Last Autumn we identified that the draft Agriculture Bill created potential issues which needed to be negotiated and recorded in new farm business tenancies (FBTs) even though the Bill was still making its way through the Houses of Parliament. At that stage the only guidance on timing was the proposed transition period of 7 years from 2021, by the end of which we would have moved from the Basic Payment Scheme to the new Environmental Land Management Scheme (ELMS). This meant that landlords wanting to be sure to avoid the potential of being left without subsidies for a number of years had two options: grant a very short FBT (to wait for more details) or grant a 9 year FBT or more.
With the publishing of DEFRA’s latest Brexit guidance we now have some welcome guidance for English FBTs:
These details provide critical help with the negotiation and drafting of FBTs in a number of ways:
An FBT, granted now, is most likely to come to an end, during the transition period between the Basic Payment Scheme and ELMS, either by expiry of the term, or by the exercise of a break clause in the agreement. If delinked payments and possibly also lump sums become available to tenants during the term of an FBT, a landlord risks being left with “naked acres” (ie without subsidy) for a number of years from 2021 until ELMS is up and running. This obviously assumes that the landlord “owns” the current BPS entitlements and they are taken into account in the level of the rent. The confirmation by DEFRA that delinking and lump sums will not start before 2021 and that ELMS is intended to start in 2024 allows us to work out more accurately the potential risk and cost to a landlord of being left with “naked acres” for a number of years.
A landlord can also take this information into account when choosing how long an FBT to grant; a five year FBT (or longer) should carry the landlord through to the start of the new ELMS scheme, thus avoiding the risk of unsubsidised years; alternatively a break clause in 2025 in a longer 15 year FBT would also enable a tenant to get out of the tenancy, if the subsidy available under ELMS alters the whole financial basis of the business.
From a landlord’s perspective, they should beware of tenant’s break clauses, which could be triggered between 2021 and 2023 as this could leave the landlord with naked acres and no access to ELMS for one or more years.
The DEFRA guidance also provides details of the cuts which are to be made to BPS payments over the coming years to fund the setting up of the new ELMS. The guidance also confirms that new Countryside Stewardship agreements will continue to be offered until 2020 and there will be a cross-over between Countryside Stewardship and ELMS. As we move towards a payment for environmental outcomes approach, landlords and tenants may be well advised to consider options available under the Countryside Stewardship to make up the shortfall in BPS subsidies and to prepare for ELMS. This should be reflected in the drafting of any new FBT.
Obviously all of this is subject to what happens over Brexit over the coming weeks and also subject to the current Government remaining in power and the Bill not becoming a casualty of the impending prorogation of Parliament – all of which are completely up in the air. Landlords and tenants negotiating an FBT should be aware that relying on DEFRA’s guidance on dates could change if there is a change of Government or the Bill gets postponed until the next session of Parliament and will definitely change if Brexit does not happen at all!
Two steps forward, one step back!
Michelmores are looking forward to putting on another Agriculture Roadshow, between 3-7 February 2025. Following the success of our tour last year, we are going...
