To contract or not to contract?
Given the contents of the Defra consultation on the future agricultural policy in England, particularly the proposed changes to the Direct Payment system, there will be some people that are now actively considering changing their farming arrangements. For larger farm businesses currently farming land under Farm Business Tenancies or those farmers looking to quit active farming, contract farming may appear as an attractive option.
Indeed it can be, but a recent legal case has highlighted what is required in order to create a legally defensible contract farming arrangement. The case was actually in Scotland and was heard in relation to a tenant farmer operating outside the terms of his agricultural tenancy but the principles outlined by the Scottish Land Court will have relevance for contract farming agreements across the UK.
The case, Fyffe v. Esslemont, concerned whether or not the tenant had breached the terms of his agricultural lease, which forbade sub-letting the land. He maintained that the arable land was farmed on a contract farming agreement. The Court held that this arrangement was a sham as it simply involved the exchange of paper invoices and the contractor keeping the crop. In this case, the tenant lost his statutory rights of protection. In non-tenancy related cases, if the contract farming arrangements were held to be false, valuable tax reliefs could be lost.
Helpfully, the Court set out the requirements to create a “true contract farming” agreement:
- a form of contract for services under which the landowner engages an individual or corporate entity to farm the land on his behalf
- normally the contractor provides the labour and equipment
- the extent of the contractor’s discretion is a matter for negotiation in every case
- the normal consideration payable to the contractor is a fee that may have a profit-related element
- the farmer assumes risk with regard to his income
- the only guaranteed payment is to the contractor, with any surplus after the other costs of production have been met split between the farmer and the contractor according to an agreed ratio.
- if the contractor orders the inputs on behalf of the farmer, the farmer will pay for them, often through a separate bank account into which any resulting income is paid
- the nature of such an agreement makes it essential that a formal contract regulating the rights and responsibilities of the parties and how it is to be administered is set in place.
As I so often have to say, it really is worth getting your farming agreements formally documented to ensure that they will stand up to scrutiny.
As an aside, in this case the tenant had diversified into a non-farming enterprise which was based on the holding and had become his main source of income. Although not integral to the case, the Court saw fit to comment on the needs of such diversification to be compliant with planning law and also the requirements of Business Rates.
If you would like any further information or to discuss any rural related matter, please contact Tom Wills, head of the agriculture & estates department at Sintons.