Brexit: Agriculture Bill catches new farm tenancies
We have been here before. At the crossroads of policy change but there are no signs, the map has a draft watermark and only half the roads are marked. These are uncertain times and the business of advising rural businesses is a tricky one.
The wheel still turns and long-term tenancy agreements and other commercial contracts are being completed daily against the backdrop of a draft Agriculture Bill, which has only just completed the committee stage with a report and third reading yet to come. The process started in September 2018 and the Bill has yet to reach the House of Lords.
The Agriculture Bill provides some indications of future policy, but it is a skeleton document at best, with 27 new clauses proposed and 61 further amendments tabled as at 15 February 2019. It is not known how many of these proposed changes will avoid the cutting room floor, but they provide a useful insight into possible directions of travel.
It would be far easier if rural business advisors could sit back and wait until Brexit and the Agriculture Bill are finalised. But to do so would be to ignore the issues already created by these developments and to fail to advise properly the parties to new tenancy, contracting and other agreements. In this article we explain some of the issues and our forthcoming roadshow will attempt to provide some of the answers.
The immediate short term
Payments under the Basic Payment Scheme (BPS) look set to be maintained until at least the start of the transition period in 2021. The transition period is currently stated to last for 7 years, but this can be extended on more than one occasion.
The Bill sets out a plan for financial assistance to be provided for the agricultural sector during the transition period. Thereafter payments will be made in return for public benefits under new environmental schemes. Financial assistance may be in the form of BPS payments or delinked payments, but whatever the format or possible combination of these direct payments they will be phased out by the end of the transition period.
So, the first fork in the road is either the status quo of BPS or the possible new world of delinked payments.
Current agreements should, if properly drafted, deal with the concepts of BPS entitlement ownership and obligations to preserve the BPS payment. However, whilst under the Single Payment Scheme we became accustomed to payments decoupled from production, we now have to grapple with payments separated from the occupation of land itself.
The Bill (section 9 (3) (c)) provides that regulations will be published, which will specify the description of persons entitled to receive a delinked payment and determine how much that payment should be. Section 9 (4) confirms that such delinked payment recipients may be those who were entitled to receive BPS payments in a certain year.
These basic provisions raise some interesting questions when drafting a long-term Farm Business Tenancy (FBT) for example.
Landlords as recipients of financial assistance
Such scant detail that the Bill contains would suggest that tenants are intended to be the recipients of any delinked payments. That would be consistent with previous agricultural support policy. However, the Bill does not rule out the possibility of landlords attempting to claim such a payment. Indeed, one of the recently tabled amendments provides that financial assistance may be given to "those persons with an interest in agricultural land, where the financial assistance relates directly to that land." This is a broad definition which would include landlords and indeed mortgagees.
Tenants as recipients
That possibility has clearly concerned some Members of Parliament and another tabled amendment aims to ensure that tenants not only receive the financial assistance (whether that is during the transition period or after by virtue of participation in one of the new environmental land management schemes (NELMS)) but cannot be prevented from claiming this assistance by a term of their tenancy agreement. The draft wording permits the tenant to apply for consent for the relevant activity and if the landlord does not respond within a month then deemed consent is given. If the landlord objects, then the tenant may refer the matter to arbitration or expert determination.
Land "at the disposal of" claimant
With other amendments we see further similarities with the BPS, and the requirement of that scheme, that the land be "at the disposal" of the claimant. One such amendment restricts financial assistance to those operating land where the predominant use is agricultural, as defined by section 96 of the Agricultural Holdings Act 1986. Further refinements are added in that claimants must be in occupation of the land, taking the entrepreneurial risk and in day-to-day management control. This is effectively a resurrection of the "active farmer" test, which fell by the wayside in 2018 and puts tenants in pole position for delinked payments.
Amount of delinked payment
Section 9 (5) of the Bill states that the amount of the delinked payment may be framed by the amount of BPS income the recipient would have been entitled to. This is a familiar concept given the historic reference period used for the Single Payment Scheme.
The Bill raises the further possibility of the payment of a lump sum being made in lieu of direct payments during the transition period. The definition of direct payments includes either BPS payments or their delinked successors. The uncertainties set out above as to the intended recipient of delinked payments therefore equally apply here. Further, another tabled amendment clarifies that any lump sum payment shall only be made to those "active farmers" taking the entrepreneurial risk and in day-to-day management control of the land concerned.
Drafting legal agreements
Returning to our example of the draft FBT that needs to be completed urgently, the type of provisions required will depend, to a large extent, on the length of the term to be granted.
If the term is 2 years or less then current drafting will probably suffice, as that takes us up to the start of the transition period and existing BPS provisions will cover most eventualities.
If the term is 2-9 years the agreement will terminate mid-way through the transition period. Clauses will be required to bridge the gap between the old BPS regime and the potentially new delinked era of support.
That might see landlords trying to secure direct payments for the holding for the duration of the transition period by restricting the ability of the tenant to delink or take a lump sum or perhaps proposing to split the latter. As a general observation, draftsmen need to have more than half an eye on the tabled amendments, as if those make it through to the Act, then they may trump the terms of the tenancy in terms of eligibility of any individual claim to financial assistance.
If the amendments don't make it through to the Act then public policy arguments may be used to prevent such contractual barriers to the implementation of the new system of payments.
Uncertainty as to qualifying criteria may be resolved by a decision that BPS entitlements are the gateway to delinked payments. That seems entirely contradictory to the concept of delinking, but it would have the benefit of utilising an existing system, which everyone understands. If this did happen then entitlements would have a value and clauses providing for an uncertain future might want to cater for such an eventuality in terms of transfer obligations and compensation value.
If the term is 10 years or more that will probably (but note the potential for extending the transition period) see the parties into the new era of NELMS. In those circumstances the terms will need to deal with who is entitled to claim what. We have very little detail on NELMS and the relatively clear distinction of tenants claiming Entry and Higher Level Schemes under the old regime and landlords exercising more control over longer-term stewardship arrangements may become blurred.
The longer the term, the greater the uncertainty; Good faith clauses can require the parties to work together to amend the document in the light of unforeseen events. However, in order to be effective the document must clearly state the objectives of the parties. Vague aspirational drafting will not cut it as the result may be an unenforceable agreement to agree.
We will be explaining these issues and providing advice on the options available at a series of roadshows at the following venues: