Grazing licence or Farm Business Tenancy: Which is right for you?
Grazing licences and Farm Business Tenancies (FBTs) are both occupational arrangements available to landowners – but which is right for you?
This will largely depend on the activities to be carried out on the land, but consideration should also be given to other consequences like tax implications. It is vital that landowners are certain which arrangement they are granting to ensure that their interests are protected and headaches are avoided.
What is a grazing licence and why use one?
Grazing licences are typically short term agreements with no rights of renewal that allow a grazier access onto another’s land to graze their animals. They essentially allow the landowner to sell the grass that’s growing without granting the grazier rights to exclusive possession of the land. This means the landowner remains in occupation and retains the right to claim under the Basic Payment Scheme. Remaining in occupation can also offer tax advantages, such as assisting with claims for roll-over or business asset disposal relief from capital gains tax. Grazing licences do not need to be registered at the Land Registry and are exempt from stamp duty land tax.
What is a Farm Business Tenancy and why use one?
An FBT is an agreement between a landowner and a tenant that grants the tenant exclusive occupation of agricultural land. As the landlord is not deemed to be in occupation of the land, a claim under the Basic Payment Scheme may only be made by the tenant.
FBTs can only be used where the land let is to be farmed by a trading business – they cannot be used for subsistence or hobby farming. Where occupation is to be for a period longer than 12 months, an FBT is usually more appropriate. Where a tenancy is to be granted for a period exceeding 12 months, a well drafted agreement should include provisions allowing the landlord to require the tenant to surrender part of the holding to enable the landlord to sell, develop or occupy the part surrendered, allowing the landlord to recover possession if development opportunities arise.
Why do we need to get it right?
If a tenancy is inadvertently created, the occupier may receive far greater rights than the parties intended. It is not always clear what type of arrangement an agreement is, and the courts have a long history of dealing with many cases where the matter is in dispute.
When drafting a grazing licence, care must be taken to ensure the agreement does not grant exclusive possession or impose obligations that may resemble a tenancy, such as an obligation to repair.
When granting an FBT, it is essential for a landowner to ensure statutory notices are exchanged with the tenant. Failure to do so risks the tenancy being converted into a business lease under the Landlord and Tenant Act 1954, which would give the tenant far greater security of tenure than intended by affording them an automatic right of renewal at the end of the lease term.
Grazing licences and FBTs each have their own advantages and consideration needs to be given to which is appropriate in each individual situation. Specialist advice should be sought to ensure that opportunities are maximised, and interests protected.
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