Learning the law – Agricultural charges

Learning the law – Agricultural charges

What is an agricultural charge?

The Agricultural Credits Act 1928 (“ACA 1928”) created a bespoke form of security that allows a farmer to grant a single charge to a bank over all his farming stock and other agricultural assets (but not the land which he farms). Almost 90 years on, it remains in place. The ACA 1928 provides that a tenant farmer can still grant such a charge even if his tenancy agreement prohibits him from doing so.

Crucially, only a farmer may grant an agricultural charge. ‘Farmer’ is defined as any owner or tenant of agricultural land who cultivates for profit. It includes landowners and trustees as well as tenant farmers. However, not every person who is engaged in farming activities falls within the definition of ’farmer’. The ACA 1928 expressly excludes any ‘incorporated company or society’, and so effectively limits the definition to individuals, who are farming as sole traders or as members of a farming partnership. It is currently unclear and remains a question of fact whether a farming cooperative, or other such arrangement under which farmers pool their resources, would be treated as a ‘society’ for the purposes of the statutory definition of ‘farmer’. It is essential to check how the farming business is described in the charge and compare this with the farmers’ accounts and tax returns.

In order to be effective an agricultural charge must be registered with the Agricultural Credits Department (part of the Land Registry) within seven days of creation. If it is not registered, it is void against any third party.

Who can take an agricultural charge?

Only a registered deposit-taking bank or the Bank of England can take an agricultural charge.

What assets can be charged?

Not all assets associated with the farm business can be subject to an agricultural charge. A farmer can only charge the ‘farming stock’ and ‘other agricultural assets’ which belong to him.

‘Farming stock’ incorporates the main asset classes which may be charged and includes items such as farm machinery, crops and livestock. If there is a particularly valuable asset it would be worth checking whether it is captured within the definition. ’Other agricultural assets’ is not what it seems. It is limited to a tenant’s rights to compensation under the Agricultural Holdings Act 1986 and Agricultural Tenancies Act 1995 and other tenant’s rights, albeit with various exclusions. However, the bank does not stand in the shoes of the tenant and cannot, as ‘assignee’, directly claim the compensation under the Agricultural Holdings Act 1986.

Assets NOT covered by an agricultural charge include: horses, chemical fertilisers, real property (freehold or leasehold), subsidies under the Basic Payment Scheme, leased assets, the farmer’s book debts and the farmer’s bank account.

What form of security does an agricultural charge take?

The agricultural charge can be fixed if the assets are specified in the charge document and this fixed charge extends to any progeny of any livestock or replacement agricultural plant bought in substitution for specific equipment covered by the fixed charge at the date of creation. Any assets acquired after the creation of the charge will be subject to a floating charge. After service of a ‘crystallisation notice’ in accordance with the terms of the agricultural charge, bankruptcy or death of the farmer or dissolution of the partnership, the floating charge element is converted to a fixed charge. Any further assets acquired by the farmer after crystallisation do not fall within the scope of the security. Agricultural charges rank in accordance with their date of registration, but all fixed charges rank ahead of any floating charge.

After service of a ‘crystallisation notice’ in accordance with the terms of the agricultural charge, bankruptcy or death of the farmer or dissolution of the partnership, the floating charge element is converted to a fixed charge. Any further assets acquired by the farmer after crystallisation do not fall within the scope of the security.

Agricultural charges rank in accordance with their date of registration, but all fixed charges rank ahead of any floating charge.

What are the bank’s rights in relation to an agricultural charge?

If the bank holds a fixed agricultural charge (either as originally granted or following crystallisation), it is entitled:

  • in the event of default (as defined in the agricultural charge) to take possession of the charged property, sell it and use the proceeds of sale to pay off the amount due under the agricultural charge (if there is any surplus this must be paid to the farmer).
  • during the period of the agricultural charge, to receive the proceeds of sale of any of the charged assets, any insurance monies in relation to the charged property, or compensation or insurance which the farmer receives in relation to destroyed crops or livestock.

If the bank holds a floating charge, it has the same rights in relation to proceeds of sale, insurance monies and compensation as it would have under a fixed charge.

If the farmer fails to account to the bank for any proceeds of sale, he is guilty of a criminal offence. The bank will also have a right to appoint a receiver. Such a power should be expressly incorporated into the charge document.

What does the future hold for agricultural charges?

There are currently no publicised plans for specific reform of the agricultural charges regime. However, the security bills of sale regime was the subject of a review and consultation by the Law Commission and this may have an impact on the use of agricultural charges. The Law Commission has proposed repealing the Bills of Sale Acts and introducing a new form of mortgage over goods for use by non-incorporated entities. The proposals would exclude goods ‘subject to a specialist registry’, including any agricultural goods, charged by virtue of the ACA 1928 with the exception of loans secured on vehicles, including tractors and other agricultural vehicles registered with the DVLA.

Currently the Law Commission has indicated that it is reviewing the role of agricultural charges as part of its remit to look at agricultural tenancy issues. Nevertheless, agricultural charges are a valuable form of security for farmers required to provide security for borrowing and similarly for banks lending to the agricultural sector.

For more information please contact Vivienne Williams on vivienne.williams@michelmores.com or 0117 906 9302

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Cereals 2024

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