The consequences of granting a Grazing Licence or a Farm Business Tenancy

Farmers, to facilitate income generation and management of their holding, will enter into various agreements with third parties granting rights of occupation or other rights over all or part of their holding.

These agreements are typically in the form of either a licence or tenancy agreement, both of which are very different legally, and the danger is a farmer may inadvertently grant a tenancy instead of a licence when drafting their own agreements.

Licence agreements

A licence agreement is a permissive right that can be cancelled at any time in accordance with the terms of the licence by the parties to it. It is a personal right and cannot benefit third parties generally unless the licence itself permits this. Licences are `non-proprietary’ – this means that they cannot be inherited or the benefit assigned to a third party.  If one of the parties to a licence dies, the licence will come to an end – it will not be binding on the beneficiaries of either parties estate.

Under the terms of a licence, the licence holder must not be entitled to exclusive possession of the land – they must share possession with the farmer and the farmer must have access to the land at all times.

It does not matter whether the parties call an agreement a licence – if, in fact, the parties have inadvertently granted a tenancy, the law will treat the licence as a tenancy agreement.  If this happens, this could be a common law tenancy, a farm business tenancy or a commercial business tenancy. This in turn can have serious consequences for the farmer – it affects how they are able to regain possession of their land and how the land is treated for tax purposes.   It can also lead to them being in breach of agricultural schemes.  This is particularly the case when these schemes require a farmer to have possession of the land at all times to perform their obligations under the schemes to ensure that they receive the subsidies.

Typically farmers grant licences such as grazing licences to generate income for a short period of time but also to ensure they can regain possession when either the licence expires or when notice is given to end the licence in accordance with its terms. It is important that the terms of the licence do not allow the licence holder exclusive possession of the land for a definite period of time or otherwise a farmer can inadvertently create a tenancy implied by law.

Tenancy agreements

A tenancy, by contrast, is usually a longer-term arrangement where the tenant is granted exclusive possession for a definite period of time in return for the payment of rent, usually payable every three months. Exclusive possession means the farmer cannot gain access the land except in accordance with the terms of the tenancy agreement. A tenancy is an estate in land unlike a licence – this means that it can be sold to third parties in whole or in part, mortgaged, sub-let in whole or in part or inherited by the tenant’s beneficiaries, subject to the terms of the tenancy, which can restrict these rights.

A tenancy cannot be terminated at any time during the fixed period unless (a) the terms of the tenancy allows for this or (b) the tenant has defaulted allowing the tenancy to be forfeited or (c) the tenant agrees a surrender. Unlike licences, tenancies can also have `security of tenure’.  This means that they must also be usually terminated in accordance with statutory requirements.  If the tenancy is a `common law’ tenancy, the tenancy can be terminated by notice being given in accordance with the terms of the tenancy, usually with a notice period being equivalent to a rental period of the tenancy. Such tenancies are usually non-commercial and non-agricultural, such as a tenancy for the private stabling and grazing of horses for recreational purposes.

It can have serious consequences if a farmer inadvertently grants a Farm Business Tenancy though – if this is the case, the farmer may have to provide a minimum 12 months-notice to terminate the tenancy  There are also mandatory requirements to compensate the tenant for improvements to the land when a farm business tenancy is brought to an end.  This can cost the farmer thousands of pounds, depending on how much the market value has been increased by the tenant’s improvements to the land. Farm Business Tenancies can also be created where a licence grants exclusive possession for a definite period for the purposes of a trade or business related to farming.

Likewise, if the farmer has granted a licence for commercial purposes which are unrelated to farming which is, in reality, a tenancy implied by law, then such a tenancy can be classed as a business tenancy under current legislation.  If this does happen, the tenancy will continue indefinitely on the same terms, unless (a) the tenant gives three months’ notice to quit, (b) the tenancy is forfeited, (c) the tenant becomes bankrupt, (d) the tenant agrees a surrender, or (e) the farmer can satisfy one of the current statutory grounds needed for them to regain possession which can be costly and expensive.

Just like a Farm Business Tenancy, the farmer may have to pay compensation to the tenant if the tenancy is terminated on some of these grounds or for tenant improvements made to the holding. Again, this mistake could cost the farmer thousands of pounds in compensation and in lost income as a result of the delay in regaining possession of the land.

Advantages

A licence therefore allows a farmer to retain possession and management of the land, which is important to receive subsidies, to manage the holding as a whole, and for tax planning purposes. In certain circumstances, it is better for the farmer to be in occupation of the land and deemed to be farming it for inheritance tax planning purposes. Licence fees are also treated as trading income rather than property income in respect of tenancies, allowing the farmer to offset trading costs against trading income. There may also be capital gains tax advantages such as roll-over relief and entrepreneurs relief that are not otherwise available where land is let under a Farm Business Tenancy. The grant of a grazing licence can also be zero-rated for VAT purposes.

When considering whether or not to enter into an agreement to allow a third party to occupy a holding, we strongly recommend a farmer takes legal advice as well as tax advice from a suitably qualified person.

WBW Solicitors have been advising farmers for decades in this area and are here to help with a dedicated property and private client team that can guide you through the above pitfalls.

For further information, please contact Darren Heard on 01626 202382 or email darrenheard@wbw.co.uka.

WBW Solicitors has offices in Axminster, Bovey Tracey, Brixham, Chard, Exeter, Exmouth, Honiton, Launceston, Newton Abbot, Paignton, Seaton, Sidmouth, and Torquay.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.