Looking south of the border, the Tenant Farmers Association (TFA) hit the headlines of the farming press recently with a claim that tenant farmers are being prevented from diversifying due to blanket bans in their leases, coupled with landlords accused of inflexibility.
George Dunn of the TFA suggested that landlords may be reluctant to consent to a diversification project for inheritance tax reasons, due to the potential impact on agricultural property relief (APR).
Like many other sectors, landowners and farmers are looking at their businesses to take stock and plan for a potential decline in subsidy.
One tool in the landed business's armoury is diversification. The recent Diversification Report from NFU Mutual, summarising insights and analysis to help UK farmers explore opportunities and challenges in a post-Brexit world, states that more than 60% of UK farming businesses have already diversified.
However, tenant farmers have agreed to take a lease of land for agricultural purposes and, with the tenanted sector being so heavily regulated, statutory rules are in place to govern diversification requests.
Our 5 key pointers:
In light of questions being raised in other parts of the UK on the willingness of landlords to consider a tenant's diversification request, we thought it would be useful to refresh our minds on the basics of tenant diversification in Scotland.
Here are our top 5 key pointers:
- Most - but not all - agricultural tenancies permit tenants to use the land for non-agricultural purposes. The main exception is the Short Limited Duration Tenancy, where there is no statutory right to diversify. It is important to take advice on the lease terms and where those terms sit against the legal position on the type of agricultural tenancy in question.
- A tenant is required to give notice to the landlord of his or her intention to diversify. Such notices must cover certain prescribed matters, including details of the proposed diversification project and the extent of the holding which will be affected. That is not the end of the story and a landlord can make a request for further information and has the opportunity to object, though their rights to do so are more constrained than they used to be.
- Tenants and landlords should think about the consequences of potential diversification, especially at rent review - the rent can be increased (but not decreased) to reflect the non-agricultural use. As well as rent, there are potential knock-on consequences for the landlord's ability to claim APR and the additional costs of commercial rates for tenants.
- The tenant should think about whether he or she intends to run the diversified business or whether this will involve any third parties. Although a lease might contain subletting prohibitions these are relaxed where the proposed sublet is ancillary to the tenant's use of the land for a non-agricultural purpose.
- The tenant should think about what additional rights he or she might require for the diversification project and whether the existing lease terms are sufficient.
Diversification could be a lifeline for landed businesses in a post-Brexit economy. The complicated world of agricultural tenancies heavily regulates the path to a successful diversification project - for landlord and tenant alike.
We recommend that you take advice on this statutory process at the earliest opportunity whether you are a tenant considering a diversification project or a landlord who has received a notice from your tenant.