Landlord & Tenant

Renting out agricultural land – what to consider?

2nd March 2023

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As an asset agricultural land does not provide the best of returns from an investment point of view. However if done correctly it can provide the Landlord with a guaranteed income with little responsibility, ensure it can be passed onto future generations without paying inheritance tax, and it can also provide a secure fixed term for tenants to invest in holdings and grow their business, to name a few.

If you are renting out or renting in a block of agricultural land, there are several different types of agreement that could be used, unfortunately there is not a one size that fits all. If land is occupied/ formalised between the parties incorrectly, this can have a severe impact on obtaining vacant possession (getting the land back), the claiming of subsidies and taxation.

We have recently seen mowing land let out between £250 – £300 per acre for a seasonal licence and when land and buildings are included on a licence in excess of £350 per acre can be achieved.

In this post we will outline the importance having the most suitable type of agreement, what the agreements could be and what do to if relationships between the two parties break down.

5 key points

1 Agreements

There are predominantly three separate agreements to formalise the occupation of land, all of which have different purposes; your requirements would determine which one is the most suitable. The agreements are a Farm Business Tenancy, Licence or Contract Farming Agreement. It is always our advice to have any agreement formalised in writing; a verbal agreement is fine until something goes wrong. Even a verbal agreement can result in a tenancy being formed.

Farm Business Tenancy (FBT)

Governed by the Agricultural Tenancies Act 1995, an FBT is the most common type of agricultural tenancy available since 1st September 1995. The terms of the agreement can be agreed mutually between the parties for however long they wish. In most instances the Tenant who occupies the land (exclusive possession) claims the subsidy or environmental schemes and pays the Landlord a rent. The terms agreed will determine which party is liable for what. The longer the term (duration of the agreement) the more likely a Tenant will invest. An FBT can be used for land, buildings, or whole farms, as long as the holding is used for agricultural purposes.

Licence

A grazing/mowing licence allows the grazier to access land and to either graze livestock or mow and takeaway the grass, where this would otherwise be a trespass. The landowner retains management control of the land. An annual licence fee is paid by the licensee to the licensor. It is imperative that the licence is no longer than 365 days, as this may result in the licensee obtaining exclusive possession and a tenancy being formed.

Contract Farming Agreement

A contract farming agreement involves the landowner (farmer) employing the services of a contractor, to allow the owner to continue occupying the farmhouse and land and then sell the grass or crops to a contractor in an arm’s length transaction. The farmer is responsible for paying for all inputs, contracting costs, sprays and fertilisers etc. The farmer would then sell the crops at the market value. The contractor charges for the work undertaken and has very little risk. The farmer however is at risk; if the crops fail, the landowner receives no income. The main reason for entering into a contract farming agreement is to ensure the farmer is still trading.

2 Subsidy and environmental schemes

To enable the claiming of subsidies or environmental schemes, the claimant must be in occupation of the land and whatever agreement that is entered into should clearly detail which party is allowed to claim. Under an FBT the Tenant has exclusive possession of the land and is occupying the land and therefore can make the claim. Under a licence or contract farming agreement the owner of the land would claim the subsidy and ensure that all cross-compliance regulations are adhered to.

The delinking of BPS will start in 2024. The last ‘normal’ claim year for BPS is 2023. A claimant will not have to occupy land or hold entitlements to claim in 2024. Providing the claimant claims in 2023 and made claims in the reference years (2021 & 2022), they will still receive the remaining BPS payment up to 2027 even if they are not in occupation or farming the land. This is all due the Agricultural Act 2020 and the delinking of payments.

3 Taxation

When disposing of agricultural land either by sale or inheritance there could be tax to pay and the agreements in place at the time will determine, if and what tax is payable.

Inheritance tax – If the land has been farmed by the owner under a contract farming agreement or grazing licence for the last 7 years then Agricultural Property Relief can be claimed. If the land was let on an FBT for 2 of the last 7 years then Agricultural Property Relief can be claimed.

Capital Gains tax (CGT) – Under an FBT, the Landlord is not trading as they are receiving a rental income and would have to pay CGT on the disposal of the land. If the land is farmed under a contract farming agreement, the landowner is deemed to be at financial risk and providing they have traded  for the last 7 years and are ceasing trading from the whole business, they could be able to claim Business Asset Disposal Relief.

4 What do to if relationships between the two parties break down

In any dispute, we would always refer to the written agreement to determine the obligations of each party. More modern agreements should detail the process when a dispute arises. In most circumstances the Royal Institution of Chartered Surveyors or Central Association of Agricultural Valuers can appoint an arbitrator or expert. If the issues can be resolved early between the parties, then this reduces professional costs and animosity between the two.

5 Do you have an unwritten tenancy?

Don’t panic! A verbal agreement can still be legally binding. In most cases both parties are agreeable to formalise the position to protect themselves. However if you have an old tenancy which was prior to 1995, this could be a bit trickier and we would certainly recommend taking professional advice on this.

As mentioned there is no one size that fits all, however agreements can be flexible and your needs will determine the most suitable. If you would like to discuss existing agreements or new agreements regarding renting agricultural land, please contact us:

01829 423 183

info@selbyrural.co.uk

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