Diversifying a farm business as a tenant farmer: what you need to know

New income streams from non-farming diversifications can and do make sense when it comes to taking proactive, positive steps to reduce the risks to a farm’s profitability.

For farmers that own their farm, the decision to explore and implement opportunities to diversify is in some ways fairly straightforward.

But what if you are a tenant farmer? James Spreckley, head of the rural sector team at law firm Lodders, explains the considerations of non-farming diversifications for tenant farmers.

See also: The key building blocks for future proofing your farm business

Currently, most farm tenancy agreements contain clauses that require the holding to be used for agricultural purposes only, and therefore specifically exclude diversification without the landlord’s consent. This can leave tenant farmers in a bit of a tricky situation before they even begin to fully explore the idea of diversification, let alone the detail of what kind of diversified business could work for them.

The range of ideas and possibilities is huge, at least in theory, from high capital dependent projects to small scale lower intensity ideas, and even a future in which environmental management of land may be diversification in its own right.

With farming incomes being squeezed, diversification is very much on most people’s minds and the same will go for tenant farmers too.

It’s a point recognised earlier this year by the House of Lords Rural Economy Committee which has called for the government to address restrictions on farm tenancy agreements which prevent tenant farmers from diversifying.

In theory, the farm business tenancy regime does have some scope for allowing diversification, but this will have to be factored in when the tenancy is first negotiated.

Those with tenancies under the older Agricultural Holdings Act regime almost certainly will find these don’t anticipate such wider uses, which means that a landlord is likely to have a complete discretion about agreeing or not.

Here are a few tips for tenant farmers considering non-farming diversification.

Step 1 - Check tenancy terms

Whilst this is just a thought, do check your tenancy terms carefully to establish if the terms are wide enough to allow for diversification.

If it limits the use allowed purely to agricultural purposes, you may have an issue which might mean diversification is potentially not possible, and certainly not without first getting the landlord’s formal written consent.

See also: Business rates for rural businesses – what you need to know

Do be mindful that if you change the use in breach of the terms of the tenancy, you may find the landlord is able to bring an action against you and even to terminate the tenancy itself, which may put the underlying farming business at risk.

Even if you are able to start a diversified business, consider the length of the lease term you have left. If you only have a few years left, then even if a diversified business is relatively quick and easy to set-up, is there really sufficient time to recoup your investment?

If works are required, check whether you are permitted to carry them out; and establish the implications for how these works are treated in terms of rent review and compensation.

Also ask yourself who or what entity is going to run the new business? If it isn’t you as the tenant, then that too may be a breach of the tenancy if technically it involves a third party occupying part the let land.

Another issue to consider is planning. Again your tenancy may restrict what you can apply for. There may be ways of working within the planning rules, for example, a farmer in a good tourist location may be able to use a field for an alternative use for up to 28 days in a year for say camping, with the help of portaloos and so on and so with pretty minimal set-up costs, and without the need for planning consent, before returning the land back to its previous agricultural use again.

Any initial check of your tenancy will help to identify some of the things to consider.

Step 2 - Do some research

Look at your assets and skills to decide what you, your assets or your location can offer to support a diversified enterprise, and which is workable, and which fits the farm, the local market and area.

Sometimes, it is easy to plan to diversify into something ‘obvious’ such as a farm shop, but you need to understand if you are in the right place realistically and location of similar competing farm shops nearby; whether you have the right skills; and again, if there are any tax or legal implications.

There may be lower set up cost ideas that have the potential to fit with the farm’s operations and don’t require a long period to recoup investment.

For instance, consider relatively quick and easy diversification projects – such as renting rooms as part of a B&B venture, a glamping business to coincide with a local music or countryside festival, growing and selling cut flowers by turning grassland or grazing land into a flower meadow, or a pop-up style farm shop selling seasonal vegetables or produce.

Step 3 - Talk to your advisers

Before you take things too far, talk to your family and to your advisers. You clearly need ‘buy in’ from the family if time, investment and effort is to go into a new enterprise. But just as important, speak to your land agent, your solicitor and your accountant about your plans.

See also: What to consider when entering into a lease

Each of these professional advisers is there to support you and offer advice about different aspects of your plans and the issues to consider what will be the commercial, the legal or the financial consequences of your plans.

They may also be able to help in thinking about how you present your plans to your landlord.

Step 4 - Talk to your landlord

Once you have some considered plans, talk to your landlord in good time.

Before you commit, you need to tie up those issues which your review of your tenancy picked up and your advisers have raised. Even if your tenancy specifies that the land can only be used for agricultural purposes, your landlord may be prepared to work with you.

If you have an older AHA tenancy, the landlord may for example, be willing to trade this for a new farm business tenancy in return for fixed term and flexibility over the uses permitted. This needs be carefully considered with your advisers but it may offer a way that works for you both.

Communication is key, as with so many things, and although sometimes landlords will be concerned about a change of use from agricultural use not least if this may affect their ability to claim agricultural property relief from inheritance tax, there may still be a deal to be done that gives benefits to both the landlord and the tenant.

So once you have marshalled your thoughts with your advisers, chatting with your landlord about your ideas, gives you both the chance to consider the options and financial implications, as well as raise the possibility of a change to the tenancy arrangements.

Food for thought

It is a reality that farming futures are going to rely more and more on diversified income, and it is important that all farmers consider and investigate non-farming options in order to spread the risk of relying solely on the returns from food production.

However, the truth is that for many tenant farmers, even if possible, this is not going to be easy and is likely to involve not only the challenges of setting up a new enterprise, but also engaging and working with their landlords to ensure that any plans are made in line with the tenancy terms.

Failure to do so may put not only the new enterprise at risk but more importantly - the tenancy itself. So, whilst the need for diversification is something most farmers will need to consider, and this will involve a lot of careful thought and advice in all cases, this is especially true for tenant farmers.

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