Between 2006 and 2016, the value of farmland increased by 277% according to a report by Savills. This certainly makes agricultural land a sound investment but it also means that care needs to be taken when buying and selling such a valuable commodity.
As with any property purchase, the overriding principle is caveat emptor, or buyer beware. Although the seller of land is obliged to answer direct enquiries about the property, the onus is on the buyer to find out as much as possible before exchanging contracts (i.e. the promise to buy). It is notoriously difficult to bring a claim of misrepresentation if a buyer believes they have been misled by a seller. This guide is here to help you avoid the many pitfalls en route to a successful sale or purchase of farmland.
What is involved in the sale/ purchase process?
Understand how the land is owned
Most people buy or sell land as a standalone asset, in other words as a straightforward transaction funded either through a mortgage, or other debt finance, or cash. However, if the land is part of a company, buying it could entail the sale or purchase of shares in the company which owns the land. The latter is a more complicated arrangement attracting significant due diligence and liability issues. Anyone deciding to purchase land via company shares needs to understand the nature of the transaction and take professional advice accordingly.
Methods of buying and selling
Most standard land sales / purchases are conducted by ‘private treaty’ which is usually arranged through a land agent. The advantages of a ‘private treaty’ sale / purchase include confidentiality during the process of the transaction (although the Land Registry will record the identity of the purchaser and the price paid once the transaction is completed); and the opportunity to walk away from the transaction right up until the point of exchange. Drawbacks include sellers trying to introduce tight deadlines for completion by keeping the property on the market, and introducing an informal tender process in an effort to drive up the price.
One alternative is to sell or buy via auction. Although in the past this was seen as a way of securing land at a lower price, this is no longer the case. Prices at auctions can reach spectacular heights if bidders get carried away. There are several other disadvantages: auctions are public events so there is no privacy around the transaction; and the property is sold on the spot so the buyer must have cleared funds within a few days. If they fail to come up with the finances, they may be liable for damages if the contract is terminated. Generally speaking, we would only advise buying at auction if you know exactly what you want and have done enough preparation to know what you are buying. Otherwise it can be a risky – and expensive - way of purchasing land.
Less popular than informal tenders, formal tenders give sellers an opportunity to push for the maximum possible price by asking for sealed bids, accompanied by the deposit, by a given deadline. The sellers are not obliged to take any of the offered bids but if one is accepted, the buyer is expected to sign the contract to purchase the property shortly afterwards.
After making an offer, but before exchange of contracts, the buyer’s solicitor must undertake a comprehensive due diligence exercise with the objective of identifying any potential problems. Sellers would be well advised to compile a list of replies to any potential pre-contract enquiries, not least to save time on later contract negotiation. However, as already stated, it is the buyer’s responsibility to check that they have all the information they need before proceeding with the transaction.
Establishing proof of ownership: the first thing a buyer’s solicitor will do is to check that the land is owned by the seller.
- Investigation of title: before online registration at the Land Registry, investigation of title used to be carried out between exchange of contracts and completion which essentially means getting hold of the title deeds (documentary proof of ownership). If the land is registered, ownership is established almost immediately, preventing any future delays. Obviously, with unregistered land, there is more risk of title issues coming to light during the buying / selling process.
- Registered land: if the land is registered, the Land Registry will hold an electronic record confirming ownership along with any rights and liabilities attached to the land. However, further enquiries might be required if, for instance, there is evidence of unauthorised occupation (for instance where an adjoining property owner has been using a field for, say, grazing livestock without a formal agreement).
- Unregistered land: if the land has not been registered (which may be the case if there has not been a ‘trigger event’ requiring the land to be registered such as a previous sale), the buyer’s solicitor must obtain a certified copy of the title deeds as proof of ownership. As part of the sale / purchase process, it is now a requirement to register any unregistered land. Not only is it easier to protect freehold registered land from squatters, it also comes with a government guarantee of ownership.
These are an important part of due diligence and buyers should always commission them, except in very exceptional circumstances (for instance, if they are cash buyers of the farm of which they are already tenants). Searches can be compiled through a combination of desk research and site inspections and are particularly useful when determining matters such as:
- rights of way
- planning notices and permissions (including any local or national infrastructure plans which might impact on the property)
- Sites of Special Scientific Interest (SSSI), listed buildings, conservation areas and historic monuments
- chancel repair liabilities
- mineral rights (land ownership does not automatically confer ownership of mineral rights)
- environmental issues (such as drainage and pollution risks)
Acting on the principle of ‘buyer beware’, it is prudent for the buyer’s solicitor to raise pre-contract enquiries not least as they compel the seller to respond with a statement of fact -rather than belief - which can be more readily relied upon in the event a claim of misrepresentation arises. For agricultural land these enquiries could be very comprehensive so it is advisable to use a solicitor experienced in agricultural land transactions. Sellers would be advised to answer these enquiries as fully as possibly in order to avoid future accusations of misrepresentation. Specific questions could cover:
- BPS entitlements
- environmental/countryside stewardship agreements
- agricultural tenancy rights
- restrictive covenants (for instance limiting the use of the land for certain activities, such as residential)
- existence of sporting and riparian rights (sellers might consider selling these rights separately)
- holdover relief entitlement
- development land potential
- crop and yield records
- livestock statistics (such as lambing and calving rates) if relevant
- water abstraction licence; drainage plans
- personal and statutory rights which might include licences and any overage payments
- recreational use of land, not designated as a right of way, which might be subject to a village green application
Establishing the boundary
The boundary will be marked on an Ordnance Survey plan (usually on a scale of 1:2500) which forms part of the title deeds. However, it may be drawn inaccurately or so thickly as to obscure the exact line. Walking the boundary is the only certain way of checking exactly where it falls. This exercise can also identify other issues, such as access rights, ransom strips, illegal dumping of waste, or pollution risks which would otherwise not be picked up (see searches above). Establishing the ownership of land adjacent to a publicly adopted highway, often a verge between the road and the hedge / fence is not an uncommon issue and may throw up questions relating to access rights to and from the farm. If a river forms part of the boundary, it is presumed that the actual boundary line is the middle of the river – and that the boundary stays with the river even as it changes course over time.
Framing the contract of sale
What contracts include
Contracts of sale should refer to Standard Conditions which are clauses, drafted by the Law Society, relating to standard elements such as general definitions of terms, the process and timing of exchange and completion, penalties for not completing the transaction, how and when payment should be made, insurance and liabilities. These Standard Conditions are usually attached as a separate sheet. Given the particular nature of a farm transaction, a contract of sale will almost always include Special Conditions, clauses covering specific matters such as entitlement transfer, which will form part of the contract itself rather than as an attachment.
There are other contracts which can be drafted specifically either to delay or eliminate the tax point (relating to Capital Gains Tax) which occurs at exchange. These can include conditional, rescindable or binding contracts all of which can be drafted to achieve the maximum tax advantage.
It is essential that all contracts clearly state whether or not the property is sold with vacant possession which means that the buyer must be able to occupy the property. This is particularly relevant when buying a tenanted farm – the seller must ensure that the tenant (and all his assets) has vacated the property. It is worth noting that anything left on the farm, from livestock and old machinery, to rubbish and containers, will cause a breach of the seller’s obligation to give vacant possession. Solicitors drawing up a contract of sale for a working farm should insert a clause requiring the seller to leave the farm tidy and clean and that anything left behind becomes the property of the buyer.
From exchange of contract…
This is the point at which the buyer, satisfied that all queries have been satisfactorily answered and all searches completed, pays the deposit and acquires a beneficial interest in the farm. The seller retains the legal title to property until the transaction completes and remains in actual possession of the farm.
The transfer deed (which officially transfers ownership of the property from the seller to the buyer) must be signed by the seller (and witnessed by someone other than a family member) before the transaction can complete. Once the seller’s solicitor has received the balance of (cleared) funds for the property from the buyer the transfer can be dated. The buyer’s solicitor must now arrange for payment of the Stamp Duty Land Tax and register the transfer of the property to the buyer at the Land Registry. Once this has occurred, the seller’s legal title is transferred to the buyer and the latter can legally take possession.
Breaches of contract
A breach of contract occurs when the transaction does not complete due to the failure of one of the parties to fulfil their obligations. Reasons might include the buyer’s failure to raise the completion money in time; the seller’s failure to sign the deed of transfer; or the failure to grant vacant possession. It is important to differentiate between delay and outright failure to complete – the latter will amount to a fundamental breach of contract.
If either party delays completion, the innocent party is entitled to compensation, expressed in interest terms (the rate of which will be specified in the contract)
Notice to complete
The innocent party can serve a notice to complete if the other party has failed to complete on time. At this point it is essential for the defaulting party to complete otherwise they risk the contract being terminated.
If the buyer fails to complete the transaction at the specified time, the seller can claim the 10% deposit, essentially as ‘damages’; or a contract can be terminated in the event of a fundamental breach by one of the parties and this is usually accompanied by a claim for damages, based on the loss incurred by the injured party; or a claim for ‘specific performance’ can be made by way of a court order. This puts the onus on the defaulting party to complete the transaction. If they are unable to do so, the injured party can apply to the court either for an enforcement order or an instruction to terminate the contract, usually run alongside a compensation claim for loss incurred.
The key to success in buying or selling a farm or an estate is to adopt a methodical approach to due diligence based on knowing where the risks might lie. If buying, visiting the property with your advisers is a tried and tested way of uncovering any potential glitches which may hamper the progress of the transaction. A thorough examination of all the facts relating to the property will do much to help the smooth transfer of ownership.
Personal Rights when Buying and Selling Farmland
The crucial difference between property and personal rights is that the latter are attached to an individual and not the land. In other words, anyone purchasing land is not bound to take them on (although they can agree to do so if they wish). Nonetheless, from a legal perspective it can be difficult to differentiate between a property and a personal right if the agreement governing the latter is not carefully drafted. This is particularly the case when granting a licence (a personal right) which gives someone the right to occupy your land on a non-exclusive basis for a temporary period. Such a licence can easily morph into a lease (and the accompanying protection it confers) if you are not assiduous about maintaining the conditions of the licence.
Licence or lease?
The essential difference between a licence and a lease is that the former is granted for non-exclusive occupation of the land in return for a fee, rather than regular payment of rent. As such, licences are usually granted for a period of less than a year with no automatic right of renewal and bestow no rights of tenure on the licensee. A common example is a grazing licence used by a landowner to allow someone else non-exclusive use of their land to graze livestock, usually during the summer growing season. A licence should not carry any repair obligations and would oblige the licensee to vacate the land on expiry of the agreement.
It is important to ensure that you do not use a licence agreement for an arrangement which is technically a lease; by the same token, do not allow a licence inadvertently to turn into a lease. A lease is a tenancy which is defined by having exclusive occupation of the land in return for payment of rent which gives security of tenure and means that the landowner has to go through a legally recognised process in order to regain occupation.
Shooting rights are also generally covered by a licence on the basis that the land cannot be exclusively occupied by someone exercising shooting rights. However, as pointed out earlier, if shooting rights are granted by deed, they would be binding on a future purchaser.
Licence to abstract water
A licence to take water (abstract) from a borehole or spring is only required if the quantity taken exceeds 20 cubic metres in a 24 hour period. It is the occupier of the land who is entitled to hold an abstraction licence. If the purchaser of the land is also the occupier then the licence must be transferred to them. The licensing authority is the Environment Agency.
There are a number of other licences which may apply to the property, such as wedding licences and entertainment licences (for the sale of alcohol or to play live music for instance). These are attached to the seller and, although they can be transferred to the buyer (providing they have the requisite experience to hold such a licence), there is no obligation.
Retaining the right to profit from future uplift in land values
Otherwise known as clawback or overage, a landowner needing to sell land which, they suspect, may increase in value at some point in the future because it has development potential, can retain a personal right to receive a percentage of any future increase in the value of the land. However, any payment will be conditional on a particular future event occurring (within a set timeframe), normally the grant of planning permission.
As this right of clawback belongs to the original seller of the land, in order to ensure that all subsequent owners of the land in question remain bound to honour the right, it is essential to register this right at the Land Registry. Once registered, any future purchaser of the land will have to enter into a new covenant with the original holder of the right of clawback. An agreement detailing this arrangement must be very carefully drafted to prevent future purchasers trying to avoid paying the agreed percentage to the original seller. The inclusion of a clawback clause in sale negotiations can prolong the process, particularly if the original seller, or their successors, cannot be easily traced.
Rights of way
A public right of way, recorded on the ‘definitive map’ (held by the local authority) is a statutory right meaning that the public has a legal right to access all public rights of way. There are a number of categories:
- A carriageway (or highway) is open to all vehicular and most non-vehicular traffic (save motorways). The local authority is responsible for maintaining it.
- A BOAT (byway open to all traffic) is open to all vehicles but is usually used for footpaths and bridleways. The local authority is responsible for maintaining it.
- A restricted byway is open to non-mechanical vehicles, pedestrians and horses. The local authority is responsible for maintaining it.
- A bridleway is open to pedestrians, cyclists and those on horseback (including leading another horse) only. The landowner is responsible for maintaining it including any stiles and gates.
- A footpath is open to pedestrians only. The landowner is responsible for maintaining it including any stiles and gates.
Landowners must not deliberately obstruct a right of way (to do so is an criminal offence) but they can erect new stiles or gates with permission from the highways authority.
Commons and village greens
Applications to register land as a town or village green (TVG) have risen in recent years by local communities wanting to prevent development of a particular piece of land. If a landowner has not objected to people accessing their land for recreational purposes (dog walking for instance) for over 20 years, then that use can be described as ‘as of right’ which can give lead to the land being registered as a TVG. To avoid this occurring, the landowner can either prevent access or expressly permit access (by use of fencing or warning notices): both tactics will interrupt the 20 year accrual period.
Breaches of planning permission
Anyone buying a farm or estate needs to be aware of any planning consents for the property and any breaches of those consents which may have occurred. Although planning permission does not have to be transferred, any breaches, such as unauthorised development, or any breaches to the conditions attached to planning consents, will be the responsibility of the buyer. Therefore it is imperative that initial enquiries cover what planning consents have been granted, and that they have not been breached. For those breaches which carry a specific penalty (such as those relating to a listed building), it is the perpetrator of the breach, and not the buyer, who will suffer the penalty. However, it will be the buyer who will be expected to rectify the breach.
Property Rights when Buying and Selling Farmland
What are property rights?
‘Property rights’ is the collective term used to describe both the rights and liabilities attached to freehold land and which automatically pass to the buyer on purchase. Most of these property rights will be instantly recognisable, such as tenancies and leases but there are other, archaic rights which continue to exist although the reason for their existence expired long ago, such as chancel repair liability.
Leases and tenancies
When buying farmland, one of the first things a buyer needs to do is establish if the land is occupied and if so, by whom, and whether such occupation is exclusive. The seller may be in exclusive occupation of all the land or only a proportion of it as the remainder of which may be let as tenancies or leases, occupied exclusively by the tenants / leaseholders. Buyers do need to differentiate between those individuals who are in occupation and those with a right to be on the land or to have access to it. For instance, the owner of any sporting rights on the land may have an agreement to access those rights but is not considered ‘in occupation’. The same applies to contractors, with whom the buyer will need to draw up a new agreement if they wish to retain their services. Employees of the landowner will not count as occupants of the land although the sale agreement may require transfer of their employment (which is a separate issue).
Whether or not the buyer has to honour the existing occupational rights will depend on their legal status and whether or not they have been registered at the Land Registry. If the tenant has security of tenure under legislation such as the Agricultural Holdings Act 1986 or the Agricultural Tenancies Act 1995, then the buyer is bound to accept their tenancy rights. Buyers can agree to take on rights which have no security of tenure, such as grazing agreements, but there is no requirement to do so.
Can a buyer terminate occupational rights?
Yes, if a buyer wants exclusive occupation, there are means by which he can terminate occupational rights before the completion of the transaction. However, they need to be carefully executed if they are to be enforceable:
- Notice to Quit: this can only be served if a legal right exists to enable the landlord to do so. Such a method is time sensitive and can be challenged.
- Agreement to Surrender: this will only work if it can be proved that the agreement is not an attempt to contract out of statutory security of tenure.
- Deed of Surrender: this documents the Agreement to Surrender and makes it legally binding from the date of the deed.
- Surrender by operation of law: this applies if the tenant’s action implies that he is surrendering the tenancy (for instance by relinquishing it) and the landlord accepts the surrender. The surrender of a tenancy is usually accompanied by a surrender payment to the tenant by the landlord (the buyer in this case as a deed of surrender will be signed after exchange but prior to completion). Such a payment will attract both SDLT and CGT and possibly VAT depending on the tenant’s arrangement with HMRC with regard to their lease.
Restrictive covenants are treated as property rights, unlike an ordinary covenant (or contractual promise) which is treated as a personal right as it is enforceable against the original person who made the promise. Restrictive covenants bind the land, not the owner. An example of a restrictive covenant could be the prevention of development on part of the land which, if it was sold, would continue to apply regardless of who bought it. There are ways of paying for the release of a covenant but that relies on being able to find out who is able to enforce the covenant. This can be particularly difficult where various parcels of land have been sold off from the main estate; in this scenario, the individual landowners can all enforce the covenant against the person trying to lift it on their plot.
An easement is a property right which grants a right of way or a right of access to a third party. Examples include an easement granting a right of way across a neighbour’s land, or from a public highway, to reach the farmhouse or farm buildings, or where a utility company needs to gain access the land in order to lay and maintain a pipeline or electricity pylon.
If responsibility for repairs and maintenance is not documented in a deed, then the benefiting parties will have the right to repair and maintain the easement – but will have no obligation to do so. If the easement cannot be accessed due to a physical impediment such as overgrown vegetation, the party benefiting from the easement (such as a utility company) has the right to remove the impediment. If the parties cannot agree or come to some accommodation, their only option may be to seek a court order – but this is an expensive solution and shouldn’t be necessary in the majority of cases.
Sporting rights and profits à prendre
Sporting rights are defined as the right of a landowner to shoot or fish wild animals (including birds raised in captivity and then released) across their own land (subject to the law governing such activities). Profits à prendre allows someone to take something from another person’s land – this could be part of the land (minerals for instance) or something growing on the land (for instance, grass).
These rights are automatically passed to the buyer of the land unless they have been specifically excluded (reserved) from a sale or granted as permanent rights to a third party (usually in return for payment). Both reserved and granted rights should be on the title deeds held at the Land Registry. If the land is tenanted, the landowner has to reserve the right to shoot or fish out of the grant of the lease. Sporting and profit a prendre rights can also be acquired through uncontested use over 20 years or more, or they can be leased to an individual or club (such as an angling club).
An option agreement between a landowner and a potential purchaser of the land (or part of the land) gives the latter a legally binding agreement to buy the land either by a certain date or once a particular event (commonly the granting of planning permission) has occurred. Such an agreement is accompanied by a non-refundable deposit (which may be set against the final purchase price), essentially committing the would-be buyer to actually go ahead with the purchase. As a property right, an option to purchase must be registered at the Land Registry against the relevant land as it is binding not only on the owner who granted the option but also on future owners. Time limits relating to option agreements have changed – on those drawn up before 6 April 2010, there is a 21 year limit on an option; since 6 April 2010 there is no time limit (although it is good practice to insert one in the agreement).
A pre-emption agreement is a property right which essentially gives someone the right of first refusal if and when the landowner decides to sell land (usually because it has development potential). If that right is exercised, the next stage would be to draw up an option agreement committing both parties to the arrangement.
A pre-emption agreement does not have to be writing (although it makes sense to do so) and has to be registered at the Land Registry meaning that it will be binding on future owners of the land. However, a pre-emption does not oblige a landowner to sell the land – it just means that should he decide to do so, he has a purchaser in hand. However, he will need to take care that he does not inadvertently trigger the pre-emption by, for instance, making enquiries about the potential market value of the land. Conversely, if the land comes onto the market and the holder of the pre-emption right decides not to buy it, then he loses that right for good.
Ancient rights (or overriding interests) have, historically, been difficult to discover on an inspection of the land and most of them are, in fact, rather esoteric, historic relics that should have little bearing on modern property ownership. Many are connected with the old feudal titles associated with Lordships of the Manor. However, although seemingly archaic, a landmark case, Wallbank v Aston Cantlow, concerning an overriding interest in the form of chancel repairs brought an old right sharply into modern focus and led to the House of Lords recommending that the ‘archaic and capricious’ law was changed. Since 13 October 2013, any ancient rights (including chancel repair and manorial rights not registered with the Land Registry) will have been lost for good meaning that, unless the rights are registered, any prospective purchaser can safely ignore them should they appear at a later date (although they remain binding on the existing owner until the property is sold).
all images adapted from freepik.com