Diversification and Farm Business Tenancies

Farmers are having to diversify part of the farm in these current times to stay financially afloat. This will likely increase due to the decline in subsidies. So how do Tenant farmers go about trying to diversify and what does this mean for Landlords?

If you are a tenant farmer and you wish to diversify the farm or part of it to a non-farming activity e.g. Glamping pods, B&B, Farm Shop etc. it is likely you will need to obtain your Landlord’s consent to do so. Agricultural tenancies usually permit the tenant to use the Holding for agricultural purposes only and may contain restrictions against taking out any part of the holding from agricultural use. Tenants may choose to ignore the tenancy agreement and pursue diversification in any event but should be warned that the Landlord could seek to enforce the terms of the tenancy agreement and recover possession of the holding. If the tenant occupies under a 1986 Act tenancy, the Landlord could choose to serve a notice to remedy and a resulting notice to quit if the tenant continues with its quest to diversify.

If the tenant wishes to set up a new company to pursue the venture the tenancy agreement will need to allow for assignment, subletting or sharing of occupation.

Another practical issue to consider is the length of the remaining term left in the tenancy. The tenant may need to negotiate a longer tenancy agreement to allow growth and return of the diversification project.

The tenancy agreement should be checked for any restrictions on carrying out alterations and works to the holding. If works are to be carried out as part of diversification then will these be compensated by the landlord at the end of the term?

The Farm business tenancy regime was implemented with diversification in mind, but diversification will have to be factored in when the tenancy is first negotiated. For existing tenancies, modifications (with the Landlord’s consent) to the tenancy agreement may be required to allow for non-agricultural use.  The Tenant should approach the Landlord and work together where such modifications are needed.

It is important that as a Landlord that you do not just ignore a tenant’s request to diversify as this could result in the tenancy becoming a business lease within the Landlord and Tenant Act 1954 and acquiring security of tenure. This means that the Landlord could only obtain vacant possession in limited circumstances.

A Landlord will need to consider any tax implications in choosing whether or not to allow diversification. For example, there may be an impact on the landlord’s capital tax position.

If the tenant occupies under an AHA 1986 tenancy, then the Landlord may be swayed to allow for diversification in return for a Landlord and Tenant Act 1954 Part II tenancy granted on it. This would be a more attractive option for a Landlord given the succession rights carried by some AHA 1986 tenancies.

For more information on farm diversification or any other farming or agriculture matter, contact our legal expert Jacqueline Barr at Pearsons & Ward who will be able to give you specialist advice. Telephone 01653 692247 or email jacqueline.barr@pearslaw.co.uk