Working a farm in a shifting environment

In November last year – following passing of the Agriculture Act 2020 (discussed in the last edition of Rural News) – Defra published The Path to Sustainable Farming: an Agricultural Transition Plan 2021-2024. This plan is to reduce and then stop direct payments between 2021 and 2024 and introduce the environmental land management approach to agri-environmental schemes and animal welfare schemes.

As the Basic Payment Scheme (BPS) is phased out, farmers will receive payment for delivering public goods, principally of environmental benefit. All BPS recipients will see their payments reduced by at least half, and larger reductions of up to 70% for those in the payment band over £150,000.00

The saving will be redirected into countryside stewardship, which will remain open until 2023 (for final agreements starting June 2024). From 2024, the new ELMs (Environmental Land Management scheme) will come into effect, with its three components, which are as follows:

  • The Sustainable Farming Incentive (SFI) for those with an existing environmental agreement;
  • Targeted natural recovery schemes;
  • Large scale landscape recovery.

The SFI is the first of the three schemes to be piloted, and Defra published details of this on 10 March, with the pilot open from 15 March. The scheme itself will be launched in mid-2022, and will reward actions taken to manage land in an environmentally sustainable way. Initially open to BPS recipients, it will eventually become open to all farmers, even those not currently in agri-environment schemes. With the first cuts in BPS imminent, it will help bridge the funding gap.

There will be separate provisions for national parks and SSSIs. To allow farmers to leave the sector, a lump-sum exit scheme is proposed, whereby some farmers may receive a lump sum payment in place of direct payments – whether under the BPS or delinked payments (which they would have been entitled to in the remainder of the transition period). Defra says it intends to offer this in 2022, but a consultation is planned for 2021, therefore tenants contemplating surrendering tenancies are quite likely to hang on for that payment.

In 2024, BPS will be replaced by delinked payments, and it won’t be necessary to farm the land to receive them, so effectively they’ll become a pension in the hands of the party (including a tenant) entitled to BPS at the chosen date. Again, there will be consultation on this.

Payment Band2021202220232024
Up to £30,0005%20%35%50%
Over £150,00025%40%55%70%

The Environment Bill and conservation covenants At the time of writing, the Environment Bill, introduced in January 2020, remains in report stage in the House of Commons, its progress slowed by other legislation. The Bill will cover improving the natural environment, regular reporting on environmental protection, a new Office of Environmental Protection and the protection of air and water quality. It also introduces the concept of environmental improvement plans – such as the 25YEP published in 2018 and ‘biodiversity net gain’ – plus the introduction of a new type of agreement, the conservation covenant.

Conservation covenants are agreements between a landowner and a responsible body – usually a local authority – which are registrable as local land charges and will bind the land. A ‘landowner’ in this context is the owner of the freehold, or a tenant with an initial term of over seven years (effectively only now an FBT). The agreement to qualify requires a landowner or responsible body to do something on the land and have a conservation purpose intended to be for the public good.

Points to consider include whether tenancy agreements should seek to bar tenants from entering them without the landlord’s consent, as well as the effect on a mortgages because their existence could potentially devalue the land concerned. There could also be an impact on tax status for APR, which will be of particular concern to mortgagees. There’s a suggested process for discharge and notification, but there are bound to be a number of issues for practitioners to be aware of.

Practical drafting issues ELMs

Most tenancies have no provisions relating to agricultural support schemes or standard BPS clauses. Practitioners have tried to devise complex “successor legislation” clauses to cover new schemes, but few we’ve seen would cover the proposed ELMs concept, which will cover more than traditional agriculture and the concept of delinking. Many of the works for which payments will be made will not be “agricultural”, within the definition of the 1986 or 1995 Acts or for tax legislation.

Consequences of non-agricultural use

The actual definition of agriculture still needs addressing, especially in relation to forestry (not within the definition of agriculture, particularly with the current emphasis on tree planting), rewilding where the land may not be being used in a business, energy crops and some of the ELMs schemes. Under an Agricultural Holdings Act (AHA) tenancy, agricultural user covenants will be strictly construed, and that substantive diversification can result in conversion of the AHA tenancy to a business tenancy under the LTA 1954. FBTs permit greater diversification if use of the notice condition is satisfied. The test is still primarily agricultural, but the test has to be satisfied only at the commencement of the term.

Overall, much work remains in developing a modern agricultural-tenancy regime suited to the new agricultural support and land-management proposals, and in providing effective guidance for our clients.

Is tenancy itself out of date?

Many farms are still operating under antiquated tenancy agreements, and even oral agreements. These are completely ill-suited to modern agricultural practices and diversification, let alone the new regime under ELMs and the requirements of many modern estates to regain part of the holding for development or non-agricultural use. It’s time to dust off the old agreement and ask the following:

  • Do provisions exist covering delinked payments and new funding under ELMs?
  • Are there requirements for tenants to obtain a landlord’s consent to entry into financial support schemes?
  • What is the user covenant, and will ELMs breach it?
  • Can a landlord refuse consent to diversification?
  • Is there a danger of the tenancy ceasing to be agricultural?
  • Is there scope for joint ventures with the tenant particularly on environmental projects?
  • Would a partnership, JV or share-farming arrangements suit the parties more?
  • Fundamentally, is the tenancy still an appropriate vehicle for the 21st Century farm or estate?

If you have any questions on the above, contact our rural law solicitors.