East Midlands: dealing with perennials

Only 12 months ago lifestyle buyers looking to invest in a piece of rural idyll were still pushing up agricultural land prices in the desirable parts of the East Midlands. Many of them have disappeared in the economic meltdown but cash-rich buyers are still sniffing around for bargains. The difference now is that they seem to be a lot more interested in actually farming the land rather than turning it into their own 'forever England' dream. But, although demand has contracted, it still outstrips supply, a factor that has contributed to the continued rise in land prices when, elsewhere, property values have been tumbling. Add to this government plans for housing development and an unusual set of contradictions begins to emerge, further compounded by the renewed interest on the part of lenders in farmland.

'In the past two or three years, land has undoubtedly proved to be the most solid asset. It has retained or increased in value during the recession and has been pretty much bomb-proof,' says agricultural law consultant Peter Geldart.

Grazing land is the greatest beneficiary, according to Geldart, with prices in and around cities now going for as much as double the price of ordinary agricultural land. 'In some parts of the region, it is not uncommon for grazing land to reach £20,000 per acre,' he says.

Land prices climbing

Even if you are not prepared to pay such prices for a patch of grass for your horse, agricultural land prices in the region in general have been going up as much as availability has declined and as other sectors of the economy suffered.

'Agriculture is the only sector in the commercial world which has stayed out of the recession,' comments Andrew Fearn, head of private client at Langleys in Lincoln.

The reasons are unclear. 'Commodity prices aren't great but land prices have stayed very strong and there is evidence that they are getting stronger,' Fearn continues.

One likely explanation is that the large estates are getting bigger in response to the recession. The pressure the downturn has placed on the economy has forced agricultural businesses to seek economies of scale through expansion. As these businesses are looking to acquire the land needed to achieve these objectives, competition for this scarce resource has pushed prices northwards.

The pace of the market has kept many law firms' property departments busy, with Fearn estimating that his firm has worked on as many transactions last year as before the recession.

Interest from cash-rich buyers has also contributed to keeping land prices healthy. Unlike the previous wave of lifestyle buyers, however, these new recession buyers are keener to buy into the countryside and into the rural community. 'There are still people with cash, whether they have made money through substantial bonuses or otherwise, and more of these buyers are buying smaller farms with a view to retaining their purpose as a working farms, not just as an amenity,' says Peter Geldart. The downside for farmers is the resulting pressure on prices and availability of land.

Housing opportunities

Government housing policies are another factor sustaining the long-term value of land. The East Midlands is one of four regions targeted by the government for housing growth. These are ten-year targets or more but local development plans are already fuelling price rises as businesses are jockeying for position.

'Much more land will be needed to meet the forecast housing needs and it has boosted the hope value in certain areas,' says Peter Geldart. One area already preparing for transformation is Kettering and the A14 corridor, but Geldart says other areas in north Nottinghamshire have been attracting interest ever since the possibility of being selected as priority housing areas has been mooted a few years ago.

Gareth Williams, head of agricultural and rural business at Hewitsons' Northampton office, says his firm has seen a moderate but noticeable rise in development interest but that activity levels are not what they used to be.

'It used to be possible to sell development land and get good cash for it but it's no longer so easy. Deals haven't come through, so the plans landowners had that relied on this source of funding have been put on hold,' he says.

But Williams reports that the firm has seen a number of projects coming its way on the back of affordable housing plans. 'There is money available for registered social landlords (RSLs) and that's creating opportunities,' he continues. 'It has not had a significant effect yet but it's an interesting sign that land is beginning to be bought and that cash should start flowing into the system again.'

Williams otherwise agrees that while the sector is not totally recession proof, it has not suffered the same adverse fate as other commercial sectors. Certainly, he says, there has not been the same level of business closures as in other sectors.

'Farming is inherently counter-cyclical,' he says. 'Commodity prices go through peaks and troughs irrespective of the wider economic circumstances, and they have not dropped during the recession; the key factor influencing food and grain prices are world markets, so as long as trade continues with countries that keep the recession under control, farmers will remain in a comparatively stable position.'

The only members of the farming community likely to have been affected by the economic crisis are those who may have sought to expand on a large scale, either because they entered the recession overgeared, or because they looked to expand dramatically.

Increasing competition

Uncannily, banks have remained keen '“ within reason '“ to continue to lend to this market, sometimes offering highly competitive terms in an attempt to lure clients. Low interest rates have also helped increase competition.

'Banks have continued lending because it has usually responded to a business need that has always been there: every year farmers have borrowed to buy equipment or essential products such as grain or fertilisers,' says Williams.

Such established relationships between borrower and lender have worked to the benefit of farmers, as banks have been more prepared to lend to agri-business than to new start-ups. The continued rise in agricultural land prices has helped and few farmers have had facilities withdrawn.

According to Andrew Fearn, agricultural clients are seen as so reliable that banks have been fighting over their business.

'I have never seen as many clients changing banks,' says Fearn, 'but because the sector is seen as one of the strongest, banks are offering particular competitive terms.'

The recession has nonetheless brought a number of issues into the spotlight.

'We have been doing a lot more restructuring work, which is a sign of an industry under stress,' Fearn continues. 'It's not necessarily done from a defensive position but landowners recognise that there are particular business needs in the current climate, in particular to ensure that the business is in good shape when it passes on to the next generation.'

Tomorrow's farmers

Whether there is a next generation and how the business owner manages the handover is, in fact, an increasingly critical issue for many farmers and landowners.

'Succession is a perennial issue,' says Gareth Williams. 'It's always better to hand over the reins of the business early on '“ you don't really want to be in a situation where the son takes over on the father's death but has no real knowledge of how things are run because the old man used to deal with the paperwork.

'Whether the children are interested is the other issue. People leaving the industry are a problem, which raises the question of where tomorrow's farmers will come from.'

Where the children are interested, a whole new set of issues usually arises. 'Farmers are great ones for trying to control events beyond the grave,' Andrew Fearn comments. 'It won't be unusual to hear instructions along the lines that 'Jimmy can have this field but I don't want him to sell it', which requires careful legal and practical constructions.'

In these circumstances, lawyers like Fearn would typically consider the drawing up of a discretionary will or the setting up of a discretionary trust where the trustees are given objectives but left to decide how best to achieve them.

For most farming families, business continuity and tax remain the more pressing challenges. Whichever mechanism is adopted through wills and trusts has to secure the position of critical family members and promote the continuance of the business.

Getting the wills right can be vital. In some cases, it is also essential that there is spare cash set aside to buy out family members who may wish to opt out of the business while staving off inheritance tax liability.

'Tax planning for the farming community is about preserving family wealth, securing the business for future generations and minimising tax exposure,' says Sarah Nash, head of private client at Derby firm Robinsons Solicitors. 'Property relief is available for agricultural businesses but the requirement that the buildings are genuinely used for farming purposes have been interpreted quite strictly. In addition, holding cash in the estate could jeopardise the availability of relief.'

Nash also says that, like many business owners, farmers and landowners can be concerned about family life and the impact of divorce on the integrity and continuity of the business. For these reasons, she says, trusts have remained a popular option despite the changes to the tax regime.

Of course the rise in land prices has meant that some farmers are now sitting on assets that have greatly increased in value since they inherited or bought them. Peter Geldart says this, in a community traditionally living day to day, has forced a lot of people into planning actively for the future of the business.

'Farmers are traditionally not good at estate planning, but with the rise in property prices even the average farmer is now sitting on substantial assets. Now only small or particularly backwards farms are not making any plans,' he comments.

The Thorner case, decided by the House of Lords just over a year ago (see solicitorsjournal.com, 25 March 2009) depicted an old-fashioned scene of remote rural communities. The case has since triggered similar proprietary estoppel claims but not on the scale feared at the time, suggesting that the countryside is already changing. With a more business-like approach and further consolidations, the winners in the legal community will be lawyers who have nurtured the relationship with farmers and have been able to provide rounded commercial and private client advice.