Sustainable Farming Incentive: The pitfalls of a farm changeover
DEFRA has published its latest guidance on payments under the Sustainable Farming Incentive (SFI) element of the Environmental Land Management Scheme (ELMS) in England. An ambiguity has arisen over what will happen when a farm (or part of a farm) changes hands. This can be due to a farm sale, grant of a new tenancy, a surrender or even a farm reorganisation.
The parties might have been assuming that an agreement could be transferred to the incoming farmer. However, from DEFRA's guidance, this may be unlikely and could instead result in the loss of SFI payments, particularly for the outgoing farmer.
DEFRA's guidance indicates that individual agreements will run for a fixed period of three years from the beginning of the calendar month after the month in which a particular claimant accepts the Agreement Document sent to them. Within the two months before the end of each year of the agreement the claimant must submit their annual declaration confirming that they have complied with all the requirements of the scheme for that year.
Changes during the Agreement period
Changes which involve increasing standards or adding land can be requested towards the end of the first and second years of the agreement, and these have to be approved by DEFRA.
Changes at any time during the three year period, which involve removing or reducing standards, removing land from an agreement or ending the whole agreement early are more complicated.
DEFRA's guidance indicates that if there has been a "change of circumstances that makes it impossible to deliver all or part of the agreement" then they may agree to allow that change, however DEFRA warns that "you may have to repay some, or all, of the money already paid to you". They explain that this is because "Your SFI standards agreement payments are based on you completing the actions in the standards for a full agreement year".
The guidance then goes on to state:
It will not usually be possible for you to transfer an SFI standards agreement to another person.
The underlying terms and conditions of the SFI provide:
8.1 Transferring Agreement Land to another person or entity
(a) If you sell, lease or otherwise transfer all or part of the Agreement Land to another party or entity (the “Transferee”) during the Agreement Period so that you no longer have Management Control over all or part of the Agreement Land we will not usually allow you to transfer your Agreement to the Transferee.
(b) In the case of 8.1(a) you must notify us of your loss of Management Control of all or part of the Agreement Land (as set out in condition 3.3) using the procedure in condition 7 (Change of Circumstances).
(c) Where you notify us that there has been a Change of Circumstances under condition 8.1(a), we may agree, at our absolute discretion and in limited circumstances only, that you may transfer the Agreement to the Transferee provided the conditions laid out in regulation 12 of the Regulations are met.
Regulation 12 of The Agriculture (Financial Assistance) Regulations 2021 No 405 gives the Secretary of State power to consent to transfers of all or part of land in an agreement where the transferee:
- has management control of the land and sufficient control of activities to be able to meet the conditions of the agreement; and
- meets the eligibility criteria for the relevant scheme; and
- notifies the Secretary of State of the transfer within any relevant deadline; and
- gives an undertaking to assume the agreement obligations in place of the original agreement holder; and
- the undertaking is accepted.
Basic Payment Scheme
Under the Basic Payment Scheme, transfers during the scheme year are left to the parties to address – so as long as there is no breach of the scheme rules in relation to the particular land being transferred, and as long as the claimant has the land at their disposal on 15 May, a transfer of the land to a third party after 15 May does not affect the payment to the original claimant. To cover the risk of a breach of the scheme rules (and a resulting loss of payment) the parties include indemnities in the contract between them. It is all very straightforward.
Agri- environment scheme Agreements
The Countryside Stewardship Scheme and previous agri-environment schemes have handled farm transfers differently because they are multi-year agreements. As long as the incoming farmer takes over the existing agreement and gives appropriate declarations to comply with the agreement terms, the agreement is transferred and continues to the end of its period. Once again, the parties cover the risk of any reclaiming of payments due to a breach of the agreement terms, through the use of indemnities in the contract between them.
The problem under the SFI
In view of the clear criteria laid out in the underlying regulations, it is difficult to understand why DEFRA's guidance indicates that transfers will generally not be permitted, as they have been for many years under other agri-environment scheme agreements. As long as the agreement requirements are met after the transfer takes place, it is difficult to see any breach, that justifies a reclaiming of the payments.
Indications are that DEFRA's approach to transfers of agreements is influenced by a desire to reduce the amount of administration associated with altering existing agreements, however there are also money saving incentives to this approach.
The SFI guidance appears to indicate that the payments in the year of the transfer are the ones which may well be reclaimed or withheld, so the outgoing farmer stands to lose these payments entirely. After the transfer, presumably the incoming farmer will then add the new land to his existing or to a new SFI agreement. The incoming farmer will need to sort this out quickly or further payments will be lost during the delay.
Over the coming years many parties will be negotiating farm sales, surrenders, new farm business tenancies and business reorganisations, having accepted an SFI Agreement. The DEFRA guidance has created considerable uncertainty regarding DEFRA's approach to farm changeovers. Although it is worth trying to obtain assurances in advance, as to the treatment of a particular changeover, they are unlikely to be given, if at all, until after it has completed.
Where changes to the occupation of land are on the horizon, the parties need to be able to take informed decisions. They will either need to accept the risk of a loss of payments and take this into account when budgeting for the change. Alternatively, if that risk cannot be accepted, the transfer could be delayed, or the parties might be able to find a way for the original claimant to remain in management control of the land until the end of the agreement. For those who have yet to enter the SFI, careful consideration should be given to the date for completion of the SFI Agreement to minimise these issues.
Whether by accident or design, this looks to be a change of approach from DEFRA. Parties looking to change the way in which land is occupied in the coming months and years need to be alive to the issue and the financial implications so that they can plan accordingly.
For more information, please contact Caroline Baines.