The arrival of the Agriculture Act 2020 last November, whilst a critical step forward in the foundation of the British Agriculture Policy, provided very limited details of how the issues covered will be developed. In publishing its Agricultural Transition Plan 2021 to 2024 and accompanying guidance in November DEFRA gave some indication of the direction of travel, but plenty remains at the stage of possibilities, rather than certainties.
The pace of business continues in the sector and in some cases decisions cannot be delayed until such time as DEFRA provides the required clarity. In our first two articles on the Agriculture Act 2020 we considered landlord and tenant issues and planning for a lump sum exit. In this third article we look specifically at the impact of the Act on the drafting and granting of new Farm Business Tenancies.
The Agriculture Act 2020 gives power for the Secretary of State to bring in delinked payments (ongoing payments without any corresponding requirement to farm) in place of Basic Payment Scheme payments for the remainder of the transition period to the end of 2027. When this was first included in the Bill, it became clear that any introduction of delinked payments before new subsidies became available, when the new Environmental Land Management Scheme (ELMS) was rolled out across the country, had the potential to leave landlords with naked (unsubsidised) acres, if the tenancy ended during this transition period. Effectively a tenant could walk off with ongoing annual payments, leaving the incoming occupant with very limited access to subsidies until ELMS came online. This in turn could well be reflected in the rent a landlord could demand under a new letting for this period.
This issue appears to have been addressed by DEFRA in its November Agricultural Transition Plan, which now indicates that delinked payments are intended to be introduced in 2024 – the same year ELMS is due to be rolled out nationwide. So as long as the roll-out is not delayed there should not be the big gap in subsidies which many feared.
However the introduction of delinked payments will have the effect of creating a reference year and only the business farming the land in that year will then be able to access the income stream that will be the delinked payments, tapering off to 2027. Historically, if the landlord provided the entitlements to the tenant, provisions would be included in the tenancy for the entitlements to be transferred back to the landlord. It should now be considered whether it is appropriate to include contractual provisions for the tenant to pay the future delinked payments to the landlord, if the tenancy comes to an end during the period from 2024 to 2027. Much will depend on the bargain that can be struck between the contracting parties and what is appropriate in the circumstances. A tenancy might come to an end earlier than expected, perhaps during the transition period because of death or insolvency and so it is worthy of consideration.
It is also sensible to establish whether the tenant is actually the claimant under the basic payment scheme. Both landlords and tenant should be alive to the potential that delinking gives to separate the income stream from the farming business.
While the timing of the roll out of delinked payments is unlikely to see a gap in the availability of support the timescale for lump sum payments could be more problematic. If as indicated in the Transition Plan, a lump sum exit scheme is offered in 2022 to those leaving the industry, there remains the possibility of a gap in subsidies in 2023 and 2024. This would be between the departure of a tenant with all BPS payments rolled up into a lump sum in 2022 and the roll-out of ELMS in October 2024. The existing Countryside Stewardship Scheme or possibly ELMS pilots may offer some funding, but only for holdings which are suitable for those schemes.
Landlords will be particularly concerned about this possible lacuna and its potential effect on rents. They may look at granting an FBT for a period which lasts beyond 2024 or longer, without the option for a tenant to break the term before 2024. Alternatively landlords could attempt to restrict the tenant’s ability to claim a lump sum or try to share in the lump sum, through drafting in the tenancy agreement. This is not straightforward drafting however and runs the risk of challenge, either for being contrary to public policy, or if the new regulations specifically outlaw provisions which attempt to get round the aim of the Act (which is to offer an incentive to older farmers to retire from the industry in order to improve productivity). Instead they may look to fix rents for a set period, before moving onto the statutory rent review formula further down the line on a long term tenancy. That requires careful drafting to ensure the rent review option is still compliant with the Agricultural Tenancies Act 1995.
In relation to the resolution of disputes the Act has widened the choice of bodies to which the parties can apply for the appointment of an arbitrator. This now includes the Agricultural Law Association and the Central Association of Agricultural Valuers. Dispute resolution provisions in new FBTs for appointment of both experts and arbitrators can now therefore refer to these wider options.
Entry into ELMS
DEFRA’s Transition Plan provides details of the three tiers of ELMS: Sustainable Farming Incentive, Local Nature & Recovery and Landscape Recovery. With the end of Basic Payment Scheme subsidies many farm businesses will look to the Sustainable Farming Incentive part of ELMS and possibly the other tiers for the opportunity to replace that funding. New FBTs may attempt to restrict a tenant’s ability to enter into ELMS due to landlord fears that environmental commitments could restrict future land use after the tenancy has ended.
It is perhaps surprising that the Agriculture Act provisions for AHA tenants were not extended to FBTs. These provisions allow AHA tenants to apply for arbitrator’s consent to circumvent landlord restrictions on entering such schemes. It is always possible that DEFRA could decide to extend this in due course, but in the meantime landlords can potentially control the tenant’s ability to enter into all parts of ELMS. However such a restriction would be taken into account on rent review and many tenants may not accept a blanket restriction on accessing what may be such an essential part of their income. An obvious alternative is for the parties to agree in a tenancy agreement that tenants can enter ELMS as long as commitments will not extend beyond the term of the tenancy. Beyond that, landlords can then join with tenants, to agree any longer term ELMS arrangements which the landlord is prepared to continue beyond the term of the current FBT.
In order to obtain the best outcome from ELMS it is likely that some degree of local collaboration will be required, either with neighbouring farmers or between landlords and tenants. This is particularly so if the higher tiers of Local Nature & Recovery and Landscape Recovery are to be accessed. Although it is difficult to make any contractual commitments (beyond perhaps a good faith clause) so far in advance of the detail of those schemes being available, there is a worthwhile discussion to be had about the views of each party.
For further information and advice on the above please contact Vivienne Williams
, Partner & Head of Agriculture Team