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When standing still’s not an option — the diversification opportunity

With Brexit fast approaching — and indeed declining direct support for many farms also pending — it’s arguably never been more important for farmers to find ways to generate extra income streams to keep farms sustainable.

Interestingly, a recent NFU Mutual report said more than a quarter of Scotland’s farmers plan to diversify to survive after Brexit and, the good news is, despite challenges including lack of time and unreliable broadband, that more than 94% of existing farm diversification schemes are successful.

With that in mind, what are the opportunities and challenges for tenant farmers and owner occupiers?

Tenant farmers

The Agricultural Holdings (Scotland) Act 2016 — with reduced grounds for landlord’s objection and a shift of onus onto the landlord to actively object to a proposed diversification — has theoretically made it easier for tenants to diversify.

That said, tenant farmers do face challenges, particularly when it comes to accessing funding for a project without being able to leverage owned assets.

Interestingly though, I recently attended the launch of the agritourism monitor farms where we heard new funding streams for similar developments may become more available again, and that some funding remains available through LEADER, depending on where the farm is.

Improvements to the holding?

Another issue is whether diversification works would be considered improvements to the holding and, if so, whether they need landlord consent. If so, the process for intimating tenants’ improvements remains the same.

That said, should improvements have been made historically, it may be worth considering whether the tenants’ improvement amnesty period, in operation until June 2020, can be used.

The amnesty is an opportunity for landlords and tenants to agree on a list of improvements contained in schedule 5 of the Agricultural Holdings (Scotland) Act 1991 that are eligible for compensation at tenancy termination, even though the proper procedures for notifying and recording the improvements may not have been followed.

Rent review

The amnesty provisions are set up principally to deal with the issue around waygo, but there is increasing likelihood that the content of an amnesty agreement prove useful in any future rent review.

The future method of rent review is still under review, but the 2016 act provides it will be based on what both the value of the property and how much landlord’s fixed equipment and land used for non-agricultural purposes might be let on the open market.

With the complexity in financial ramifications of diversification on a tenanted farm, the best practice remains early and open communication with the landlord.

Owner occupiers

Whilst owner occupiers do not have to face the complexity of negotiation with landlords in any diversification, other challenges arise, and apply to both tenanted and owner occupied proprietors.

  • Planning issues — navigatingthe legal minefield of planning law can make or break a project, so it is worth getting professional advice early on to ensure the viability of a diversification initiative.
  • Funding issues — whilst owner occupiers can lever debt against a property and obtain access to funding, great care must be taken over the business structure and how best to attract this funding without jeopardising the main farming business. Again, assessing the position at the outset is key to long-term success.

Both tenants and owner occupiers need to be mindful of the legislative landscape, and factor it into the business plan. Take the example of GDPR, the new European data protection regime. It presents another challenge for many businesses that uses databases for both the promotion of their diversified enterprises as well as for attracting repeat business.

In short, there are plenty of opportunities for all types of farming businesses, even against the backdrop of a challenging economic and political climate; however, the underlying principle of a keen business eye for the legal and accountancy aspects of diversification is key and so, as always, is building a team of trusted advisors from the outset to give any diversification project the best chance of success.

A shorter version of this article appeared in The Courier on 4 March 2019.

Linda Tinson

Stirling-based Linda is our head of rural, land and business. She has vast experience in all aspects of business in the rural and agricultural sector. She has a strong background in property, including purchasing and sales, advising on security transactions, property development and tenancy issues. She also has experience in family business and personal succession planning.

Posted, 07 March 2019 by Linda Tinson
Categories: Private client | Rural