What are the options and problems for farmers in navigating the legal side of land sales? Here, Tristan Ward, an agriculture lawyer from BDB Pitmans, explores the legal practicalities of buying, selling, and managing land in the current climate.
Why would anyone want to sell their farm? Wheat prices are at record highs and the demand for food can only grow as the world’s population increases.
Unfortunately life is not so simple or easy. Brexit has increased the cost and paperwork of exporting to our nearest markets and made finding employees more difficult. On top of this, climate change exacerbates the challenges.
The costs of fertilizer, diesel and other inputs are increasing even faster grain prices; making profit on growing corn is harder than ever while the basic income payment is being withdrawn.
Those producing meat face the increasing cry that “eating meat is wrong”, but perhaps most fundamental of all, many farmers are elderly.
If there is no son or daughter who wants to take over the business an old hand may well prefer to sell up to take advantage of high land prices to enjoy retirement.
Or perhaps the farmer has died, and the next generation wants to cash in as soon as inheritance tax relief has been achieved.
Preparation, preparation, preparation
So the decision is made. How does one go about the sale so as to achieve the best deal? As with so many things, the key is preparation, preparation and even more preparation.
Planning reduces stress and can prevent a transaction failing. All family members and other should agree with the sale decision, or at least accept it. Trustees’ agreement may be required.
Once the decision has been made, a farmer should consider the implications for what happens afterwards. Will the farmer wish to remain in the farmhouse, or move elsewhere so another house is to be purchased or rented?
Is there to be a clean break, or will the farmer want to carry on farming, perhaps as a tenant or contractor on the farm for a time? Or does the farmer want to lease or contract the farm instead?
It may, depending on circumstances, be possible to pass the farm to the next generation but with reduced or no inheritance tax by doing this.
The selling team
A sensible farmer will make these decisions with the assistance of advisors: the lawyer, the accountant, the banker and the land agent.
These professionals will be able to discuss the implications of the choices that are being made with the benefit of experience as well as professional expertise: after all most owners only sell a farm once, but the professionals have done it many times.
A useful exercise is to understand the profile of a likely buyer. For example, an investor or amenity buyer will be open to the seller managing the land under a lease or contract farming agreement, while the next door neighbour will want to farm the land themselves.
The amenity buyer will want to live in the farm house, while the neighbours (probably) only want the land and buildings. The investor may not care.
The investor and the neighbours will be more interested in paying a keen price, while the amenity buyer may be less sensitive to price because they have fallen in love with the property. A good estate agent can give guidance here.
Preparing a farm for sale is a long process. Traditionally, marketing begins in the spring once crops are established and look good, with completion of a sale taking place on 29 September that year.
However a well advised seller will have assembled a legal package, including a skeleton sale contract, by the time marketing begins.
Collecting information to inform the buyer’s investigation of a farm takes many days; and no one wants to start that process only after buyer and seller have shaken hands on the deal.
The seller should also identify and provide solutions to legal and practical problems before a buyer identifies them and uses them as leverage to reduce the price.
Estate agents will want to start to prepare marketing materials in the summer before the sale, and I recommend the legal preparation process should start, at the very latest, once autumn crops are in the ground in the year before marketing is to begin.
In addition, a winter maintenance and tidying programme make the farm look more attractive, while agronomy practice might supress a blackgrass burden.
Anticipating practical problems
A wise seller will try to anticipate the practical problems of selling a farming business as part of the preparation process, especially if some land or the farmhouse is being retained.
It is a good idea to prepare a comprehensive memorandum on sale with the assistance of the selling agent so as to identify commercially important issues.
These might include the completion date, overage, employees, sale of machinery, stores and spares. What happens to animals and how will they be cared for?
Are there contracts for sale of milk or other products that run beyond the proposed sale date, and if so, will the buyer be required to honour them?
Will the seller be compensated for the cultivations carried out before completion, but where harvest takes place afterwards?
Will harvested crops need to be kept on the farm after its sale but before shipping? Who is responsible for providing labour for loading and who pays drying costs?
There are routine ways of dealing with most of these issues but is it always easier to provide the best solution without being under pressure from the buyer, before the marketing process starts.
Employees provide a good example. They may be made redundant or they may work for the purchaser? In either case statutory consolations must take place and appropriate timetables must be observed. Do any live in farm cottages? If so, will they have to find new homes?
One common option is for a (former) employee to remain in occupation for up to 12 months after completion while the seller takes necessary action to obtain possession, either by negotiation or through the courts. In these circumstances the sale price is reduced if possession cannot be obtained.
Alternatively a seller may wish to ensure a loyal employee is able to remain in his home: the cottage could excluded from the sale or the occupants given a long lease.
Some tax considerations
Tax is always an important consideration on sale, and depending on the facts, a capital gains tax return and payment may be required within 30 days of completion, and in any event by the end of the tax year. The accountant should be prepared.
Entrepreneur’s relief from capital gains tax Using entrepreneurs’ relief often means paying half as much CGT as you otherwise would when selling shares and/or business assets, with a total lifetime saving of up to £1 million of tax.
Clearly the sale process should not jeopardise this valuable relief; and a timely gift to a spouse (typically tax free) involved in the business for more than 2 years before the sale may double the amount of tax relief available.
VAT can also be an issue. VAT will always be payable by the buyer on the sale of basic payment entitlements and machinery, but is never payable on value attributed to any residential property.
Occasionally VAT must be charged on the value of other land and this is obviously a substantial sum. Since the seller must account for VAT to HMRC, if the buyer does not pay the VAT, the seller must pay it themselves, so it is important to get this right.
Continuing relationship between seller and buyer
At a more practical level, there may be a continuing relationship between the seller and buyer after completion, especially when the seller keeps land or buildings.
Water can be especially problematic: I was involved in one sale where the farmhouse took its water through a cast iron pipe laid in the 19th century.
The seller, who kept the farmhouse and cottages, did not fancy sharing responsibility for future maintenance, and so put the farm house on to mains water before the sale.
The seller may want to think about boundary issues, or restricting use of the sold land to prevent development or certain unattractive uses.
That may affect the sale price. Some sellers want their ashes scattered on the farm, and I have known land to be retained as a family graveyard.
Potential for development
Where land has potential for development, a seller might consider whether the buyer should make an additional payment (known as overage) if planning consent is granted for a non-agricultural development such as housing or renewable energy.
Typically a seller might take 30 or 40% of the net increase in value, payable either when the development starts or when the land sold to a developer, and in either case where the consent is granted between 15 and 25 years after the sale. However I have seen overages that lasted for 80 years.
All these provisions are extremely technical, time consuming and costly to negotiate: they may not deliver real value to a seller if development is unlikely.
Expect the unexpected
As mentioned, the preparation process routinely throws up the unexpected. Occasionally the family discovers that parcels of land are owned in unexpected ways, for example by someone who has died years before.
In such a case the executors of the deceased must agree to the proposed sale, and/or put the land whether it ought to be. More commonly land occupied by the seller is not be registered at the land registry.
There may be breaches of planning control, or water abstraction licences may be required. Historic farm dumps can be problematic: a well advised buyer will always want to know what kind of things are in them in case the waste is potentially contaminative.
I dealt with one that spontaneously combusted during the marketing process. In that case the seller retained ownership of the dump until the burning stopped, after completion of the rest of the sale.
Ideally the seller will have identified all the issues affecting a farm. Defects will have been remedied before the marketing process starts. Where this is not possible, potential solutions can be identified and put to potential buyers as part of the sale process.
In selling farms, as with most other things, surprises cause problems.
Tristan Ward is the Head of Agriculture, Estates and Rural Business at solicitors BDB Pitmans LLP and a former farmer.