Tag Archive: FBT

Opportunity Knocks

We all find ourselves in interesting times within the business community and more specifically within our agricultural industry. The phrases “lockdown” and “social distancing” are now commonplace in our vocabulary and indeed the way that we do business in the future will most definitely change. Our industry has diligently continued supplying our country with a much-needed resource, food. It was not long ago that MPs were standing up in Parliament and suggesting that farmers were no longer needed, how wrong they were, now they’re on the list of keyworkers!

What we hope is that our nation now has a new appreciation of our farming industry, food production, pricing, and in particular, enforcing the ethos of locally produced.

The resilience of our industry cannot be underestimated; however, we must understand the vulnerability of some business and in particular, the susceptibility of different sectors. A number of our diary clients are reaching breaking point having not been paid, in some cases, for 9 weeks of continued milk supply. We are working closely with these businesses in order to provide them with budgeting and cash flow forecasts in order to access further working capital from the banks, many of which are being incredibly supportive. The importance of being “bank ready” cannot be underestimated not only for changes that may be forced upon the business but for opportunities that may be available in the future.

We are seeing a number of opportunities arise within the industry for extra land under FBT or Contract Farming opportunities. We are making sure that our clients’ businesses are financially ready to be at the front of the queue in order to take on these opportunities.

Our industry is strong and resilient, however, in order for this to be the case farming businesses need to have a clear plan and strategy as to how their business will perform, its cash requirement, and in particular its exposure to risk. We are currently carrying out a series of business health and asset checks making sure that our clients are in a position to take advantage when “opportunity knocks”.

If you would like to discuss this article further or think your business would benefit from some independent advice, a ‘health check’, please contact Simon Britton on 07866 721146 or click here to send an email.

Rent Reviews: Back to Basics?

Andrew Entwistle, Partner and Head of Valuations, delves into the world of rent reviews, looking at what could change in this time of uncertainty.

Without mentioning the dreaded “B” word, it’s evident that uncertainty is more prevalent in farming than it has been for many years. It’s some time since agricultural rents have actually been reduced at formal rent reviews and the prospect of formal rent reductions now seem to be less distant than before.

Rent Reviews

There are two main types of tenancy for letting agricultural land. Theses tenancies are known as the “old style” Agricultural Holdings Act tenancies (AHA 86), and any tenancies created after the 1st September 1995; they are known as Farm Business Tenancies (FBTs) under the Agricultural Tenancies Act 1995 (ATA 1995). Both Acts allow rents to be increased or decreased.

The AHA 86 statute prescribes that a rent is based on a number of factors; the terms of the tenancy, character and situation, productive capacity and related earning capacity, as well as current level of rents for comparable lettings. These factors are known as the ‘rent formula’.  Clearly, the key elements of productive capacity and related earning capacity in a potential world with reduced subsidies and increase export tariffs could lead to a reduction in rent.

When FBT’s were brought in, they offered more freedom of contract between Landlords and Tenants on the terms of the tenancy, but with some statutory safeguards. For example, an FBT agreement generally cannot prescribe that a rent can be reviewed upwards only. Usually, once a rent is fixed under a AHA 86 or FBT, there cannot be any rent reviews for another three years.

So, in a period of extreme uncertainty, what could change? Certainly the rent review process may become much more tactical. Perhaps issuing a rent review notice a year in advance may become less common, which may result in a last minute horse deal before the matter has to be referred to arbitration (which was prevalently a landlord activity). Once a notice (by either a landlord or tenant) has been issued, either party can instigate a rent review. Some landlords that have already served notices may be agreeing rent “stand ons” to secure rental certainty for the next three years. Others may be sitting quietly ‘on the fence’ in the hope that the tenant may not propose a new rent figure or renewing the rent review notice at the last minute.

In formulating strategies for rent reviews, the first item to look at is the term date within the tenancy. This dictates the timescale for serving notices and forward planning is essential. However, it still does not get around the fact that in most cases you a dealing with a set of circumstances a year in advance. With this period of extreme uncertainty on the horizon it is difficult to predict what the rent climate will be.

However, there are opportunities to mitigate the uncertainty. Landlord and tenants often forget rent reviews can be carried out by agreement at any time, outside the statutory time frame, if it suits the parties. Accordingly, there may be an opportunity to perhaps fix a rent for something in return such as a succession or some capital investment, however, anything that is agreed must be considered in terms of the statutory background to make sure it is not annulled or creates unintended consequences.

The last downward rent review trend happened around the 1980’s where decreases were tenant led; it’s not inconceivable that this trend could reoccur, but a trend of increasing rent cannot be ruled out either. In the interim, opportunities remain for both Landlords and Tenants to make arrangements between themselves to make their businesses and income more resilient to any change in the future.

Knowledge Sharing: are you fulfilling your business objectives?

Simon Britton, Partner at George F. White, explains the importance of knowledge sharing in farming and discusses their upcoming seminar at the National Sheep Associate (NSA) North Sheep event.

It’s becoming increasingly difficult to predict the future impact that our potential exit from the EU will have on the economy. As we’ve discussed before, in order to minimise the impact of a potential reduction in direct subsidy payments and disruption of our free trade agreements; farmers need to review their businesses and endeavour to become a top performing farm business.  There’re a number of characteristics of a top performing farm business, including budgeting, knowledge sharing, benchmarking and most importantly, a clear direction of travel; changing 100 things by 1% rather than one thing by 100%.

Knowledge Sharing

On Wednesday 5th June, the bi-annual NSA North Sheep event will take place at New Hall Farm in Settle, North Yorkshire. Over the years, their seminar programme has become one of the most prestigious in the calendar of summer events; challenging, inspiring and educating the sheep farming community whilst promoting knowledge sharing around, sometimes, more difficult subjects. We’re extremely proud to be sponsoring the seminar programme again this year; in times of uncertainty it’s vital that we take every opportunity to discuss the safeguarding of our farming businesses by improving their performance.

Managing Partner, Robyn Peat, and myself, will be kicking off proceedings at 10am in the Seminar Marquee, discussing Share Farming Agreements (SFA), Contract Farming Agreements (CFA) as well as obtaining a Farm Business Tenancy (FBT).

Over the last two to three years, our dedicated team of 14 farm business consultants have seen a significant increase in opportunities for joint venture agreements and land being let on farms across the north of England. This increase is, in part, due to retiring farmers but also businesses that are scaling down due to a significant increase in machinery costs. Agreements can be structured that’ll allow the farmer to still reside in the farm house, continuing to farm the land, yet not having to employ all the labour and machinery that’s required in modern farming. The uncertainty, namely Brexit, hasn’t helped and we feel that this has accelerated a number of retirements and exits from agriculture; however, this offers opportunity for others. It’s important to give farmers a better understanding of the opportunities open to them through joint venture agreements and structured applications for farm business opportunities.

knowledge sharing

Our talks will give attendees a much better understanding of how and when to use a SFA or CFA and how to get to the top of the list when applying for a FBT.

In order for some farming businesses to expand, their only opportunity could be applying for a FBT. The seminar will give the attendees clear instruction as to how to apply and what to include in the initial application in order to get you to the interview stage. We’ve been incredibly successful in obtaining FBTs for our clients and know what goes into making a credible application.

The attendees will gain valuable knowledge that’ll help them make decisions and assess opportunities that may come their way.  We’ll clearly outline how to best take advantage of these opportunities and make sure that when you submit an application, or for that matter establish a SFA or a CFA, it’s for the right reasons and it’s going to fulfil your business objectives.

In the current market, as a team of farm business consultants, we think that there’ll be a number of opportunities arising in the future and it’s imperative that farmers understand these opportunities and how best to take advantage of them. We know that our industry has to change and farm businesses must consider how much they know about their existing business, how change will affect their business, how they’re preparing for change, and also opportunities that will arise in the future.

As we mentioned, knowledge sharing is imperative, I can guarantee that when you come to NSA North Sheep, and attend one of the seminars, you will learn something new and you’ll and benefit from it.

Will we see an increase in FBT’s if support payments are capped?

The reform of the CAP in 2005 allowed freedom of cropping/stocking and removed the years of headage and quota payments but inadvertently, created little incentive for landowners to let land under formal tenancies for any duration of time. Allied to the incentive of roll over relief for those selling development land and 100% inheritance tax relief (either BPR or APR), there has been a significant shift away from Farm Business Tenancies (FBT’s) to contract/share Farming Agreements (CFA’s).

Nick Unwin Farm Image

CFA’s which run well are all about a working partnership with mutual respect for both parties roles within the agreement. We find that at the end of the day, the returns create an even balance and split of the profits with neither one party seen to be the better off. This balance is so often lost with formal tenancies when rents are reviewed at various intervals and in reality, just depends on the price of wheat/livestock at that moment in time. Tenancies have never really been able to react as market forces react on a year to year basis and there isn’t really an approach that considers yields, prices and inputs as much as a contract agreement does.

We’ve also found that once the contract agreement is operational, very few see changes in contractors and that’s down to the better working relationship between all. Of course, CFA’s come with more hassle and management and income only at the end of the trading year as opposed to regular intervals, but as we move forward in more uncertain support payment times, relationships between owner and contractor/farmer are more and more important. Also remember that CFA’s aren’t difficult to run, so don’t get carried away with management fees charged by some consultants who often see them as a gravy train.

We’ve seen a significant increase in contract agreements recently, particularly in the livestock sector; it’s more challenging as we have stock ownership to consider but I think it’s in part a recognition that the economies of scale in the cattle and sheep sector can drive significant cost savings and increased outputs, leading to more direct income to the farmer by use of a contract/share farming agreement.

Having said all of that, I anticipate that we are likely to see landowners considering, once again, letting land back out under tenancies in order to avoid potential capping on future support payments. Given that, I suspect many rely on this income to manage/prop up the estate, therefore it would seem more logical to let the land back out and allow the smaller tenants to expand a little and just receive the subsidy through rent rather than be capped. I do think though that landlord and tenant need to find a more fair basis of rent that reflect what is actually happening on the ground in that harvest year.

Finally, if you’re not aware, please take careful note of the major changes with EFA’s announced this week; the impact particularly on using pulses for EFA areas is great and may require some careful cropping plan adjustments.

Louis Fell, Partner
01665 511995
louisfell@georgefwhite.co.uk

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