How tenants could benefit from natural capital initiatives

Tenancy agreements mostly rule out long-term environmental schemes such as tree planting and rewilding.

However, generating an income from carbon offsetting and sequestration, nutrient neutrality units, biodiversity and third-party access is possible in some cases.

Although there are restrictions on how tenants can capitalise on the natural capital assets on their farms, Philip Meade, director at Davis Meade Property Consultants, said there is a widely held misconception that environmental initiatives are based on long-term agreements that rule out tenant farmers.

“This is not necessarily true, especially if you have a good landlord/tenant relationship that you are prepared to work on. But even if you have a fractious relationship, there are still opportunities to be had,” he said.

See also: Natural capital on farms – what it is and how to value it

“There are things you have to be careful of with tenanted farms, but it doesn’t mean that all natural capital opportunities must be completely written off.”

What natural capital opportunities exist for tenants?

Carbon offsetting schemes can be as simple as changing a crop grown – for example, switching from growing winter wheat to spring oats can significantly reduce a farm’s carbon footprint in a year, Mr Meade explained.

“Spring oats are not as profitable as winter wheat in many senses, but if there is a local business that is prepared to pay a farmer to grow them and take credit for that carbon offset then there is an opportunity for a relatively short-term contract that a tenant might sign up to.”

A voluntary carbon market for individuals is also gaining traction.

“The Greta Thunberg generation, who are very conscious about their carbon footprint, are more likely to pay to offset their carbon – for example, someone who wants to fly to New York for the weekend but feels guilty, might pay a farmer or landowner for carbon offsetting to offset their conscience,” said Mr Meade.

This could take the form of paying a farmer to grow different crops or minimising tillage operations.

Another possibility is nutrient neutrality – landowners and farmers in certain catchment areas can be paid to reduce nitrogen and phosphate run-off into a river to offset any increase caused by development.

What terms do I need to be aware of in my tenancy agreement?

The tenancy agreement will stipulate what is permissible and should be the first port of call when considering a natural capital opportunity.

Look for the term “user clause” in an Agricultural Holdings Act (AHA) tenancy or a farm business tenancy (FBT); this typically states that the farm can only be used for agricultural purposes.

“The growing of trees, with a few minor exceptions, is probably not going to be allowed and neither is turning the whole of the farm over to rewilding,” said Mr Meade.

But growing crops will usually meet that requirement, although modern tenancies often state that a crop must not have a cycle of longer than 12 months.

The “alienation clause” is another one that will apply in this situation.

Mr Meade gave an example of how this might apply, citing an actual agreement in which a GP surgery had paid a farmer to convert a block of woodland into an area for reflection for its patients.

Nature Photographers/Alamy Stock Photo

“This wouldn’t necessarily breach the alienation clause of ‘part with possession of’ which covers subletting,” he said.

However, it might be in breach of the user clause, although Mr Meade emphasised that it is always worth tenants having the discussion with their landlord.

The rules of good husbandry are often written into farm tenancies and require tenants to undertake good husbandry as set out in the 1947 Agriculture Act.

Rewilding, in which nature is allowed to take back large areas of your farm, would not be compliant with good husbandry and so would risk breaching a tenancy agreement. 

Mr Meade said farmers should seek advice if they are unsure of how to interpret these terms.

Do I need to involve my landlord?

Engaging and involving the landlord is always preferable to working against them, especially as buyers of natural capital assets will want a long-term commitment that a tenant often cannot give.

“If you are constantly looking over your shoulder and worrying that you are in breach of a tenancy agreement and your landlord is looking for ways to catch you out and serve you with a notice to remedy or notice to quit, then it is going to be very hard to get any natural capital investor interested in partnering up with you as a tenant, so engage and involve your landlord, if possible.”

If not, there are still opportunities, but they may be more limited, he added.

Can a scheme result in a rent rise?

Mr Meade said it is reasonable for landlords to expect a return on capital, usually in the form of an additional rent payment, if they are prepared to work with their tenants on projects and provide capital expenditure.

However, if a tenant is paying for the investment and doing the work to get the natural capital opportunity in place to replace what is being lost under the Basic Payment Scheme (BPS), then it will be harder to justify an increase.

Under the terms of an AHA tenancy, the question will be “has the productive and related earning capacity of the farm increased?”. These are definitions in the 1986 AHA Act that are key to any rent review.

“If the BPS has gone down by 50% and you are just replacing that with an opportunity to partner up with your local doctor’s surgery, then if the overall productive and related earning capacity of the farm has not really changed, then just because you are making a bit of money in a different way, is that an excuse to put the rent up? I think the answer is generally no,” said Mr Meade.

“There is little reason to expect significant rent increases unless the landlord is making a significant contribution as well.”

Can my succession rights be at risk?

Applicants for succession under an AHA must have earned their income from agricultural work on the holding; if the farm becomes hugely diversified and there is little agriculture involved, that could jeopardise a succession application, unless agreement is reached in advance with the landlord.