The challenges of change: the Agriculture Act 2020 and Farm Business Tenancies

In November, the Agriculture Act 2020 received Royal Assent, bringing with it fundamental changes to the financial support system available to the farming industry.

For landowners and farmers entering into Farm Business Tenancies, what does this mean and what can we expect as we move forward in the Agricultural Transition period?

Changes during the transition period

The transition period we are now in will see a move away from the Common Agricultural Policy and a new farm support system will be developed.

Direct support payments under the Basic Payment Scheme (BPS), which are currently paid based on the amount of land farmed, will be phased out between 2021 and 2027 and new schemes will be developed based on environmental improvements, animal health and welfare improvements, and reduced carbon emissions.

From 2021 a phased reduction of BPS payments will commence, with greater reductions seen in higher payment bands. Payments will be reduced until the final payment for the 2027 scheme year and no payment will be made after the 2027 scheme year, unless the Agricultural Transition is extended. (It should be noted that the Secretary of State can, by regulation, extend the Agricultural Transition period.)

Delinked payments

It is planned to replace the BPS with delinked payments in 2024 until 2027. Delinking means that a claim for direct support will not be dependent on occupying land and delinked payments will not be impacted if the party receiving the payment expands or reduces their farming operation or even stops farming completely. If a recipient continues to farm, they will have to comply with all applicable standards regarding the environment, plant health, and animal health and welfare.

Eligibility for delinked payments will be based on a reference period. Although the detail of this has not yet been finalised, it is likely that it will be necessary to have been eligible for and claimed under BPS in a particular scheme year or years.

DEFRA will consult with those in the agricultural sector prior to the reference period and before the decision on when to introduce delinked payments is made.

Lump sum payments

It is anticipated that a lump sum payment scheme will be introduced in 2022. This will give farmers the chance to take a lump sum payment in place of annual BPS or delinked payments. Again, there will be a consultation on the rules for lump sum payments before they are finalised.

The lump sum payment scheme is being promoted to assist farmers to retire if they wish to do so. Therefore it is possible that such a scheme may be targeted at certain age groups.

Impact on farm business tenancies

Landowners and farmers entering into farm business tenancies (FBTs) will undoubtedly be  concerned about the possible impact of the proposed changes to direct payments, given that details are evolving and will continue to do so over the next few years.

For tenants, there may be concern about their ability to pay FBT rents due to the reduction of payments and income into their farming business, particularly if their business has also been adversely impacted by the current COVID-19 pandemic.

For landlords, particularly for existing FBTs, the concern may be that there is no certainty that they will be able to get future payment rights back at the end of the tenancy because the new terms introduced by the changes will not be referred to in the majority of agreements.

The benefits of introducing flexibility

To mitigate concerns about the impact of the changes, introducing flexibility into an FBT is one solution. Landlords and tenants with existing FBTs should consider the possibility of agreeing a variation of the terms to allow for additional flexibility during the transition period.

For those considering entering into new FBTs, it is important that the drafting allows for flexibility and includes provisions such as an indemnity to compensate the landlord for losses incurred as a result of any loss of entitlements or any replacement payment scheme.

Another option is to include mechanisms for the landlord and tenant to agree substitute provisions if the changes mean that the commercial effect of the original provisions in the FBT is materially altered.

It is likely that we will see the impact of the Agriculture Act 2020 emerge throughout the transition period and this will require landlords and tenants to adapt as the new system evolves. The key is to draft as flexibly as possible during such periods of rapid and significant change to ensure that all parties with either existing or potential FBTs are protected

You should seek legal advice before entering into, or seeking to vary, any legally binding agreement with other parties.

This article was first published in the February 2021 edition of South East Farmer.

This content is correct at time of publication