Diversification – the legal pitfalls

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Guest article written by Caroline Hawcroft, Head of Agriculture at Lupton Fawcett Solicitors. 

This is an extremely challenging time for the farming industry. With lower food prices, increasing energy costs, slashed subsidies, and increased competition; it is not surprising that many British farmers are finding it hard to make a living. Add in Brexit and the recent publication of the new Agricultural Bill we are likely to see the biggest shake up in the industry for decades.

With all the challenges facing our farming community it is no surprise that many farmers have to think laterally to make ends meet.  As such diversification is likely to play an even greater role in creating a strong, robust and successful farming business than ever before. A diverse farming business with more than one income stream has a greater chance of succeeding in the future. Business diversification is a key strategic step to future proof farming businesses.   However, it is essential that landowners are properly advised before embarking on such a project in order to avoid the legal consequences of the various pitfalls:

Title

It is important to check the title of the property to determine whether there are any restrictions which could prevent diversification.  In addition, if the land is secured by a bank charge it is likely that bank’s consent will be required to any change of use.  If the property is leasehold then careful consideration of the terms of the lease need to be carried out to ensure the terms allow for a change of use. Landlord’s consent is likely to be required before any diversification works can be started.  Furthermore, if the land is tenanted, do the terms of the tenancy/licence allow for termination if the land is required for the project?

Planning

Careful consideration must be given as to whether the diversification project requires planning consent.  For example, renovating a farm building to be used for commercial or residential use is likely to require a change of use and, as such planning consent.  However, consideration should be given as to whether the proposed development would be permitted under Permitted Development Rights, without a full application.

Services

Development of land or buildings may require connection to utilities such as water, drainage, electricity, etc.  Are there express rights for services in the title? If connection to the services cannot be obtained direct from the land easements may need to be negotiated with neighbouring land owners.  Consent to connect to public utilities may also be required from statutory undertakers.

Finance

Additional finance may be required to fund the diversification project with security being required over land/buildings.  It is sensible to discuss the diversification project and any funding requirements with a lender at an early stage.

Tax

Obtaining tax advice before committing to a diversification scheme is essential as diversification can have tax consequences, in particular Inheritance Tax. As such, it is extremely important that tax advice is taken at the outset of the project.