Natural Capital And Biodiversity Net Gain

Natural capital and biodiversity net gain

Natural capital and biodiversity net gain (BNG) offer farmers and landowners new opportunities to secure additional income and new revenue streams, as the Basic Payment Scheme (BPS) is phased out with de-linked payments ending in 2027.  There is a growing realisation that financial value must be placed on the natural environment and the benefits it provides.

The changes are significant for how the countryside is managed, and farmers and landowners are right at the heart of the opportunities for managing things differently. However, with change comes uncertainty, complexity and risk and it is vital that the right team leads you through the process.

At Wilson Browne, we have many years of experience advising on the legal aspects of farm diversification to help farming businesses optimise such opportunities whilst minimising risk. We advise on the legal aspects of new natural capital agreements.

A major consideration is whether to take land out of food production – for decades. There are implications for how that land will be managed in practice, as well as the future options for use; plus, the tax implications of taking land out of agriculture, which could have a major impact on a farming family in future generations.

Our legal experts work for landowners alongside land agents and accountants to help achieve a seamless project and help to avoid the pitfalls that can come with venturing into new territory.

What is natural capital?

Natural capital has been defined as “that part of nature which directly or indirectly underpins value to people, including ecosystems, species, freshwater, soils, minerals, the air and oceans as well as natural processes and functions”. The phrase “natural capital” describes the outputs of land which deliver environmental benefits, alongside, or perhaps instead, of conventional benefits.

Examples are:

• creating wildlife habitat such as species rich grassland and new wetlands
• moorland to filter and slow water running from upper to lower ground
• reed beds to provide a natural filter for sewage treatment
• carbon sequestration by wetlands or trees.

Social benefits are also included, such as green space in a city which provides recreation and a habitat for biodiversity.

What is biodiversity net gain and what are the key dates?

Biodiversity net gain (BNG) is an increase in biodiversity associated with development.  This increase is measured by the statutory biodiversity metric tool provided by Defra  HERE

As from the 12^{th of} February 2024 most large development sites are legally bound to provide an increase of at least 10% in biodiversity. Smaller sites came on stream as of the 2^nd April 2024 (READ MORE HERE) and Nationally Significant Infrastructure Projects are due to come on stream in late November 2025. Many developers will be looking off-site for that gain. The minimum period for which the habitat must be managed is 30 years – in reality most agreements are for 33 years. Agreements relating to nutrient neutrality are a minimum of 80 years.

This is an opportunity for landowners to make the most of the natural capital of their land for profit, help to replace income lost after the loss of BPS, and for the good of the public.

Considerations for landowners include:

• whether or not to enter into a direct agreement to deliver BNG, which comes with certain liabilities and risks or whether to go through a habitat bank provider which may mean less return but also less risk
• putting in place a different entity to manage the land under Habitat Management Agreements
• long term agreements that bind successors in title
• do agreements allow the sale or dealing with other natural capital
• whether entering into such agreements will trigger existing overage arrangements
• tax implications as to when and how sums received are taxed i.e. income or capital
• effect on Agricultural Property Relief (APR) of land being taken out of agriculture – some clarity has now been offered by the Agricultural Property Relief (APR) Extension introduced by the spring budget 2024. (MORE HERE)

There are essentially two ways of entering into this market:

The Indirect Route

Entering into an agreement with third party habitat bank provider such as the Environment Bank or Biofarm, although other habitat bank providers are available. Typically, such agreements are 30+ years with five-year monitoring and usually in the form of a long lease coupled with a Habitat Creation Agreement or Habitat Monitoring and Management Agreement. Such agreements require either a Section 106 Agreement or a Conservation Covenant to be entered into. Option Agreements may also be used depending on when the habitat is to be created.  Such agreements may typically offer less risk but also less return, although this may depend upon the terms agreed and whether or not the landowner wants to manage the habitat themselves or not, and exactly when and how they expect to receive their returns.

Direct Route

Entering into an agreement directly with a developer for a specified development site. Again, such agreements will typically be for 30+ years with five-year monitoring and may take the form of an Option or Sale Contract, depending on when the units are to be delivered and will require a Section 106 Agreement or Conservation Covenant and a Habitat Management and Monitoring Agreement. In this case there will be no third-party habitat bank provider entering into the contract to deliver the units, and therefore the landowner will be directly responsible and therefore liable for the delivery of the net gain. It should be noted that climate change may have a significant impact on delivery of the scheme over a 30-year period. Typically, developers will setup special purpose vehicles (SPV’s) for particular developments and so it’s important to ensure that the landowner received their payments upfront, or that there is a means of securing the receipt of those payments.

Wilson Browne services include:

• drafting and negotiating long term farm business tenancies (FBTs) or commercial tenancies for biodiversity net gain and woodland carbon units
• habitat bank providers – negotiating documentation for landowners documenting arrangements with providers including FBTs and habitat management or habitat creation agreements
• dealing with Section 106 Agreements where offsite offsetting is being provided for development sites
• drafting and agreeing conservation covenants where suitable responsible bodies have been designated by Defra – so far as of 24^th September 2024 only Natural England and another 5 responsible bodies have been designated Conservation covenants: list of designated responsible bodies – GOV.UK (www.gov.uk)
• getting approval from lenders to enter into such agreements where land is charged to a bank
• advice on business restructuring and financing or moving land into separate legal entities
• advice to both landlords and tenants on whether farm business tenancies allow or prohibit such long-term schemes being entered into and/or
• advice on the effect on existing or proposed overage agreements

We’re here to help with specialist lawyers Northampton, Corby, Kettering, Higham Ferrers, Wellingborough, and Leicester, but location need not be an issue as we can can help you wherever you are in England and Wales.