The agriculture industry is facing more uncertainty than many other industries following the Brexit vote; the potential loss of some, or possibly all the subsidies, on which many farm businesses rely is a very real threat, not just in the long term, but within the next five years.
Although many farm business tenancies are granted on a relatively short term basis, many other farm business structures (contracting, share farming, partnerships etc.) are intended to last several years, if not decades, to allow for proper investment and growth in the business. Whatever business structure is being negotiated, it is very difficult in the face of such financial uncertainty to conclude a sensible commercial deal, which takes into account the likely income of the business over the whole length of the arrangement.
So the parties inevitably need flexibility to allow for a renegotiation or adjustment of terms, once the shape of future agricultural policy becomes clearer. Without this flexibility one or other party could find themselves locked into an arrangement, which is no longer financially viable, or unable to access valuable farming or environmental subsidies in the future.
This flexibility, or “Brexit-proofing” comprises a variety of measures, which need to be considered whenever a new tenancy, licence, contracting agreement, partnership, share farming or other farming arrangement is negotiated.
Brexit-proofing must not only anticipate the terms of a future UK agriculture policy, but must also cover any interim transitional phase, which may take effect whilst a long term policy is developed.
The most straightforward form of Brexit proofing is a “get-out” or “break” clause, which leaves the parties free to renegotiate the terms, and in particular the financial basis, on which they operate. The provision must state whether either or both parties will have the right to break, the date when that break can be effected and how much notice must be given. The period of notice for some agreements is imposed by statute; for example more than 12-months notice must be given under a farm business tenancy granted for more than two years. For other types of agreement the parties are free to choose the appropriate notice period.
Appropriate break points must be selected; in light of the Government’s commitment to fund farm support at current levels until the end of this Parliament, agreements may need to allow for annual breaks over this period in case an earlier election is called or in case there is a fundamental shift in the way farm support is allocated before 2022.
The break clause can be unconditional (i.e. exercisable for any, or even no, reason) or it can be conditional (i.e. can only be exercised if the conditions are fulfilled). The disadvantage of imposing a condition is that it is difficult to anticipate the break event and legislate for it with sufficient precision. For example, if the break clause is exercisable on the abolition of the Basic Payment Scheme, what will happen if the scheme is not actually abolished, but morphs into a scheme, which provides an entirely different level of funding? If a condition is imposed and is subsequently challenged, the Court will apply a strict interpretation to the question of whether the condition has been fulfilled.
In some arrangements, however, one or other party may not want the possibility of the agreement being terminated so soon. Other forms of flexibility and protection are therefore required.
Depending on the type of agreement and who receives any subsidies paid for the farm, a provision allowing for a review of rent, licence payments, contracting fees or division of profits etc. may well be appropriate.
If subsidies are to continue in some form or other, provisions will be needed to address the submission of claims under the relevant schemes and compliance with the relevant rules. New schemes may require an annual application (i.e. similar to the Basic Payment Scheme) or may entail a one-off application (akin to some of the Agri-environment schemes).
It is possible that some new form of entitlement or right to subsidy will be created to limit the amount each farm business can claim. Whenever such allocations have been made in the past, we have seen an allocation based either on previous entitlements, previous production or an application. Depending on the type of arrangement in question provisions are therefore needed to cover all these bases to procure the maximum allocation to the party managing and/or farming the land. Once allocated, protection clauses may be needed if the new subsidy rights are agreed to be preserved for the benefit of the farm.
The most complex issues often arise at the start and end of a new arrangement; the grant of a new tenancy, the surrender of part of a holding, the creation of a new partnership, the appointment of a new contractor etc. All subsidy schemes impose conditions, with penalties applied for their breach. When a farm changes hands, there are invariably periods of time during which the party in receipt of the subsidy is not in control of the land. If the conditions of the scheme relate to the use and/or management of the land, there is a risk of non compliance by an outgoing or incoming occupier. This leaves the claimant at the beginning and at the end of the arrangement vulnerable and in need of indemnities (i.e. promises to reimburse losses) from the outgoing or incoming occupier or land manager to cover this risk.
Over the last 15 years it has become commonplace to see clauses which essentially commit the parties to reach agreement regarding ownership and use of any new types of payment rights, which may be allocated under a new subsidy scheme during the tenancy. Failing agreement, the terms are then often referred to arbitration for determination. As a general legal rule “agreements to agree” are unenforceable. The parties are always free to reach agreement over new subsidy rights; a tenancy agreement or other legal agreement needs to prescribe what will happen if they cannot agree. References to arbitration at this point will incur considerable time and expense and arbitrators can sometimes make unexpected determinations. They could also encourage one or other party to refuse to agree, simply to negotiate a better deal at the time of allocation. Therefore it is highly likely to provide more certainty and to save considerable cost, if careful drafting anticipates the creation of future subsidy rights, rather than risking arguments about the enforceability of agreements to agree.
Brexit looks likely to provide UK agriculture with a once in a generation opportunity for fundamental reform to the way the industry is subsidised. The UK Government has for many years argued against direct payments, so if time and resources permit, we can anticipate a major shift in approach. In Brexit proofing legal agreements, it is therefore critical that any drafting encompasses all types of new subsidy arrangements, whether linked to traditional farming, environmental outcomes or any other aims and whether allocated in the form of subsidy payments, credits or limits of any type; it is time to think outside the box!
For more information please contact Ben Shaprles in our Agriculture team on ben.sharples@michelmores.com or +44 (0)117 906 9303.
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