Getting grazing 'right for landowners

We all like to make the most of our assets and many of our landowner clients are no different, so if the opportunity arises to generate some income from under-utilised pasture by allowing horse owners to use it for grazing, it is a tempting one.

However, while these agreements can at first sight seem quick and easy, without careful thought they can lead to unexpected problems. As such, there is merit in encouraging landowners to take a more considered approach before allowing horses to graze their land.

Part of the problem arises because, despite the generally rural connotations of horses and riding, the law does not always see the grazing of horses as entirely agricultural. Perhaps surprisingly, horses are not treated as livestock for most legal purposes, and this can make for difficulties in contexts where being ‘agricultural’ is critical.

Understanding what the parties intend is key. ?Is it purely grazing? Are these private horses of the grazier used solely for recreational purposes, or is there any suggestion that other activities, such as schooling, jumping, or livery of others’ horses, might be involved? Does the grazier have any related businesses, such as a livery or riding stable elsewhere or even a stud farm? How much land is involved? Is the landowner expecting to need the land back at short notice?

The answers to these questions will dictate ?the likely issues to consider.

Tax reliefs

One of the key concerns for landowning clients ?is whether the availability of tax reliefs, which help to pass farms and landholdings from one generation to the next, may be affected, particularly agricultural property relief (APR) ?and business property relief (BPR).

Very simply, APR allows the agricultural ?value only of the land to be excluded from the landowner’s estate, and, if not available for all the value, BPR does the same for land used by trading businesses (in this context, likely to be farming businesses).

The availability of APR and BPR is often dependent on the landowner being in occupation and farming the land in question. A grazing licence, if properly drawn up, should mean the landowner remains in occupation, but for farming purposes, the landowner needs to be growing the grass for the grazier, and the licence and the realities on the ground need to reflect this. Indeed, this is advised in the HMRC guidance.

However, in Wheatley’s Executors v CIR (SpC 149) [1998] STI 559, APR was not available where there was a grazing licence because the land ‘was not occupied for the purposes of agriculture’ and therefore did not qualify as ‘agricultural property’. The horses were not livestock, but were used instead by their owner for leisure. This decision has been much criticised, however.

Other points to note are that income from a grazing licence is generally zero rated for VAT purposes and is usually treated as trading income where the landowner continues to ‘farm’ the land, but rent under a tenancy is likely to be treated as property income and taxed accordingly, and the VAT treatment follows the landowner’s VAT position.

BPS entitlements

The implications for the landowner’s ability to claim basic payment scheme (BPS) entitlements are also easily overlooked. For a claim, the land must be ‘at the disposal’ of the claimant at the start of each claim year. A grazing licence arrangement should enable the landowner to continue to claim BPS subject to compliance with other conditions.

Where a longer-term arrangement is proposed, has there been a ‘material change’ in the use of the land from agriculture to keeping horses for recreational purposes? If the land is used solely for grazing but no other activities (such as schooling or exercising, stabling, or even additional feeding), it is probable there will ?be no change of use, as the grazing is an agricultural use in this context. 

Equine uses vary widely and can be, in ?different circumstances, private and recreational, commercial, and even, in limited situations, agricultural (stud farms, for example). ?The particular use will affect how best the arrangement needs to be documented to ensure that the landowner can be confident of getting the land back when needed.

Security of tenure

What sort of agreement should one use? Often ?a short-term agreement is documented by a grazing licence. A licence is likely to avoid some ?of the risks mentioned, provided that it truly is a licence which permits only temporary access to the land for grazing with no exclusive rights to occupy it, so that the landowner remains in legal possession and occupation of the land. 

Such licences are not really appropriate for longer periods, nor should they be renewed on a regular basis or left to run on once they have expired. Indeed, good practice would be to make sure the grazier vacates the land for a day or two, even if the licence is renewed. A grazing licence will be judged on substance over form, so it should not include any obligations that are more characteristic of a tenancy, such as repair obligations or a right for the grazier to claim BPS, to avoid its being seen as more than a permissive licence.

So long as the licence is just that, then when it comes to an end or is terminated the landowner should be able to recover the land without difficulty.

For longer-term arrangements a tenancy is more likely to be appropriate, but this can only be confirmed once careful consideration has been given to the overall context and the expectations of all concerned.

The key issue is that by granting a tenancy the landowner will be parting with possession of the land in question, with potential adverse and perhaps unexpected consequences.

For non-business recreational use of land, ?then common law tenancies may well be most appropriate, providing for exclusive occupation of the land and payment of a rent, usually for a fixed term. If so, the tenancy will expire automatically at the end of the term, but if it is or becomes periodic, then the appropriate notice must be given to terminate the tenancy, varying according to the circumstances.

A tenancy is likely to contain more detail about restrictions and other practical matters, such as dealing with fencing, ragwort, and particularly public liability insurance issues.

However, the danger with these arrangements is that the use changes over time to become a business use.

Where the grazing arrangement is linked to a business use (for example, as part of a livery business or a riding school), any tenancy can become a business tenancy, meaning it is likely to attract the security of tenure rights under the Landlord and Tenant Act 1954 (LTA).

If this may arise, the tenancy should be a business tenancy contracted out of part 2 ?of the LTA. 

Form of agreement

In limited circumstances, a farm business tenancy (FBT) can be used for grazing agreements for horses, but great caution should be exercised. This is possible where only commercial grazing takes place on the land and so the use is, in this case, an agricultural business use, or the grazing use is incidental or secondary to a non-agricultural business use, for example a livery business or riding school, provided that it takes place somewhere else.

The advantages of an FBT are principally that it does not confer renewal rights, security of tenure, or succession rights, and, for short terms, it will simply expire at the end of the term (although notice is otherwise needed to end it). On the downside, the tenant can be entitled to compensation in some circumstances.

Again, the danger is that a non-agricultural business use will begin to operate on the grazing land and so the use will cease to be agricultural, thus attracting security of tenure rights under ?the LTA. 

Very rarely, a so-called ‘profit a prendre’ agreement may be used. This is an agreement which allows someone to take something (in this case, grass through the mouths of the horses by grazing) from another’s land. In general, similar principles to grazing licences apply, but care is needed before using this form.

Where a proposal for a grazing arrangement for horses arises, a lot of thought is needed to ensure that the most appropriate form of agreement is used, factoring in a number of diverse elements.  While they may be surprised at what is involved, we all need to offer our clients the best advice. However, as they say, ‘You can lead a horse to water…’

James Spreckley is a partner in the agriculture and landed estates team at Lodders Solicitors @LoddersLawyers www.lodders.co.uk