Natural Capital and Agricultural Tenancies

Back in June 2020 we posted a blog entitled ‘Natural Capital: Why rural business need to take stock’. Legislation since that blog, triggered by the exit from the EU and the need to halt climate change, means that Farmers now have to deal with issues such as sustainable farming and carbon credits.

The government continues to promote Natural Capital as a financial opportunity for farmers as the Basic Payment Scheme is phased out. (It is however conceivable that the Government may have to U-turn on some schemes as the cost of living and food prices continue to rise and the government looks again at increasing food production in the UK to reduce its dependency upon imported food products).

As with diversification this increasing emphasis upon Natural Capital has highlighted the deficiencies in many farmers’ tenancy agreements. Many of the tenancy agreements were negotiated long before the change of policy regarding the Basic Payment Scheme and most of the previous schemes for environmental support, let alone these latest proposals.

User clauses restricting activities to agricultural purposes may rule out participation in some schemes, and that is without consideration being given to whether certain carbon sequestration activities are even within control of the tenant under the tenancy, given some schemes require long term commitment beyond the length of the tenancy. Agricultural Holdings Act Tenancies (AHA) are, despite the security of tenure, usually expressed to be from year to year and Farm Business Tenancies (FBT) are rarely granted for periods in excess of 10 years.

Furthermore, landlords are being advised to be cautious as they themselves don’t know how much schemes will evolve. As such, most new FBT’s contain an express prohibition on tenants entering into any Natural Capital projects and give the landlord the ability to regain possession to enable them to take over. At this stage we are in the dark as to how farms are to be assessed given that there are a number of carbon calculators currently on the market and on tests each have given different results.

As schemes develop, the scenario for both landlords and tenants should become clearer. That said, any farmer either landlord or tenant should take advice from both their Land Agent and Lawyer prior to entering into any current scheme on offer and, either they be granting or entering into a tenancy agreement.

For a review of your tenancy agreement, contact our Agricultural and Rural Affairs Team on 01606 334309.