Agricultural Tenancies: New code, changes to AHA tenancies & natural capital scheme collaboration

Agricultural Tenancies: New code, changes to AHA tenancies & natural capital scheme collaboration

Since 2015 we have seen wholescale change to agriculture across the UK as we have moved from the EU Common Agriculture Policy to our own domestic agriculture policy in each of the devolved nations. Although the law relating to agricultural tenancies has always been governed domestically, other issues, fundamental to the success of agricultural businesses, have gone through wholescale change, which has prompted new modifications to tenancies.

As part of those developments, this year, we now have a new Landlord & Tenant Code of Practice, new changes on the horizon for tenancies governed by the Agricultural Holdings Act 1986 (AHA), as well as new opportunities arising from longer term natural capital schemes.

  1. New Landlord & Tenant Code of Practice

In our recent article “Agricultural Landlord and Tenant Code of Practice for England: A new era?” we explained the main areas of the code. We will now consider how it affects the drafting of agricultural tenancies and how it will be enforced.

How is the code going to affect new tenancy agreements?

The code is entirely voluntary and does not affect underlying law or the terms of a written tenancy agreement. There is encouragement from within the industry to incorporate it into tenancy agreements and this, for new tenancies, can be done in a variety of ways. The most common is to include a clause requiring the parties to take account of its terms, during and on termination of the tenancy.

On wider drafting issues, the code encourages fairness, a written tenancy agreement and the inclusion of a schedule of conditions at the outset of every tenancy. Blanket bans on participation in environmental and other opportunities are discouraged. These all seem very sensible measures and have been addressed in our in-house tenancy agreements for some time.

The interesting question which then arises is what will happen if the parties breach the code whether or not there’s a clause in the tenancy agreement requiring them to comply with the code? Are we going to see parties suing each other for breach and, if so, how is that going to play out?

Enforcing the code

In general terms, the code is setting out what the parties should do unless there is a good reason to suggest otherwise, which inevitably involves a subjective element to that judgment. This will make taking action to enforce the code through mechanisms like forfeiture more difficult; tenants are quite likely to obtain relief from forfeiture because of the subjective element involved. So, it is unlikely that the code will be enforced in that way.

However, where it is likely to have more impact is in the way the parties conduct disputes and even when considering whether the dispute is worth pursuing at all. The code’s principles of clarity and communication in working through disagreements are set out, as is a statement that dispute resolvers, such as arbitrators, who have authority to make costs awards, may wish to take into account, whether the parties have acted in accordance with the code, when making their award.

So, for example, where a party loses a case, they generally have to pay the winner’s costs. But the arbitrator then has discretion to decide how much those costs are and they can take the parties’ conduct into account when assessing that quantum.

In view of the fact that all three industry bodies which appoint arbitrators, namely the RICS, the CAAV and the ALA, have endorsed the code, it follows that their members are likely to be influenced by its recommendations.

In addition, the RICS has said that “RICS Regulation will be mindful of the existence of this voluntary Code and will take due note of what best practice looks like”, so RICS members may feel additional pressure to adhere to the terms of the code.

Very recently DEFRA announced that it will be appointing a Commissioner for the Tenant Farming Sector (CTFS) this autumn. The role is planned to be a source of “neutral and confidential advice for tenants, landlords and advisors who have concerns about poor behaviour and complaints that the Code of Practice on responsible conduct is not being followed”. Indications are that this will simply be a method of helping to resolve issues before they escalate to more formal dispute processes.

  1. Changes to AHA tenancies

The Agriculture Act 2020 introduced some changes to AHA tenancies and the last of those changes comes into force on 1st September 2024. From that date, on succession applications, the commercial unit test will no longer form part of the eligibility test. Instead, succession applicants will only have to satisfy a 2-stage eligibility test comprising:

  • close relationship test; and
  • principal source of livelihood test.

They will also have to satisfy a revised suitability test, which will replace the current test. For this, the tribunal needs to take into account all relevant matters, including the capability and capacity of the applicant to farm, taking into account the need for high standards of efficient production and care for the environment. The tribunal then also needs to look at a person’s experience, training and skills in agriculture and business management.

The two new elements in all of that are, first the reference to care for the environment, which now sits alongside efficient production and, secondly looking at a person’s experience and skills in business management. These changes reflect the shift in government policy towards promoting the protection of the environment, which we have seen in many different contexts.

With the commercial unit test falling away, we may see some fairly large-scale enterprises now eligible for succession, which would have been cut out by the previous test. This change reflects the government’s desire to promote food production and large scale, efficient operations and also to encourage the handing down of businesses to the next generation.

This may result in more succession applications coming through on retirement, rather than on death, which effectively gives the successor a trial run at succession to see where any weaknesses or arguments lie.

For greater detail about these changes please see the article on our website “Agriculture Act 2020: England finalises new AHA succession rules”.

  1. Natural Capital Scheme opportunities

The top tier of DEFRA’s Environmental Land Management Scheme comprises the Landscape Recovery Scheme (LRS), which is intended to involve large scale projects, covering a wide area, using blended public and private finance and is likely to require collaboration between multiple landowners and occupants.

DEFRA has made it clear it is keen for tenants to be part of that collaboration and there is plenty of opportunity for landlords and tenants to cooperate, both under existing tenancies and new agreements.

LRS legal framework

We expect LRS to work through a series of interconnected agreements. A lead applicant will be appointed by all the parties to deal with DEFRA. That applicant will often be a company set up for the role, known as a “special purpose vehicle” (SPV). The SPV will enter into a contract with DEFRA outlining the whole scheme. Beneath that, each landowner will contract to take on the relevant obligations and commitments for their respective areas of land.

The landowners will also enter into conservation covenants or s106 planning agreements with local planning authorities (or other responsible bodies) which will bind their land to ensure performance of the environmental commitments (such as tree planting).

Where tenancies exist, the LRS obligations will be delegated further down the chain through sub-contracts between the landowners and their tenants for the relevant areas of land.

How can tenants be involved?

First, by managing land within the LRS in collaboration with their landlord – for this existing tenancy agreements may need to be varied by agreement.

Secondly, tenants can be appointed as contractor land-managers by landlords on in hand land within the LRS, Thirdly, tenants can become shareholders in the SPV, jointly with landlords, and their shareholding can reflect each party’s input, taking account of time, financial contribution, risk etc.

Lastly, tenants could also be involved in the management of the SPV as directors, employees etc.

Inheritance tax changes

One issue which has been holding landowners back from entering longer term schemes has been the knotty issue of IHT and the fact that land in new environmental schemes do not currently qualify for Agricultural Property Relief.

Fortunately, the government addressed this problem in the latest budget and confirmed that the scope of APR will be extended to encompass ELMS from 6th April 2025. For more details of this tax change see the article on our website “Budget update: Taxation of environmental land management and ecosystem service markets”.

If you would like to discuss any of the issues raised in this article, please contact Vivienne Williams or Caroline Baines.