As Wales prepares to launch the Sustainable Farming Scheme (SFS) in 2026, tenant farmers are increasingly being approached with opportunities to participate in Natural Capital Contracts. These agreements reward land managers for delivering environmental benefits such as carbon sequestration, biodiversity enhancement, and water quality improvements. While these schemes can offer new income streams, tenants must navigate legal, financial, and practical considerations unique to Wales.

1. Aligning with the Sustainable Farming Scheme (SFS)

The SFS is the Welsh Government’s flagship post-Brexit agricultural policy. It replaces the Basic Payment Scheme (BPS) and is structured around three layers:

• Universal Actions (mandatory for all participants)
• Optional Actions (voluntary, targeted enhancements)
• Collaborative Actions (landscape-scale projects with others)

To qualify, tenants must have:

• At least 3 hectares of eligible land or over 550 standard labour hours
• Exclusive occupation and management control of the land for at least 10 months of the year

Natural capital contracts, whether public or private, must align with these eligibility rules and the SFS’s broader goals of sustainable land management.

2. Reviewing your Tenancy Agreement

Most farm tenancies in Wales will be either a tenancy under the Agricultural Holdings Act 1986 (generally for tenancies entered into before 1995) or a Farm Business Tenancy (generally for tenancies entered into after 1995) (FBT) arrangements and and it can be the case that these were negotiated long before the change of policy regarding the BPS and previous environmental support schemes. As such, these agreements often restrict non-agricultural land use, which may include environmental schemes like tree planting or habitat creation.

Tenants should:

• Review tenancy clauses for land use restrictions
• Seek written landlord consent before entering any scheme if required
• Clarify who receives payments and who holds responsibilities

Entering a scheme without proper consent could breach the tenancy and risk legal consequences.

3. Using the Landlord & Tenant Code of Practice

The 2024 Landlord & Tenant Code of Practice encourages fair and collaborative approaches to environmental schemes. It supports:

• Transparent communication
• Joint planning of scheme participation
• Fair sharing of benefits and responsibilities

This code can help tenants negotiate access to natural capital opportunities and avoid disputes.

4. Legal and Financial Considerations

Natural capital contracts can be long-term and legally binding. Tenants must consider:

• The length of the contract vs. the tenancy term
• Exit clauses and penalties
• Liability for delivering environmental outcomes
• The condition in which land must be returned to the landlord

It is important to seek legal advice before entering into any agreement.

5. Tax and Subsidy Implications

Participation in natural capital schemes may affect:

• Eligibility for SFS payments
• Tax treatment of income
• Inheritance Tax (IHT) reliefs if land use changes significantly

Consulting a rural accountant or land agent is strongly advised.

6. Private Market Caution

Private schemes (e.g. carbon credits) may offer higher payments but carry more risk – whilst Wales is exploring natural capital markets, they are not fully regulated yet. Tenants should:

• Verify the credibility of scheme providers
• Understand payment structures and ownership of credits
• Ensure contract transparency
• Be cautious about liability for non-compliance and long-term obligations that outlast the tenancy.

Conclusion

Natural capital contracts offer tenant farmers in Wales a chance to diversify income and contribute to national environmental goals. However, these opportunities must be approached with care. By reviewing tenancy terms, seeking landlord consent, and aligning with the Sustainable Farming Scheme, tenants can ensure they benefit from these schemes without jeopardising their tenancy or financial stability. Landlords and Tenants should seek advice from both their Land Agent and Solicitor prior to entering into any current scheme on offer.

By Zoë Jones, Solicitor, based in our Pumsaint Office.

The original article was published in the Tenant Farmers Association Cymru Members Newsletter in August 2025. www.tfa.org.uk