The financial and planning barriers to farm diversification
09/10/2009
By Sue Lister, Associate in Commercial Property & John Spence, Associate in Dispute Resolution. Featured in AL Bulletin.
In the current economic downturn, it is more important than ever that entrepreneurial farmers should be supported in their efforts to diversify from their core farming business into different non-farming activities such as commercial and residential lettings, retailing of farm produce, leisure facilities and tourism in order to boost their income. Annual income from diversification is worth millions to the farming industry. Total income from diversification for 2006/07 was £430 million1. Yet despite this, farmers with enterprising proposals for farm diversification still face major barriers in the form of banks reluctant to lend to them and a planning system that is still overly complex and confusing despite several attempts at reform over the past decade.
This article examines the financial and planning barriers to diversification, and offers farmers some guidance on what issues they need to be aware of when considering diversification schemes.
Farm diversification
It should be a good time for farmers. Land values remain stable and healthy. There is more public interest in the rural and agricultural way of life than ever. In theory Government policy supports diversification into non-farming, stand-alone enterprises, and aims to encourage environmental schemes, both in land management and alternative, sustainable energy projects.
The farming community has, for many years, been forced to seek alternative sources of income that can help spread the risk of the traditionally volatile farming business, but now more than ever projects need up-front, often serious levels of capital investment. The range of diversification available to a farmer will depend on the location and geographical conditions of the land, and whether there are any planning or legal restrictions, and these in turn will affect suitability for funding. Farmers should also have an eye on tax considerations - just as they are embracing diversification more fully, HM Revenue & Customs are taking a closer look at projects that claim agricultural or business property tax relief or for VAT exemptions.
Bank funding
The turmoil in the financial markets over the last 12 months has affected the farming community looking to support capital investment, despite a healthy rise in land values in previous years boosting collateral security that can be offered to lenders. Many farming clients are finding that their long term 'financial friend' with whom they have banked for years now sets tighter restrictions on lending criteria, to the extent that borrowers may be forced to look elsewhere for better deals. On the one hand this is no bad thing - it means that they take advantage of a competitive marketplace. On the other hand it means that they may be severing the trusted relationship with a local advisor who understood the volatility of their particular business.
Local bank managers are keen to emphasise that they are still open for business, but they have less flexibility in interpreting stricter centralised policies, and potential projects require greater scrutiny.
Mark Ashbridge of Savills Private Finance feels that the market is settling down. Where once lenders commonly charged 1% over base rate on e.g. long term loans of £1 million, the credit crunch provoked a knee jerk reaction of interest rates of as much as 2%-3% over base rate. Now the volatility seems to have steadied though currently, he says, you would be lucky to find loans offered at less than 1.75% over base rate. Mark points out that lenders are more specific about the security they are prepared to accept. For instance they will shy away from commercial development projects where the rental income market is weak. Where once they may have been happy to rely on residential buildings, the marketability of residential accommodation is still fragile (although there are signs that it is picking up in some areas) and low grade buildings in a poor location won't be considered. Loan to value ratios of 50% -70% can be achieved provided the debt can be serviced by other, non-farming sources of income.
Clearly, then, farmers should be prepared to research potential schemes carefully, and present lenders with a well argued business plan and cost benefit analysis.
Grant funding
If clients cannot get the full funding required from banks, there are a number of central and local government grants available which may at least help with a proportion of the capital investment. The Rural Development Programme for England (RDPE) operates through Natural England for agri-environmental schemes, and the Forestry Commission for woodland grants, as well as regional bodies such as, in our clients' area, the South East Development Agency (SEEDA). Regional bodies now operate through Leader or local action groups with the aim of speeding up the application process2. Although they will not provide up-front funding and require evidence of e.g. 50% of capital investment which they will then match, they will work closely with applicants to assist and advise. Leader groups have fixed funding to distribute, and typically the maximum they will grant for any one project is £50,000, although larger applications can be made direct to the regional body. Some diversification projects will not be suitable for grant funding. Part of the criteria is that the project is sustainable after funding is finished, that the project will make a difference to the local community and that it is innovative i.e. that it is not being copied nearby.
Viable diversification
Clients will be looking to strike a balance between tying up land over a long period of time, the investment cost and the achievable return, and reducing the commercial risk. Developing farm buildings into commercial business lets will, apart from planning considerations, depend on location and circumstances as to the achievable rental income in the short and long term, and in some cases it may still be possible to persuade the planners and the banks to support such development. The planners are currently enthusiastic about accommodation for holiday lets, though they could be labour intensive, but one must consider how cost effective it would be to manage the lettings business, whether employing a family member or a professional management agency.
Some projects may cost very little and produce a reasonable level of income. One enterprising land owner rented an unused hillside field to a leisure group for one of the newer activities, ‘zorbing' - i.e. rolling down a hill inside a plastic ball! No, or low, cost and good rental income.
Easements and restrictions on title
Clearly farmers need to check whether there any legal restrictions or obstacles to overcome with regard to land use. For instance clients should be advised as to whether their freehold title or tenancy agreement will permit them to carry on non-farming activities or to develop the land. Rectifying problems on their title may be costly and an added expense to factor in.
There may be an absolute or qualified restriction on development, and it may not be possible to trace the original covenantee to request that the restriction be waived or released. Developing an old barn or dairy into residential or commercial use will require new or enhanced utility connections. One cannot assume that the title will have express rights to access, renew, enhance, repair and maintain water, sewer or gas pipes or electricity cables, or make connections to the mains supply directly or across neighbouring land. It could take considerable time and money to obtain statutory undertakers' permission, let alone the consent of a neighbouring land owner.
A problem may arise where the land comprises two or more titles. Although they maybe in the same ownership, the rights benefitting one title may not benefit the other(s), so that e.g. access to one area may not be extendable to the adjacent area. Solicitors should be particularly careful when acting for clients granting a charge to lenders over part only of land in a title. Should the client default and the lender need to operate its power of sale, the charged land must be able to be separated from the retained land so as to have adequate rights of access, utility service connections and access for repair and maintenance. As the land is owned by the same proprietor, the owner cannot grant the necessary rights to itself over the charged land, because of unity of seisin. It may be worth applying to the Land Registry to split the title, if there is good reason or sufficient evidence to indicate that the land is destined for development, but it is at the Land Registry's discretion.
Another way is to offer the lender an option to acquire easements over the retained land effective upon power to sell. An option is registerable on the title but only enforceable for a maximum of 21 years, and if the lender's charge extends for a term of say 25 years (or in the past as much as 40 years), provision needs to be made for a further option to be granted.
Problems may not be insuperable or reduce viability of a project, and the client may be able to obtain indemnity insurance, but the costs may escalate as a result.
Planning barriers
Farmers who are able to successfully secure bank loans or grant funding face further barriers to implementing their diversification plans in the form of our present planning system. Despite the government introducing numerous reforms to the planning system in England and Wales over the past decade, today's farmers still face an overly complicated planning application process and local authorities often unwilling to permit even minor development in the Green Belt or rural areas. So what has gone wrong?
The decade started promisingly enough. In 2004, the government introduced Public Policy Statement 7 entitled Sustainable Development in Rural Areas3. PPS7 sets out the government's main policies on development in rural areas to be followed by all local authorities when deciding planning applications. PPS7 requires that all local authorities should be supportive of well-conceived farm diversification schemes for business purposes that contribute to sustainable development objectives and help to sustain agricultural enterprises, and are also consistent in their scale with their rural location. Furthermore, PPS7 requires that local authorities give favourable consideration to proposals for diversification in Green Belt areas, where possible. The national policy is therefore very clear: local authorities should be supportive of farm diversification schemes. Sadly, this has not been the common experience of many farmers.
In 2004, the government sought to increase the transparency of local planning policy making and speed up the decision making process by bringing in the Planning and Compulsory Purchase Act, but this Act failed to deliver on many of its promised reforms to our planning system.
Perhaps in recognition of these failings in the system, in 2006 the government commissioned the Barker Review of Land Use Planning. The Barker Review made a number of wide-ranging recommendations that included removing some of the major barriers to farm diversification. One of Barker's key recommendations was that our planning system should allow a wide range of economic activity and not unduly restrain development in rural communities.
In 2007, in a follow up to the Barker Review, DEFRA tried to identify in more detail the barriers to farm diversification and to make recommendations on how they could be removed. The resulting report, Barriers to Farm Diversification, acknowledged the vital importance of diversification within the farming industry and that alternative and additional enterprises can make a valuable contribution both to total farm business incomes and more broadly to the rural economy4. The DEFRA report made numerous recommendations for removing planning barriers including: the need for the planning procedures to be simplified; permitted development thresholds widened to allow more minor development on farms; more resources to be set aside by councils for pre-application consultation between planning officers and farmers to encourage diversification; and requiring local authorities to give consideration to the economic costs and benefits of farm diversification proposals equally with any social and environmental impacts.
Two years on, the government commissioned another report this time from Liberal Democrat MP, Matthew Taylor. The Taylor Review was asked to report on how our planning system could better support rural businesses and deliver more affordable housing in rural areas5. The Taylor Review, published in July 2008, found a recurring message from their research was that national policies, such as PPS7, are not being implemented consistently or as intended at either regional or local levels. It found many local planning authorities give more weight to other competing Planning Policy Statements such as transport and town centre planning with their environmental and urban bias against development in rural areas.
The Taylor Review recommended the following: that development proposals in rural areas should not be turned down simply because it is not accessible by public transport; better pre-application discussions; new planning policy that better recognises that all forms of business can be appropriate in the countryside; an end to planning rules and practices that encourage small rural businesses to move out of the countryside into urban centres as soon as they start to grow. In March this year, the government published its response to the Taylor Review and accepted most of its recommendations including those on how to remove planning barriers to farm diversification. At the end of last year the government brought into force the new Planning Act 2008 in a further effort to streamline our planning system. The Taylor Review makes further legislation likely.
Too much red tape
David Jarman, a planning consultant with Hobbs Parker Property Consultants LLP, says "A key barrier to farm diversification projects is the level of complexity demanded by local planning authorities for planning applications. This will often include full detailed plans, a design and access statement, landscape and/or ecological assessment, transport statements and farm business plans as well completed application forms. Significant investment is required to get a scheme to the Council, often without any clear guidance from the planners as to whether it is likely to be acceptable." Jarman feels that one of the reasons why barriers remain is because "rural development is not often deemed to be a priority by the Government and focus has tended to be on urban areas and infrastructure. There is also often a general resistance to change and associated development in this area, which may be to the detriment of well founded farm diversification schemes."
As we approach the end of a decade that has seen a lot of new planning legislation and worthy reports on how to remove barriers to farm diversification, it seems that for entrepreneurial farmers, many unnecessary barriers still exist in our planning system. It is therefore perhaps not surprising that we in the legal profession often have client farmers, who have attempted diversification, come to us when their projects have fallen foul of planning controls either because they thought the proposals were within their permitted development rights or because they failed to obtain the necessary consents from their local authority because of what they perceive to be costly 'red-tape'. Farmers who commit serious breaches of planning control risk their local authority taking enforcement action and imposing substantial fines which can damage their businesses.
Summary
Gone are the days when farmers could rely on the local bank manager to argue their business plans for them. Farmers must also properly prepare their planning applications for diversification projects without assistance from their local planning authorities. If they want to be able to overcome funding and planning barriers, they will be expected to back up diversification plans with a thorough feasibility study. They need to improve their business skills and knowledge, as well as seek assistance as early as possible from their land agents, lawyers, accountants and planners.
1. DEFRA Farm Business Survey 2008
2. Details of grants from www.defra.gov.uk/rural/rdpe/progdoc.htm and of the Leader network at http://www.ukleader.org.uk/
3. Planning Policy Statement 7: Sustainable Development in Rural Areas, Office of the Deputy Prime Minister, 3 August 2004
4. Barriers to Farm Diversification - Report of the Joint Industry-Government Working Group published by DEFRA in May 2007
5. The Taylor Review Living Working Countryside 23 July 2008