Carbon Trading and new environment agreements under agricultural tenancies

Following the introduction of Environmental Land Management Schemes (ELMS) in place of the EU funded Basic Payment Scheme and the introduction of other payments for environmental services, carbon credits and biodiversity net gain, it is becoming increasingly clear that issues will arise in the context of agricultural tenancy agreements.

A number of joint industry guidance notes have been prepared or are to be issued imminently. Many of the activities which will attract funding will not be strictly agricultural for tenancy or tax purposes so Landlords will need to be wary that any consents they give to Tenants will not prejudice their position, or that of their mortgagees, by for example converting the tenancy to a business tenancy or losing agricultural property relief.

Tenant and Landlord relationship

Many tenancy agreements prevent Tenants from entry into schemes without Landlords consent. The Agriculture Act 2020 makes changes to the Agricultural Holdings Act 1986 by providing a mechanism whereby a tenant can demand arbitration if a Landlord refuses consent to vary terms of the tenancy to access sources of funding or to comply with a statutory duty.

At present there is no equivalent provision for farm business tenancies under the Agricultural Tenancies Act 1995 but there is some pressure for this to be extended.

A new Code of Good Practice

To coincide with the introduction of the Agricultural Holdings (Requests for Landlord’s Consent for Variation of Terms and the Suitability Test) (England) Regulations 2021 the Tenancy Reform Industry Group was asked by Defra to produce a new Code of Good Practice for agri-environment schemes to make it relevant for the new statutory procedures.

The emphasis is on a conciliatory approach and working together but the Code does not override legislation and a Landlord will have other remedies if consensus cannot be reached. An arbitrator is to have regard to all relevant matters, and this would include the value of the Landlord’s holding, but there is no specific mention of change in the status of the tenancy. This is therefore something that has to be monitored carefully in practice when advising Landlords and drafting FBTs.

Carbon trading

Tenancy issues will also arise if Private Schemes for monetising carbon are proposed by a Tenant. For carbon trading the tenancy issues will be complex and involve analysis of both ownership of underlying carbon in the land and sequestration potential.

The freehold fee simple absolute includes soil, vegetation and minerals lying underneath the land. Sometimes minerals have been severed but if not, they rest with the freehold ownership. Carbon stored in these components will prima facie belong to the freeholder. It may be worth noting that soil is probably not within the definition of minerals (Coleman v Ibstock Brick) so even if minerals have been severed the soil probably has not.

In addition, the 1990 Planning Act refers to minerals as something removed from soil. This will be particularly relevant in the tenancy context. If the freeholder is also the occupier of the land it is likely he will own not only the underlying carbon but also the sequestration potential, provided of course there is no other structure e.g. share farming, partnership etc. which specifies to the contrary but for tenancies the position is more complex.

A tenancy agreement will usually except and reserve to the landlord mines and minerals and timber. Because of the question of whether minerals include soil, most new tenancy agreements are now providing, as we do, an additional exception and reservation of carbon, carbon storage and sequestration potential of the soil, provided the tenants ability to farm normally is not affected.

Tenancy agreements will usually contain agricultural user clauses which will generally restrict a tenant to operations that would for example improve the soil but not cover the planting of trees, which is often forbidden.

Sequestration potential would therefore have to be achieved by normal agricultural operations. Modern agreements are now seeking also to expressly provide that the holding shall not be used for the purposes of sale, lease, exchange or any dealing with carbon credits without Landlord’s consent. Tenant groups are advising their members not to sign agreements of this type and lobbying for legislation to clarify ownership of sequestration potential.

A lack of certainty

For the moment however, given the lack of certainty, every tenancy or farming arrangement will have to be examined in detail to ascertain the ability of the alleged owner of the sequestration potential to deal with this. In addition, there will be complications on the term of the tenancy. Most old style 1986 Act tenancies and some farm business tenancies post 1995 are now yearly although the tenant is protected to some, and differing extents, from notices to quit. Some carbon sequestration contracts will presumably need to be for longer terms.

It is quite likely that provisions enacted for Landlords consent to enter new public finance schemes like ELMs will be mirrored in private contracts for carbon trading. This a very fast-moving field with huge uncertainty in the industry. Advisers are, we believe, urging caution whilst some of the unknowns are clarified. Until this is forthcoming every single case will entail a detailed investigation as to whether the entity purporting to trade is entitled to trade.

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