Farm diversification has been widely assumed in the rural sector as a means of improving the sustainability of farms and supporting the income from the existing agricultural businesses. Research conducted by NFU Mutual in December 2019 suggests 48% of farmers were planning to diversify or to further expand their diversification enterprises.
There are a number of factors to be considered before diversifying, including what to diversity into, how it will be funded and whether training is required. For tenant farmers, they also require their landlords consent.
One of the principles underpinning agricultural tenancies is that the tenanted land (the Holding) must be used for agricultural purposes. Agricultural purposes include arable crop growing, dairy farming, livestock breeding, fruit and seed growing and use as grazing land. Furthermore, it is common for agricultural leases to prohibit the use of the Holding for any other purpose. Diversification is by its very nature the use of the Holding for a non-agricultural purpose. Where it is prohibited, an agreement must be reached between the landlord and tenant before any diversification takes place. Failure to do so could result in the tenant breaching the terms of their lease.
The Tenant Farming Commissioner (“TFC”), a role introduced by the Scottish Government in 2016, has recently released new guidance to assist landlords and tenants in reaching agreement on changing the use of a Holding. It is important however that the correct procedures are followed in reaching the agreement. In summary:-
Not less than 70 days before diversifying, the tenant must send a written ‘notice of diversification’ to the landlord. It must confirm:
- What the non-agricultural purpose is;
- The land that will be used for the purpose;
- Any changes that the tenant plans to make to that land;
- The proposed start date of the activity.
The tenant should also include a business plan and an indication of how the activity will be managed and financed. The more information the tenant can provide, the better, but the landlord can, within 30 days of receiving the notice, request further information from the tenant and the tenant must comply with any reasonable request within 30 days. Once the information is provided, the landlord has three options:-
1. They can object on one of three grounds:-
- They reasonably consider the intended use of the Holding would:
- lessen the amenity of the land;
- prejudice the use of the land for agricultural purposes in the future;
- be detrimental to the sound management of the wider estate which the Holding forms part of; or
- cause the landlord undue hardship.
Where they consider that the proposed diversification will not be viable.
Where the tenant has failed to provide the requested information within the 30 days.
Where the landlord objects, they must first advise the tenant in writing. The onus is then on the landlord to raise the matter in court within 60 days regardless of whether the tenant responds. Failure to raise the action will result in the landlord’s objection failing and will enable the tenant to proceed.. The Land Court may either reject the objection, uphold it or allow the diversification to proceed subject to conditions.
2. They can consent but impose reasonable conditions.
3.They may not respond in which event they are deemed to consent to the diversification and the tenant may proceed.
Where a landlord consents, the tenant should expect it to be conditional upon the landlord sharing in the uplift in income to be generated by the diversification. If the diversification is expected to become significant, the parties may wish to consider removing the land (and any buildings) used for the diversification from the Holding and enter into a commercial lease instead. This may provide both parties with greater freedom to agree terms and may also provide an asset which security can be taken against.
While the time frames set out are tight, any tenant wishing to diversify is encouraged to seek early engagement with their landlord rather than rely on the statutory procedures.
