Guide to business agreements
There is a wide variety of agreements and arrangement possible in the agricultural industry. The differing agreements and structures serve a variety of different purposes.
Farm Business Tenancy
- A Farm Business Tenancy (FBT) is an agreement between a landlord and tenant allowing the tenant broadly unrestricted access to land for a defined period of time.
- Farm Business Tenancies allow parties the freedom to negotiate the terms they wish, however legislation does insist on certain criteria.
- At least part of the land included within the lease must be farmed for the purposes of a trade or business. Added to this, the ‘agricultural condition’ demands the character of the tenancy is primarily agricultural.
- The two parties are free to agree the rent level between themselves. Generally this is expected to be a market rent.
- Farm Business Tenancies do not provide default provisions if an agreement is silent on a matter, therefore an FBT should always include clauses regarding the following: repairs & insurance, husbandry and the use of the land, assignment and subletting, and break clauses.
- Involves the landowner and a working farmer entering into a contract jointly.
- Share farming agreements allow the owner to retain his land and have an active interest in the running of the farm.
- The owner usually relinquishes a large degree of management control to the share farmer.
- Both parties can own a share of the livestock, often this is a good route for a new entrant to build up their share of the livestock ownership over time.
- Both parties will share the income but also contribute to the costs of rearing the livestock or growing the crop.
- Share farming allows the owner to still be considered as a farmer and as such can still benefit from the associated tax benefits.
- Contract farming is an agreement between two parties, the owner of land and a contractor who provides a contract service (usually labour and machinery) to manage the farmland.
- The owner provides ‘fixed assets’ in the way of land and buildings, whereas the contractor provides the labour and machinery and management skill.
- Remuneration for each party is usually made up of two fees on each side.
- On the owner's side a ‘basic return’, a compensation for providing the land and buildings and his share of the ‘divisible surplus’, a percentage of the profit which has been agreed.
- The contractor would often receive a basic fee followed by his % of the ‘divisible surplus’.
The % of the ‘divisible surplus’, which the owner or contractor would receive, is essentially what has been agreed in the negotiations. Usually the split is highly in favour of the contractor.
- A large amount of farming enterprises in the UK use partnerships as a business structure. Often a partnership agreement is between family members.
- Partnership agreements can include a broad range of terms if they gain the required level of approval from existing partners.
- Partnership agreements, at a minimum, should look to set out if the partnership is a general partnership or a limited liability partnership: which assets will be held in the partnership; how profit and loss will be split; capital contributions; time put into the business; voting; drawings and banking; insurance and the appointment of new partners; death; retirement and dissolution.
- Good partnership agreements often embody flexibility and clear due process in equal measure. If dispute does arise the process should dictate the financial implications for the individual partners and the overall partnership.