20th November 2020
With the phasing out of farm payments, what are the opportunities and considerations around diversifying?
With the phasing out of farm payments, there are widening financial holes in many farm businesses. As part of our annual agricultural seminar hosted in November, Mark Charter spoke about what other diversification strategies are available, focusing particularly on residential developments and renewables projects, and what landowners should consider.
Here is a summary of his address.
Tax treatment has been a major concern for farmers and landowners looking to develop their properties or land this year.
From a landowner perspective, we believe it is important that our clients’ land (if development and trading in land is not their business) is not inadvertently appropriated to trading stock. This is to avoid the danger of the sale price being treated as an income, rather than capital, receipt and taxed as such. To give protection in this respect, landowners should have provisions prohibiting infrastructure being built on the land before the landowner has sold it and transferred the title.
Landowners need to be careful about section 106 planning obligations. While it is fair to have planning obligations relating to the land they are selling, such obligations could have an impact on land being retained if not careful. This could, in effect, sterilise retained land by the back door. Similarly, landowners should look to preserve access and service rights for their retained land, so that they are able to go ahead with future developments.
Our team has seen problems arise when things have gone wrong with renewable projects, which creates worries for the landowner as to whether they are going to end up being liable for any additional costs incurred. This makes negotiating sinking funds or remediation funds a priority for landowners, so that a cash reserve can be built up to use to deal with problems or restore the land at the end of the project’s lifecycle.
Another potential issue is renewables operators trying to argue that the value of the kit they are installing on the land is to be treated as part of that value for that reserve. There are a couple of possible problems here. Firstly, the kit may not have the value the parties originally thought it did when the landowner needs to sell it to pay for remediation. Secondly, the landowner may not have a good title to it and the operator is likely to charge it to a lender. Finally, it can be difficult to find a buyer for possibly out-of-date and used kit, which adds to the headache to resolve an issue that was not the landowner’s fault in the first place.
We also believe that long lock out or exclusivity agreements should be avoided if possible. There have been recent examples of operators not being able to perform, and an agreement like this could effectively prevent the landowner from seeking alternative deals in the market.
With advances in factors like solar battery technology, we are seeing more sophisticated deals being offered. For example, some leases will now have different component parts for rent, such as a base rate for the land for solar panels, as well as additional rent for battery storage, sterilised land (for landscaping or ecological purposes) and a sub-station rent.
Renewables projects like solar have the potential to provide good income streams spanning 20 to 30 years or more. As a landowning family, it may be worth considering ring-fencing these projects to allocate the income from them for future generations. To do this effectively, thought as to structuring (e.g. placing the land in trust) should happen before the prospect of obtaining planning permission. This helps to ensure that an associated transfer of land, for example into trust, takes place whilst the land is still at or near agricultural value, rather than an enhanced value.
For further information on any issues raised in this article, please contact Mark Charter.