Guidance on Farm Diversification

INTRODUCTION

This guidance note is concerned withbusiness diversifications which are outside the scope of agriculture but are farm-based. It covers:

  • Principles of Diversification on Tenanted Land
  • Preparing for Diversification
  • Landlord’s Consent
  • Landlord’s Reponses and Notices
  • Good Practice in Diversification
  • Resolution of Disputes

PRINCIPLES OF DIVERSIFICATION ON TENANTED LAND

Agriculture is defined as including: horticulture; fruit growing; seed growing; dairy farming; livestock farming;the use of grazing land and meadow land; willow coppicing; market gardeningand nursery grounds; and woodlands, where that use is ancillary to farming the land for other purposes. Therefore, this guidance refers to diversification activities that are outwith these categories of activity.

Under the provisions of Part 3 of the Agricultural Holdings (Scotland) Act 2003 (sections 39-42) a tenant is permitted to use part or all of a holding for non-agricultural purposes, subject to certain conditions. The land does not cease to be subject to the agricultural tenancy because of the diversification project (section 39 (1)). Additionally, any condition in a lease which prohibits the use of land for non-agricultural purposes or prohibits subletting is not enforceable so long as the sublet is ancillary to the diversification project.

There is no reduction in the rent of a holding if a diversification reduces its rental value. However, the rent can be increased if the project increases the rental value (see Agricultural Holdings (Scotland) Act 1991: Section 13 (7) (b) (ii)) and Section 7 (A).)

PREPARINGFOR DIVERSIFICATION

All diversifications should be based on a sound and properly costed business plan, taking accountof the challenges as well as potential advantages of moving into a new area of business. Depending on the circumstances, there are many practical issues which may need to be considered, including the following

Planning issues: Whilst agriculture is treated advantageously within the planning regime diversification projects may be treated as non-agricultural development.

Property and access issues: Where a property is accessed through a private road or a shared access, change in use or increased access needs to be considered. Similarly, wayleave or other access requirements need to be taken into consideration.

Rating: Agriculture benefits from some advantages under the rating system but these may not apply to diversification projects, and may lead to a part of the farm being brought within the Valuation Roll and subject to payment of Business Rates.

Environmental legislation: Some diversification activities may be subject to environmental regulations that do not apply to agriculture.

Food legislation: Diversifications involving food processing or manufacturing fall under specific regulations and may require additional training and qualifications for personnel.

Operating licences: Some types of diversification may require specific operating licences.

Health and Safety: Some diversification projects will require specific health and safety training for personnel, and possible adjustments to employment contracts.

Taxation: Income tax and inheritance tax issues need to be considered. These may influence whether it is more advantageous to operate the diversification within the farm tenancy or to establish it under a separate lease arrangement.

LANDLORD’S CONSENT

If a tenant wishes to diversify his business he must first notify the landowner in writing not less than 70 days before the date on which it is proposed to commence diversified use. This written notice must contain the information prescribed in the Agricultural Holdings (Scotland) Act 2003, as follows.

  • Thenon-agricultural purpose of the diversification.
  • The land to be used.
  • Any changes to the land which are proposed; and how the changes to the land or business proposed are to be financed and managed.
  • The proposed start date of the project.
  • Whether there will be any significant loss of amenity of the land or surrounding area and if so how is it going to be addressed.
  • Whether the project will substantially prejudice the use of the land for agricultural purposes in the future.
  • Whether the project will be detrimental to the sound management of the estate of which the land forms part. (Sound management is not legally defined but is generally interpreted to mean better management or improvement of land.)

LANDLORD’S RESPONSES AND NOTICES

On receipt of a diversification notice a landlord has four options.

He can accept the proposal.Under these circumstances the project may proceed at the start date given in the tenant’s notice (i.e. a minimum of 70 days after the notification has been served). If there is no response from the landlord he is deemed to have accepted the proposal.There is an exception to this in cases where the diversification involves planting trees: in that case a positive response from the landlord is required before a tenant may proceed.

He can ask for further relevant information. This must be done within 30 days of receiving the tenant’s notice and in that case the tenant has 30 days to supply it. When that information is received the landlord has 30 days to request additional information (and this process can be repeated).

He can accept the proposal subject to reasonable conditions. These conditions have to be notified to the tenant within 60 days of the later of (a) the date of the tenant’s notice being submitted or (b) of the date of the last request by the landlord for relevant information.

He can object to the proposal. However, this must be donewithin 60 days of the later of (a) the date of the tenant’s notice being submitted or (b) of the date of the last request by the landlord for relevant information. Objections to the diversification may only be made on the grounds that are set out in the Agricultural Holdings (Scotland) Act 2003, as follows.

  • That it would significantly reduce the amenity of the land or surrounding area.
  • That it would substantially prejudice future use of the land for agricultural purposes.
  • That it would be detrimental to the sound management of the estate of which the land consists or forms part.
  • That the financial viability of the project has not been demonstrated in the tenant’s notice.
  • That the project would cause the landlord undue hardship. (Undue hardship is not defined but would normally relate to the personal circumstances and future plans of the landlord, and would need to be material.)
  • If the tenant fails to provide relevant information reasonably requested within the 30 day limit that applies.

GOOD PRACTICE IN DIVERSIFICATION

Since it will enhance the viability of the tenant’s business both the tenant and the landlord have an interest in a successful farm diversification. They also share an element of associated risk, and for the landlord the diversification may have implications forother business or other activities within his estate or land holdings.

It is in the interests of the tenant and the landlord for each to feel confident and content about thediversification proposed. This can be helped by adopting the good practices, as follows.

Initial preparation:Tenants should consider in depth the nature and detail of the diversification proposed. Different diversifications may be considered before the preferred option is selected. In thisprocess tenants should take account of potential limitations on the diversification that might arise because of the location or characteristics of their holding or adjacent landlord’s holdings.

Pre-notice discussion: When a tenant has determined what diversification he would like to pursue a pre-notice discussion meeting with the landlord is recommended. This should be designed to advise the landlord what the tenant is considering and to elucidate the landlord’s initial thoughts on the proposal. It should also consider, the period before a diversification notice will be submitted.Landlords should use this pre-notice discussion to raise any issues relating to the proposal that are likely to lead tolater objections or the potential imposition of conditions.

Mitigation:Both parties should also seek to explore any mitigation that might make a particular proposal more mutually acceptable. They should seek to be open and transparent about subjects on which there may bepersonal or business divergences of interests, including where each party is considering similar typesof diversification or mutually incompatible diversification proposals. These discussions should be designed to reflect a mature business to business relationship, recognising the need to find mutually acceptable resolutions.

Diversification notice:Based on the developed plans for diversification and pre-notice discussion the tenant should submit to the landlord a diversification notice providing all the information required for the landlord to make a clear decision about the diversification within the required 60 day period. The details provided in the notification should take full account of the landlord’s need for information on which to plan his own business, and should pay particular attention to topics which have been raised in the pre-notice discussion or which are likely to be contentious.

Commercial confidentiality:In cases where the diversification notice may contain commercially confidential information or commercial or intellectual property, the two parties should establish a confidentiality agreement to protect both the tenant’s and landlord’s business interests.

Legal and financial awareness: Diversification projects have potential implications for both tenant and landlord and there needsto be a shared understanding of the legal and financial implications of any proposal. There are, therefore, matters of which both parties should be aware.

  • There is no legal obligation on a landlord to assist a tenant’s proposed diversification project buta successful diversification may increase the viability of the holding and bein both the tenants and landlords interests.
  • There is no legal obligation for the landlord to grant servitude, wayleave or other rights which may be required to enable the project to proceed: agreement on such matters needs to be negotiated.
  • The Local Authority may require a ‘Section 75 Agreement’ to be entered into so that planning conditions are met and the diversification project can proceed. The landlord needs to be a party to such an agreement butthere is no legal requirement on him to accept such an agreement: his acceptance will need to be negotiated.
  • A tenant may need to comply with a range of planning, health and safety, food hygiene, licensing, insurance and other requirements, depending on the nature of the diversification project. The tenant needs to ascertain whether the landlord’s agreement or consent is needed for any of these purposes: his acceptance will then need to be negotiated.
  • Subletting by a tenant is permitted,despite any prohibition of subletting in the farm lease provided the sublet is ancillary to the tenants use of the land for non-agricultural purposes (see Agricultural Holdings (Scotland) Act 2003, Section 39 3(a) and (3b)).
  • The legality of a sub-let will vary on a case by case basis. For example, subletting a cottage to a manager of a diversified farm shop might be deemed ancillary to the diversified business, whilst the subletting a cottage of itself would not be deemed a valid diversification. Tenants should seek advice on what is permissible or negotiate and agree resolution with their landlord.
  • Landlords should ascertain whether the diversification will have any implications for their own liabilities and/or requirements for insurance.
  • The landlord’s Inheritance Tax position and their ability to claim Agricultural Property Relief (APR) may be affected if a diversification project affects all or part of a holding and significantly alters its agricultural character and use.
  • Even if a lease contains a resumption clause, it does not empower the landlord to resume the land in respect of which a tenant is planning to undertake a diversification project, and landlords should avoid any action that might be construed as ‘fraud on the lease’.

Maintaining good relationships: Throughout a project both tenant and landlord should seek to maintain good working relationships. Whilst, in the ultimate, a significant disagreement or dispute may be taken to the Scottish Land Court for resolution that process will incur costs on both sides and is unlikely to facilitate good long-term relationships.Also, where a diversification project is agreed, with or without conditions, the tenant should seek to minimise the disruption to neighbours, for example during any required construction work.

RESOLUTION OF DISPUTES

Except in the case of planting or cropping of trees, the landlord is deemed not to have imposed conditions or to have objected if he fails to give notice within 60 days of the date of submission of the tenant’s diversification notice.

However, where the landlord has imposed conditions or raised objections or where the tenant considers a diversification proposalis being delayed by unreasonable requests for additional information or by differences between parties in interpretation of the law, the tenant and the landlord may be in dispute. There are a number of ways to address this (See TFF Guidance on theResolution of Disputes in Tenant-Landlord Relationships).

However, in the ultimate, a tenant may apply to the Scottish Land Court if he is in dispute with his landlord about:

  • any conditions imposed by the landlord;
  • any objections raised by the landlord;
  • any action by the landlord which is considered to be unreasonable under the provisions of the law, including unreasonable repeated requests for additional information.

On application by the tenant, the Scottish Land Court has the power to set aside any or all of the landlord’s conditions or the landlord’s objections to the diversification which they deem to be unreasonable or to address matters of application of the law. The Court may also impose any reasonable conditions they deem to be appropriate.

TFF, 16-7-13

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