Advice for tenant farmers considering diversification

Changes in support payments and tough trading conditions mean many farmers are considering diversifying, but tenant farmers have an extra hurdle to clear before embarking on any project.

Agricultural tenancies usually permit the tenant to use their holding for agricultural purposes only, so the landlord’s consent must be obtained before they can undertake any diversification activity.

Farmers Weekly spoke to Adriana Vaux, rural surveyor for the Tenant Farmers Association (TFA), to get some advice.

See also: Advice and tips on common issues for tenant farmers

What is the process for asking permission?

In 2021 the Tenancy Reform Industry Group (Trig) published the Code of Good Practice for projects, schemes or works requiring landlord’s consent in agricultural tenancies.

This provides a good, suggested process for both parties.

A first step always should be to check the terms of the existing tenancy agreement, so you are aware of the parameters you are working within.

Tenants are then advised to approach their landlord as soon as is practical and arrange a meeting to discuss the proposal in broad terms, together with the potential implications and benefits for the landlord and the tenant.

At that meeting, landlord and tenant should agree what information needs to be provided to support the tenant’s proposal or request for consent.

Levels of requested information can vary hugely, from a simple discussion of the proposed diversification through to a comprehensive business plan with budgets.

However, the Trig guidance points out the amount of information requested should be proportionate to the proposal concerned.

There should also be discussion about how the costs arising from preparation and consideration of the detailed proposal are to be dealt with, and once agreed this should be confirmed in writing.

The TFA advises that tenants should always put their request for consent in writing and if an agreement is reached verbally, ask for that in writing, too.

Often tenants are afraid to rock the boat and ask for things which should be a standard procedure, says Adriana.

“Without anything in writing it is not an agreement and therefore the terms of the tenancy are legally binding.”

The TFA frequently comes across cases where tenants have relied on the word of the landlord and their agents, who then change their mind.

“This happens so regularly and every time it’s just as hard to listen to.”

For example, a problem which the TFA frequently encounters is that of new entrants tendering for a farm based on implementing a diversification, which is in their business plan or raised during verbal discussions.

However, the landlord or their agent do not allow this to be written into the tenancy or they tell the tenant they will add it later.

“This doesn’t ever happen, so the tenant is yet again left in a position where they cannot make the holding earn what was first anticipated, causing financial stress which in turn creates a really unhappy and stressful situation.”

How easy is it in practice to get permission from a landlord?

A landlord cannot be forced to grant consent for non-agricultural diversifications, it has to be a negotiated agreement.

Adriana warns that many tenants find that getting permission is not easy and the TFA feels that many landlords or their agents are too focused on what they can get out of the tenant and take an unreasonable stance.

“We see this in the form of proposals that consent for diversification will only be given if a tenant agrees to, for example, share 50% of turnover [with the landlord],” she says.

“The issue with this is that often the diversification requires a huge amount of investment by the tenant and therefore a proposal like this is not only ludicrous, but totally impossible for a tenant and their family to survive.

“The tenant ends up having their wings clipped before they have even begun, as they cannot either start or progress a business which would see their family do well.”

It is a problem that seems to be getting worse, adds Adriana, who says landlords’ agents are getting “more aggressive, more commercialised, less empathetic and generally creating issues where there needn’t be any”.

They are frequently seeking a large share of the turnover or profit or proposing that the tenant can only do the diversification for a set time, rather than for the rest of the tenancy.

The TFA suggests an option would be to strike a deal on the basis of a percentage of net income received, rather than what is in theory “receivable”, but always taking into account the balance of input and risk between landlord and tenant.

Before entering into any discussions, it is important to have thought about the proportion of income a tenant might be prepared to share with the landlord in return for being granted consent, and alongside any investment or risk being borne by the landlord.

Farming landscape

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Are there any common diversifications which don’t need specific permission from the landlord?

The majority of tenancy agreements have a specific user clause within the tenancy, which determines what activities are allowed.

Some are as very narrow, for example, dairy only, but the vast majority are for agriculture.

Anything outside of these parameters is not allowed under the tenancy and needs specific permission.

In practice, what tenants can do is very limited because even if they think they can diversify slightly within agriculture, such as allowing people to come and buy eggs from the farmgate, they could be hit by another clause within the tenancy which prevents sales, or parking or the general public from entering the farm for that purpose.

It is therefore very difficult for any tenant farmer to diversify in any way without the consent of the landlord.

What happens if tenants diversify without permission?

Diversifying without consent can have huge repercussions for the tenant as it is a breach of the tenancy agreement.

This can result in notice to remedy for Agricultural Holdings Act 1986 tenants, potentially followed by a notice to quit.

For someone with a farm business tenancy (FBT), it can result in the landlord initiating forfeiture proceedings to recover possession due to the breach of tenancy.

What else should tenants be aware of?

The TFA says it comes across many cases where the carrot of diversification consent is used to try to force AHA tenants to move to an FBT.

“This is often under the guise of ‘making the transaction tidy’ or ‘formalising the arrangement’ or I have even heard it be told to tenants that because they are on an AHA which cannot be changed they need to ‘switch to an FBT to enable diversification to take place’,” says Adriana.

“As long as the holding remains predominantly agricultural, it is perfectly possible for a landlord to grant consent for diversification under an AHA tenancy either by memorandum or licence.”

There are also instances where consent to diversify has been given, but later when the tenant needs to expand and grow, the landlord will not grant consent for further investment.

Without these consents the tenant sometimes cannot carry on, as they need to grow to make enough money or they are always limited in what they can do.

Are there any changes on the way to make it easier for tenants?

A consultation has recently closed on a new code of practice for landlords, tenants, and their professional advisors, to help encourage more collaborative tenant-landlord relationships.

It is hoped that improved communication and clarity between parties could lead to more positive outcomes when it comes to diversification requests.

In its response to the recommendations of the Rock Review on tenant farming in England, the government has also said it will ask the new Farm Tenancy Forum to explore a recommendation on whether legislative changes are needed to better enable tenants to diversify their businesses without the landlord unreasonably refusing consent. 

Reasonable grounds for landlords to withhold consent

According to the Trig code of practice there are grounds where it would not be deemed unreasonable for the landlord to withhold consent. These include:

  • Where the proposal would be detrimental to the landlord’s own business interests, including the loss of tax reliefs if a diversification proposal made valuable land non-agricultural
  • If it would substantially interfere with the enjoyment of the landlord’s own retained land – for example, if a proposal involves attracting visitors in a way that might interfere with the landlord’s sporting activities
  • Where the granting of the landlord’s consent would result in the landlord being in breach of a covenant for quiet enjoyment or other covenants in relation to other tenants, occupiers or interested parties
  • Where the proposal, in the reasonable opinion of the landlord, is not considered viable or not materially different from a previous unsuccessful request
  • 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.