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Departing from Equality in Farming Divorces

Nichola Bright, Senior Associate at Myerson, explains some of the difficulties inherent in divorces involving agricultural assets.


 

 

 

 

 

 

Nichola Bright, Senior Associate at Myerson

Agricultural divorces can be "notoriously difficult to resolve" (Wilson J in R v R [2004] FLR 98).

There is often a departure from equality in farming cases due to the non-matrimonial nature of some farming assets. For example, a farm which has been gifted, inherited and/or in the family for generations, in the expectation that it will be handed down, is an important factor which the court will take into consideration.

Whilst a distinction can be made between matrimonial and non-matrimonial assets, the needs of one or both parties will dictate the sway of a settlement. However, needs are an elastic concept, and if needs can be satisfied without recourse to non-matrimonial farming assets, the yardstick of equality can be stretched and tested. Each case will turn on its facts and the outcome will depend on a wide variety of factors.

Sharing and equality

The landmark case of White v White [2000] UKHL 54 was itself a farming case. Martin and Pamela White both came from farming families and were married for over 30 years. They had three children together and lived their married life as successful dairy farmers. At the outset of their relationship, they each brought into the marriage a modest £2,000 and shortly after their wedding purchased a £32,000 farm in Somerset, known as Blagroves Farm. This consisted of 160 acres of land and a farmhouse, the marital home. They purchased the farm using a mortgage and an £11,000 loan from Martin's father. Over the years, they purchased more land which increased the size of the farm substantially. The parties also farmed Rexton Farm, consisting of over 300 acres, as part of their farming partnership. Rexton Farm was part of the Willett estate, which Martin's father purchased for an advantageous price in 1971. Later, Martin's father transferred that estate into the joint names of himself and his three sons, including Martin. In 1993, Martin purchased Rexton Farm, as his part of the Willett estate, subject to a mortgage of £137,000. This was purchased in Martin's sole name and it was not treated as belonging to the couple's farming partnership. Rexton Farm was valued at £1.78 million.

At trial, the total net assets were calculated at approximately £4.6 million. At first instance, the wife was awarded £980,000 on the basis that this is what she "reasonably required". This equated to around a fifth of the overall assets. The reasoning behind this was that she required a farmhouse with stabling and 25 acres, which at the time would cost around £425,000. She also needed £40,000 in periodical payments per annum, which was capitalised at £550,000. This would leave the husband with assets that exceeded his needs.

The wife successfully appealed the first instance decision and she was awarded 43 per cent of the overall assets. The key points taken from this case:


- Home-making contributions are treated the same as the financial contributions to a marriage. The court found that both parties put a tremendous amount of effort into their marriage and family. Within the home, it was primarily the wife who brought up the children whilst also working hard on the farm. The husband was a hardworking and active farmer.

- The end of "reasonable requirements". This term had become synonymous with "needs" and used as a limiting factor on the award which was (usually) made to wives. In White, the House of Lords steered us back towards the statutory language of "needs".

- Inheritance was an important factor. The couple would not have been able to purchase Blagroves Farm without the loan from Martin's father. Also, Martin purchased Rexton Farm on advantageous terms, stemming from his father's purchase of the Willett Estate. The House of Lords approach was to recognise the inheritance and family contribution and take this into account in any settlement. However, the inheritance factor will carry little weight, if any, in a case where financial needs cannot be met without recourse to this inherited property.


The outcome of White v White changed how all family lawyers approach a case, with reference to the starting point of equality. The main principle derived from this case is that equality should only be departed from if there is good reason for doing so and there should be no bias in favour of the bread winner, as against the homemaker.

Soon after White v White, reasons to depart from equality crept in. In N v N [2001] 2 FLR 69, another farming case, the court took the view that the theory of equality was impractical. For example, equality may have the effect of crippling the family's finances to the ultimate detriment of the children. In the case of N v N, the wife received around 40 per cent of the matrimonial assets, but this was done over time, on the basis that the husband's farming business needed to continue with little disruption, to retain its value.

In the same year, in the non-farming case of S v S (Financial Provision: Departing from Equality) [2001] 2 FLR 246, there were grounds for departing from equality on the basis of the existence of the husband's second wife and family. It was held that, having regard to all the matters in s 25, the award of £400,000 to the wife, required to achieve equality, would discriminate against the husband. On the facts, such an award would mean that the wife lived in luxury, while for the husband with a new family to support, things would be much tighter. If an agreement was harder on one party than the other, then there has to be a good reason to depart from equality. The court should aim to provide both parties with a comfortable house and sufficient money to discharge their needs and obligations. On that basis there was an order for the husband to transfer to the wife his half-share of the matrimonial home and of the joint investments, and to pay to her a lump sum of £300,000.

After S v S, the non-farming landmark case of Miller v Miller; McFarlane v McFarlane [2006] UKHL 24 highlighted that the concept of sharing had replaced the concept of equality and confirmed that sharing was not the same as equality. The needs of the parties were the emphasis in this case and the straightjacket of "needs" may not result in an equal division of assets.

Cases of equal sharing in agricultural divorces have been rare. The reason for a departure from equality in farming cases is often justified due to the nature of farming assets. Put bluntly, the needs or reasonable requirements of the parties can perhaps be satisfied without dividing a farm in half.

Many farming cases settle on the basis of a wider family-based agreement, with the farming family agreeing to use family money to buy out one spouse in order to achieve a clean break. However, those cases that do not settle often end up in court due to thorny issues surrounding trusts, partnerships, companies, third party rights and inheritance issues.

Thorny issues in farming cases

Farms can be valued like any other asset. However, common problems that distinguish farming cases from non-farming cases are as follows:


• The farm itself may be owned by a corporate entity with third party share interests. It is not unusual for extended family to have part ownership in a farm.

• The farm or parts of the farm could be held in trust.

• Farms may be run by several members of the family: parents, children, grandchildren, all of whom may have different roles and interests in the business. Farms are typically inherited assets and have been part of one family for many years.

• The farm may be the only source of income, which has to meet the livelihoods of several members of the family and its extended relatives, not simply confined to meeting the income needs of the separating couple.

• It is not uncommon for farm income to be reduced to enable the farming family to claim tax benefits to support their income, to reduce tax, or in some circumstances reduced in an attempt to limit the claims of the other spouse in financial proceedings after separation.

• Farmland is often rented out to long term tenants, which generates an income but may prevent the land from being sold for a certain period of time.

• Compared to residential property, it is not as easy and straightforward to mortgage or otherwise charge farmland to extract cash.

• Farms that have diversified (for example, commercial offices, farm shops, holiday lets, boarding kennels) may add complex issues to the valuation process due to the nature and number of diversified elements.

• The farm owner may be party to an environmental stewardship agreement, which provides an annual income. Many famers also receive yearly financial entitlements as part of the Basic Payment Scheme. These financial incentives are a valuable feature of any farm, but there can be difficulties in transferring these entitlements from person to person. 


Extracting value from a farm, whilst keeping the farm alive, is the crux of the problem in most agricultural divorces. In R v R [2004] 1 FLR 928, the issue for the court was "to contrive a raft of arrangements which enable the wife and the children to vacate the farmhouse…to move to other accommodation and to live there at a reasonable level without disabling the husband from also living at a reasonable level".

In R v R, the husband's company; a farm, had no means, either by immediate payment or by borrowing, to provide a lump sum for the wife. The company offered to buy the wife a house that the company would retain, but in which she could live.

Mr Justice Wilson said it would be wrong for the wife to have to be beholden to her husband's family and leave the husband with assets, his shares in the family company, worth around £450,000. A lump sum by instalments could be paid over time and could be used as security for raising a mortgage on her own property. Therefore, the husband was required to pay £30,000 immediately and £225,000 over 20 years (charged on the husband's shares in his business).

Brexit

Leaving the EU has meant that the UK is no longer part of the EU Common Agricultural Policy, which has traditionally paid UK farmers £3.5 billion per annum. This has been a significant, if not the main, source of income for some farmers. These payments have been the difference between some farms making a profit or not, in any given financial year. In 2018, DEFRA estimated that around 42 per cent of farms would have outgoings exceeding their revenues, without the benefit of these payments.

The Agricultural Act 2020, which came into force on 11 November 2020, provides Ministerial Powers to develop new farm support approaches in England. Newly introduced Environmental Land Management (ELM) Schemes will provide farmers with financial assistance for producing 'public goods' such as environmental or animal welfare improvements and 'public benefits' such as better water and air quality or public access through farmland.

There is no mention of any direct subsidies or quotas within the new Act. Payments under the current scheme, which will be phased out over the next seven years, are based on the size of the farm and how much land is farmed. There will be a multi-annual financial assistance plan for at least the next five years but there is no certainty on how payments will be made under the new scheme.

It is therefore very important that this seven-year phase out period is factored into any valuation of a farm or farming business, for current cases in particular. For future cases over the next five years, details of the new payment scheme will hopefully be clarified and therefore factored into any valuation of an agricultural business.

Diversification and valuations

Because of the Brexit-induced shift in emphasis towards environmental factors, the value of farmland may vary, as some farms will find it easier to meet the environmental requirements than others. For example, land which was previously valued at the lower end of the market, due to accessibility, may now benefit from an increase in value if it is repurposed to benefit the environment in some way, such as, for instance, restoring wildlife habitats, boosting wild species or woodland creation. Also, land with public footpath access may now actually increase in value due to the financial incentives that attach to having such access.

Some farms diversify with farm shops, workshops, holiday lets, wedding venues or even commercial office space. The focus on environmental factors may mean that those farms need to change how they operate or balance their carbon footprint by also benefiting the environment, as described above, to maximise the government subsidies they receive. That being said, some farms that have diversified are very lucrative already, so may not feel the effects of the change as much as, say, a small crop farm. The value of the diversified business may itself outweigh any reduction in subsidies and the value of the land itself.

The diverse nature of farms highlights the importance of expert knowledge and valuations within farming divorces. As well as land and buildings, the farming business (or businesses) will need to be valued along with machinery, government subsidies and entitlements. The potential challenges brought about by Brexit may affect valuations and it will be more important than ever to instruct a trusted Agricultural Surveyor and Consultant when presented with an agricultural divorce.

Accurate and creative advice is needed at an early stage, to ensure that money can be released to satisfy the financial needs of both parties. For example, it may be possible for just part of the farm to be sold or there could be provision for capital payments over time. It is also possible for land to be transferred between spouses, in satisfaction of their financial claims. If there are other assets of a marriage which can be distributed to avoid a sale or part sale of a farm, that is also an option to be explored. Alternatively, or in addition, it may be possible to commence diversification of a business to aid a settlement. 

Conclusion

Since the case of White, there are no widely reported farming cases where an equal division of assets has been ordered. The reason for this may lie in the nature of the assets themselves, but it may also be because of the emphasis on "needs" brought about by Miller & McFarlane. Some may say that "needs" has become a polite alternative to "reasonable requirements", which the House of Lords attempted to move away from, in White v White.

Whilst for non-farming divorces, an equal division of assets and wealth accumulated during marriage is considered a fair outcome, the reality is often unachievable for farming families, because of the desire and need to preserve assets that were owned long before the marriage or inherited by one party.

Fairness, however, still requires financial needs to be met.

22.04.21