Tenant farmers are diversifying their businesses in increasingly innovative ways - but there are critical steps which must be followed, writes lawyer Eilidh Robertson.
The drive to diversify Scotland’s farm businesses shows no sign of slowing as farmers seek greater financial security, sustainability and success for their enterprises amid ever-evolving cost pressures and legislative change.
For tenant farmers non-agricultural diversification(s) can be transformational in terms of the potential income it can generate in support of their farming activities. They also allow people to be “at home”, as opposed to holding off-farm jobs.
More than half of Scottish farms are reported to now have at least one form of diversification - from farm shops and cafes to farm parks, playgrounds, holiday accommodation, driving ranges and so much more. And, while it’s never been more important for farmers to be entrepreneurial beyond livestock and crops, consider their assets and seize new opportunities, it is vital that those who lease their holdings do not overlook the legal steps they must follow in respect of diversifications, as well as wider business planning.
All secure and fixed-term agricultural tenants in Scotland, other than tenants under Short Limited Duration Tenancies, have the statutory right to diversify by following the process.
Relationships are critical in any tenancy. So, before starting formal processes, it’s recommended that tenants approach their landlord for an informal discussion about their proposal. This ensures that no-one is taken by surprise - and you might even agree a way forward.
Any discussed agreement does not, however, override the formal legal process.
The process is set out in Agricultural Holdings (Scotland) Act 2003, through which a tenant must send a “notice of diversification” to their landlord. This must be done at least 70 days before starting the new activity and should specify:
- What the non-agricultural purpose is
- The land / buildings that would be used
- Any proposed changes to the land / buildings
- The date from which the proposed non-agricultural purpose is intended to start
Landlords have the power to impose “reasonable conditions” on non-agricultural uses. They also have the opportunity to object in certain circumstances, including if they think the proposal could prejudice future agricultural use - and could ultimately turn to the Land Court if agreement cannot be reached. To help address this early, tenants must address potential grounds for objection in their diversification notice.
Tailored legal advice is always wise at this stage.
For tenants, it’s also important to keep the big picture in view, as well as their records in order.
Landlords will generally look to share in the additional income that a diversification could create through an increase in rent and an experienced surveyor’s advice would be beneficial during this process.
There can, however, be an opportunity for tenants to secure compensation for their investment at waygo when a tenancy ends - provided that the diversification has increased the value of the holding and that proper procedure was followed. Conversely, landlords can seek compensation if the diversification has reduced the value of the holding.
In some circumstances - particularly where a sizeable funding partner may be brought in by the tenant or a longer lease is required - it may also be worth considering your options for taking the land and buildings used for diversification out of the agricultural lease and into a commercial one.
But these are conversations to have with your lawyer.
Any other regulatory requirements - such as planning permission - are, of course, in addition to this process.
Diversification has undoubtedly been one of the defining features of Scottish agriculture in recent years. Tenant farmers can benefit greatly from them, provided they follow the proper procedures.
