When purchasing land for development there can often be a sizeable delay between the point of purchase and the time when works finally commence on the ground.
In those circumstances it can very often be desirable to have a tenant in place to look after, farm and manage the land in the interim period and to bring in an income when the land would otherwise be left bare.
In relation to agricultural tenancies, there are however a number of pitfalls which the unwary or uninitiated may fall foul of, which could result in delays of months or even years and significant additional costs in regaining vacant possession before works can commence. This article examines what to look out for if you are purchasing a site with an existing agricultural tenancy, or considering such a tenancy between purchase and commencement of development.
Nowadays, there are a number of different types of tenancy agreement found in relation to agricultural land. From grazing licences to common law tenancies, but the most common is a Farm Business Tenancy (FBT) under the Agricultural Tenancies Act 1995. It is therefore the FBT which will be explored further in this article.
If buying a site with an existing FBT, or agreeing and implementing a new FBT, what key terms should you be aware of to ensure a smooth transition into development?
1.Term and early termination provisions
Under the Agricultural Tenancies Act 1995 (the 1995 Act), an FBT for a term of two years or less will expire at the end of the term and may include a short term (e.g. three months) notice period to allow for the FBT to be brought to an end early. You must however be careful to ensure that possession of the land is taken back or a new FBT granted at the end of the FBT to prevent the tenant from obtaining a periodic tenancy. In those circumstances additional rights will be afforded to the tenant as set out below.
An FBT granted for a period of more than two years (or a periodic tenancy as set out above) on the other hand is automatically required to comply with the provisions of the 1995 Act in order to be brought to an end and will not terminate at the end of the fixed term but will continue until brought to an end by notice. Notice in these cases must be for a period of no less than 12 months ending on a term date (by example, should notice be served on 1 October 2021 for an FBT commencing on 30 September, the notice would not take effect until 29 September 2023 – a delay of nearly two years). It is not possible to contract out of these provisions and the same notice periods would apply in relation to early termination provisions in the FBT.
An open dialogue with the tenant about the future intended use for the land, either before purchase (with the assistance of the seller), or when negotiating the tenancy agreement, can of course also assist, and it is possible to bypass the notice provisions where an early surrender of the FBT can be agreed with the tenant. This may however require payment of a surrender premium to the tenant.
2. Reserved rights
In the period prior to development, it may be necessary to come onto site to carry out surveys, test pits and minor works. Recent case law suggests that the Court will read any rights of access granted under FBTs and leases restrictively and so careful consideration should be had at the outset as to what purposes access to the land may be required for during the term of the FBT.
3. Is it agricultural?
If you do decide you would like a tenant to provide an income stream before you commence the development, you should ensure that the type of tenancy agreement you are putting in place is correct for the nature and intended use of the land. By example, horses are not considered to be agriculture unless certain exemptions apply (for instance, they are working horses or being reared for their meat) and so a different type of tenancy should be used where horses are simply to be grazed on the land. Having discussions with legal advisers and land agents at the outset can assist with this to ensure that the tenant does not gain more protections than intended.
4. Payment subsidies and grants
There are currently a number of different payment subsidies and grants available to farmers which can be claimed by tenants under an FBT. Some such agreements can run for a year (e.g. Basic Payment Scheme payments) whilst others can run for longer (e.g. Countryside Stewardship Schemes). When buying a site, you should investigate whether the land is already included in a pre-existing scheme, or if you are considering granting a tenancy, ensure that you are clear on what, if any, schemes you permit the tenant to enter in to. If there is a scheme already in existence, before completing your purchase you should consider who will be liable for repayment of any grants or subsidies which may lead to penalties as a result of non-compliance following the commencement of the development. All this can be addressed within the purchase contract.
When bringing an FBT to an end early (especially in the case of a short term FBT), there can be financial ramifications for the farmer if, by example, there is a crop in the ground. Covering off compensation within the FBT can save time and cost later on and make it easier to be able to serve notice at any time of year. Alternatively some tenants may require that a notice to terminate can only be served in a manner to expire at a certain time of the year so as to coincide with the harvesting of the land. When buying a site, you will need to address who pays any compensation within the purchase contract.
The points raised above are but a handful of potential pitfalls to be wary of when purchasing a site with an existing tenancy, or before granting an agricultural occupation over land which is due for development. You should always consult with your land agent and us early as preparation here is key to avoid potentially long and costly delays.
This article is from the first issue of Foundations, our newsletter for those working in the housebuilding industry. To download the latest issue, please visit the newsletter section of our website. For further information please contact Adam Burden or another member of Birketts’ Housebuilders Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2021.