Our agricultural landscape, both physical and economic, is changing rapidly on many fronts.
There are a number of differing factors at play. Since our departure from the European Union, we have seen the largest overhaul of farm incentives in a generation. Meanwhile, farmers are experiencing squeezed wholesale prices, managing the challenges of extreme weather, and adapting to the changing dietary preferences of consumers. Little wonder that the scale of diversification in our rural businesses is becoming ever greater and more complex.
The Department for the Environment Food and Rural Affairs’ most recent Farm Business Survey reveals that 68% of farm businesses were engaged in some form of diversified activity in the year 2021/22. That diversification can take many forms. It is far from uncommon to see rural businesses operating a campsite alongside a farm shop. It may be investing in habitat enhancement – with the dual purpose of producing environmental benefit and offering leisure opportunities for tourists. We are even seeing increasing numbers of energy schemes, including the production of timber for biomass and the use of agricultural land for ground-mounted solar energy generation schemes (and the cable strips required to connect them to the grid).
What does this mean for farmers and landowners?
Some 61% of farm businesses that responded to Defra’s Farm Business Survey were tenants of at least some of the land occupied by their farm business. Farmers who tenant land may assume they can change their land use in order to diversify their businesses either in whole or in part. However, that is not necessarily the case. Of course, most leases restrict the user of the land to a particular use. Often that is “the use of the land for agriculture”. If the provision is phrased as a restriction on other uses, then the tenant is restricted to that precise use.
Importantly, there is no covenant implying a requirement for the landlord to act reasonably in deciding whether to grant consent for a change of use. The question of reasonableness will only be relevant if the covenant itself requires the landlord to be reasonable, ie consent to change of use “not to be unreasonably withheld”. If the landlord is contractually required to be reasonable then it may not be able to object to the tenant farmer’s proposed diversification. What is reasonable depends on the particular circumstances as well as the drafting of the particular lease. Some guidance has been provided in the Tenancy Reform Industry Group Code of Good Practice. This code (published on behalf of TRIG by the RICS) sets out the following circumstances in which it will be reasonable for the landlord to withhold consent:
- Where the implementation of the proposal would be detrimental to the sound management of the estate of which the land consists or forms part, or other land and property belonging to the landlord. This includes where the granting of consent results in the landlord being in breach of covenants with other tenants/occupiers.
- Where the project, in the reasonable opinion of the landlord, would substantially interfere with the quiet enjoyment of retained rights over the land.
- Where the proposal, in the reasonable opinion of the landlord, is not considered viable (for example, where the proposals do not provide an adequate return and could prejudice the landlord’s interests).
- Where the proposal would cause the landlord to suffer undue hardship.
- Where insufficient consideration has been given to the issues where implementation of the proposal would result in all or part of the holding ceasing to be under the Agricultural Holdings Act 1986 or the Agricultural Tenancies Act 1995.
- Where the tenant is in material breach of the existing tenancy agreement and the matter has been brought to the attention of the tenant prior to the submission of a proposal for diversification.
- Where the tenant has failed to adhere to the code.
- Where an application is not materially different from a previously unsuccessful application.
It will be necessary to consider whether there are covenants other than user which are relevant. Often, agricultural tenancies contain requirements to comply with restrictive covenants in the headlease. Such covenants could well restrict the possible user of the land. Additionally, there may be covenants as to how the land is to be farmed, including what fertilisers should be used, when and how. Such covenants are designed to ensure the agricultural value of the land is maintained, but may not sit comfortably with any change of use.
Likewise, it is necessary to consider the planning position. Most tenancies will include a covenant by which the tenant agrees to comply with statute. Using the land for a purpose which is not permitted by planning permission could represent a breach of such a covenant. Conversely, obtaining planning permission for a non-agricultural use could have an impact on the value of the landlord’s reversionary interest. Such covenants will require careful consideration and, in all likelihood, a negotiation between landlord and tenant to ensure that the rights of both parties are effectively balanced.
If, as is often the case, the land permits use only for agricultural purposes, what does that mean for the tenant?
Most likely under a tenancy protected under the 1986 Act or the 1995 Act, the word “agriculture” or “agricultural” in the lease will be given the meaning attributed under that legislation, namely “horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes”. This is not an exhaustive definition and indeed the growing of crops (the commonest form of agriculture) is not listed.
Does a change of use pose a risk to the landlord?
The concern for a landlord could be twofold; if the change of use affected the nature of the tenancy and/or if there was an unwelcome impact on rent.
While changing the use on the land could change the nature of the tenancy, in practice that would rarely be the case. The reason is this: if a tenant has a tenancy under the 1986 Act, that will carry security of tenure and could well carry succession rights. That form of tenancy is less valuable to a landlord in the sense that it is often difficult to recover possession unless the landlord is proposing to redevelop the land for non-agricultural purposes and has a planning permission to support that. There are, of course, other grounds for possession, but the one mentioned is a common one for commercial landlords.
If, for any reason, the tenancy (through a permitted change of use) has in fact lost its 1986 Act status, from a landlord’s perspective that may be better – either the tenancy may have no protection at all, or it may acquire the protection of the Landlord and Tenant Act 1954. The 1954 Act carries security of tenure, but in very general terms it is often easier to recover possession (as a landlord wishing to redevelop) and it does not have succession rights. Alternatively, if the tenant has a tenancy under the 1995 Act (known as a farm business tenancy) then that tenancy cannot revert to a tenancy under the 1986 Act. A change of use could mean a total loss of statutory protection, or again, it could mean a tenancy under the 1954 Act arising. While the latter could be deemed “worse” for a landlord, not least as 1995 Act tenancies do not have the benefit of security of tenure, the chances of an FBT transforming into a 1954 Act tenancy are slim. This is because of the definition of an FBT: to be an FBT, the “business condition” must be met and then also either the “notice condition” or the “agriculture condition”.
Could a change in use result in a reduction in rent?
The answer is always “no” if there is no rent review mechanism. If there is an opportunity for review, that review would generally take into account all permitted uses under the lease. Therefore, the rent would be the same whether the use changes within the parameters of the user clause or not.
What about diminution in value as a result of the change in use?
That is a question for a valuer not a lawyer, but certainly if the tenant farmer was only entitled to change use with landlord’s consent, such consent not to be unreasonably withheld, one consideration would be diminution in value. Generally speaking, the landlord would need to show more than a paper loss to be able to withhold consent on this basis.
Where does that leave us?
Perhaps in a place where tenants can diversify without too much concern for landlords. Given market pressures, some diversification could be a win-win. Landlords have thriving tenants able to pay the rent, and tenant farmers can expand, hedge against a changing market and, put simply, run a more viable business.
Lisa Barge is a partner and head of commercial dispute resolution and Rob Phillips is a partner in real estate litigation at Eversheds
