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Farm diversification: How to navigate the land and property law

Farmers looking to diversify their farm business can get a headstart by understanding the complex legalities and avoiding the pitfalls.

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Farm #diversification: How to navigate the land and property law

As incomes continue to be challenged, more farmers are considering diversifying operations to provide additional income and, if these plans include selling property or land, there are certain issues to be tackled and overcome.

 

Farming businesses are increasingly reliant on income from sources other than basic food production, says James Spreckley, head of Lodders’ agricultural and landed estates practice.

 

“Diversification offers real opportunities to secure the futures of farming and land-based businesses, but it’s vital new ventures, and any associated sales or development of property and land, are carefully set up to work for the long term.

 

“Diversification will differ for each farming enterprise. It may be a way of generating additional income for the farming business, but sometimes it is needed to keep family members apart, yet keep the farm together – so could be part of a strategic redirection of the business, or a planned succession structure.”


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Land under the hammer?

 

Working with immediate assets such as the sale of farm land can provide a cash injection, be it an opportunity to streamline operations, or present a platform for a new enterprise.

 

“The demand for residential housing is causing a boom in land promotion and development, and many rural landowners are being approached,” says the head of Lodders’ real estate team, Mark Miller.

 

“The explosion in planning opportunities has brought all sorts of players into the market. Some are very sophisticated and experienced, and some are not. It is critical the landowner signs up with the right development partner if it is to be successful.”

Agreement structures

 

The types of agreements landowners may come across are:

 

Conditional contracts – typically, the sale and purchase of a property would be conditional upon a developer obtaining planning permission for the property. In these contracts, it is important for the parties to agree what would be a ‘qualifying’ planning permission for the condition to be satisfied so that it is clear to both parties at what point they will proceed to completion.

 

Option agreements – a traditional option that grants the developer an option to purchase the property from a landowner during a specified period. The developer would seek planning permission for the property and would then be able to exercise its option to purchase the property. The purchase price can either be fixed at the outset, or be the market value of the property with the benefit of planning permission.

 

Promotion agreements – enable the land promoter (at its cost and risk) to obtain planning permission on behalf of the landowner. If successful, the property would be marketed to developers/housebuilders with the landowner then selling the property with planning permission to the party making the ‘best offer’. In return, the promoter is refunded its costs and paid a ‘success fee’, usually a percentage of the sale proceeds.

 

Hybrid agreements - an amalgamation of a promotion and an option agreement, normally only employed on larger development schemes where the development is to be sold off in a number of parcels. If the developer obtains planning permission, the site would be divided up into parcels, with an element offered to the developer to purchase (on an option basis) and the remainder sold on the open market.

What landowners need to remember:

 

  • Land is the most important asset so listen to professional advice before signing any documents. Negotiating heads of terms are a critical first step in all land sale agreements and it is important to consider lockout agreements if planning needs to be progressed at an early stage by the developer/promoter.
  • Be mindful of being locked into a bad deal, and consider whether a promoter/developer has a commercial incentive and whether the land may not be promoted properly.
  • Be wary of the wrong commercial terms (there are too many horror stories of landowners receiving far less financial reward than expected).
  • Be patient as transactions can be complicated and can tie up land for a number of years.

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