income in the short to medium term to survive and grow is imperative. However to assist in achieving that longevity, often careful structuring and planning is needed in order to try and protect the capital assets of the business – generally land. As such, often key to retaining the capital assets of the business is the ability to pass the assets on from generation to generation, in particular using the benefit of both agricultural property relief and business property relief. Ensuring the business’s assets remain eligible for these reliefs is often also a major driver and consideration when making business decisions.

What are the key Regimes?
When it comes to occupation of property it is important to understand who is in occupation and on what basis. Depending upon the use to which land is put, a tenancy arrangement is likely to fall within one of a number of key statutory regimes and each one can have material implications for the terms of the letting, the ability of the landlord to require the tenant to vacate and as such have both practical and valuation consequences.
These regimes broadly cover agricultural uses, business uses and residential uses. There are tenancies which fall outside these too and are governed by the Common Law but our focus is predominantly on agricultural and business tenancies.
Most agricultural tenancies will fall within one of two regimes:
• Agricultural Holdings Act 1986
Broadly a tenancy of an agricultural holding granted prior to 1 September 1995 is very likely to be an AHA tenancy. This regime generally continues a tenancy on expiry as a yearly periodic tenancy. The critical issue is that such a tenancy comes with lifetime security of tenure as a rule (and can have succession rights) and can only be ended by the landlord giving notice to quit in only limited statutory circumstances. Diversification is not common with AHAs.
• Agricultural Tenancies Act 1995
Generally tenancies of land granted after 1 September 1995 will fall under the Agricultural Tenancies Act 1995 and are called farm business tenancies. A tenancy under this Act will continue when the fixed term ends if for over 2 years or if periodic in nature, but the legislation essentially guarantees the landlord getting the land back once it comes to an end, but only on statutory notice which is usually 12 months to end at the end of an annual cycle. There are exceptions for short term farm business tenancies of 2 years or less though.

For business tenancies (and business in this context is widely drawn) these will generally fall under the Landlord and Tenant Act 1954. A tenancy under this regime will continue once the fixed term ends until the statutory notice is given but the tenant has a right to ask for new tenancy. There are limited grounds on which the landlord can object and even if successful, may have to pay compensation to the tenant. As such a tenant with these rights has quite a high degree of protection. Many diversified businesses are likely to fall within this regime unless the process for excluding the security of tenure rights is followed before the tenancy arises.
This is why a lender holding a security over land will want to understand these things clearly and will almost certainly insist on approving any tenancy proposals in advance.

The particular risk which arises with diversified business uses, especially where operated by third parties, is that a business use can arise and lead to an occupational arrangement falling inadvertently within the security of tenure regime of the Landlord and Tenant Act 1954 with high levels of security of tenure and rights to request a new tenancy.

Having clarity of who is using what part of the farm and for what purpose is often overlooked until it is too late.

So whilst there will be practical matters to consider such as planning, title matters, rates and EPCs for example, farmers looking to diversify should be sure to consider not only the additional income stream, but ensure that any occupational arrangements are clearly thought through, so that issues such as security of tenure are addressed in advance but also more prosaic matters such as repairing arrangements are clearly recorded. Funder’s consent should be sought where needed and tax advisors should consider the long term consequences of any change of use or third party occupations.

For more information: James Spreckley, Head of Agriculture and Rural Sector Team, Lodders Solicitors. Tel: 01789 206166 Email: james.spreckley@lodders.co.uk Visit: www.lodders.co.uk

Tags: UK200

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