Landowners with electricity poles and wires crossing their land will be familiar with the term “wayleave”. But what does it mean in practical and financial terms?
As government support for green energy technologies continues, more landowners are likely to be approached by a provider for permission to cross their land with infrastructure and cabling.
The company will want to “rent” space above the land and, in return for hosting that equipment, landowners are entitled to an annual payment of rent or compensation.
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That’s where a wayleave agreement comes in.
Wayleaves are a form of permission that don’t create a permanent right for the provider – commonly known as the undertaker – to keep apparatus on land.
As such, they are a quick and easy agreement to put in place, suggests Rebecca Collins, policy and technical adviser to the Central Association of Agricultural Valuers (CAAV).
Agreements can normally be terminated by the landowner giving 12 months’ notice, however undertakers can rely on statutory powers to keep equipment on land.
“Just because the wayleave agreement may appear to be a temporary right, once the apparatus is on the land a landowner may not necessarily be able to seek its removal,” warns Ms Collins.
The undertaker can resist removal by seeking a necessary wayleave – a statutory route set out in the Electricity Act 1989.
Negotiation
It is common for the two parties to negotiate to avoid this, as a necessary wayleave entitles the landowner to statutory compensation.
Ms Collins cites the example of a landowner who has secured consent to build houses on that land, giving it a much higher value than its agricultural worth when the wayleave was granted.
The negotiations might consider the option of rerouting around the edge of the field but, if it is a large row of pylons that cannot easily be moved, the electricity company might seek a necessary wayleave instead.
This section of land would be “sterilised”, with the owner unable to develop on it.
“The compensation in this instance would be the value of the sterilised strip of land, reflecting the development value,” says Ms Collins.
But, of the thousands of wayleaves that exist, very, very few are necessary wayleaves, she points out.
Different utilities have different rules and legislation – for instance, telecommunications equipment and the rights of their operators are governed by the Electronic Communications Code.
But when it comes to payments, telecommunications and electricity cables have agreed wayleave payment rates and most are set at this level.
These standard wayleave rates may not suit every circumstance however, and in those cases it will be appropriate to negotiate a higher rate.
For bigger projects, such as pylons or a gas pipeline, an agreement known as an easement is often sought from the outset.
“This brings forward the conversation about the future value and the future uses of the land,” says Ms Collins.
“Because the landowner is giving away the land for a long time, potentially forever, more detailed and careful advice is needed to make sure compensation is adequate and that everything has been thought of,” she says.
Julie Butler, of rural accountant Butler & Co, advises that the amount paid generally relates to the loss of earnings and compensation that results from the construction phase, and an annual payment thereafter.
“To work out what that might be, look at the commercial acreage that cannot be used during the work, calculate the loss of earnings and then negotiate an appropriate sum,” she advises.
This is generally done between the agents acting on behalf of the landowner and the company.
“There will be an upfront payment for some of the loss of earnings, based on how long the company intends to be using the land, and then a second payment if the work goes on for longer,” says Mrs Butler.
The annual payment from thereon will depend on how much land is taken up by the infrastructure.
Compensatory payments can be split between the owner and the occupier, as it will be the tenant who will be out of pocket during the construction phase and until that land is reinstated.
Although there are no policy changes on the horizon governing wayleaves and easements, the government through its Department of Business, Energy and Industrial Strategy called for evidence earlier this year as it looks at the suitability of the current framework to deliver the UK’s need to shift to renewables.
Wayleave payments
In the case of electricity fixtures, wayleave payments are paid to the landowner and the tenant, with rates agreed annually between the Energy Networks Association (ENA) and the farming unions.
The ENA recommends settlements to its member companies and it is then a matter for each company’s discretion whether to adopt the recommendation.
The rates, which change every few years, are usually out of date – for instance, current payments won’t reflect the recent huge rises in fertiliser and fuel costs and the impact these are having on growing crops and grass.
As a result of changes agreed between the NFU and ENA in 2019-20, the five-year averaging of rates and upward-only adjustment agreement was removed from the calculation in 2020.
This means that rates can now go up more sharply than before, but can also fall.
Advisory wayleave payment rates are also in place for the buried broadband fibre in rural areas.
In 2018, BT and Openreach negotiated with the Country Land and Business Association and NFU on rates set out in a 2012 agreement and a big uplift was agreed, to £3.90/m for a permanent wayleave.
This is seen as a gold standard for compensation.
But fibre network builders want a voluntary agreement instead and have hinted at the possibility of a test legal challenge, citing legislation that was designed to reduce the cost and delays of rolling out fibre in the 2017 Electronics Communications Code.
Tax
Are wayleaves and easements farm property income, trading income or capital sums?
As farmers and landowners have such diverse income tax and capital tax positions, tax expert Fred Butler, of Butler & Co, says it is essential that tax advisers approach payments with an open mind.
To work out how the payment will be treated for tax purposes, it is important to have a good understanding of what is in the agreement, the trading activity that the land is used for – in the case of farmland producing livestock or growing crops – and the type of compensation that is being paid, he advises.
“There is no room for ill-researched assumption. Planning in advance of the final agreement can be very tax-efficient,” he suggests.
In many cases, a wayleave or easement can be treated as trading income by a farm business rather than property income, because the land is part of their trade.
“If the land is used for farming, the rent and also the expenses incurred – for instance fees paid to an agent – can be brought into account in calculating the profits of the person’s trade,” says Mr Butler.
However, treating payments as property income can have advantages for Class 4 NIC and could benefit from the tax-free property income allowance, if available, he adds.
“For some farmers, for instance under the hobby farming rules where that farmer needs to make a profit to be able to continue to offset farm losses against other income, treating the wayleave as trading income may be more advantageous.
“But of course it depends on the facts of the case.’’
If a single lump sum payment is received for the grant of rights in perpetuity, or for a specified number of years, this can be subject to capital gains tax.
“It is likely that when large payments are received that this is a mixture of trading and capital income, therefore analysis and review of the facts is important to determine the tax treatment for the landowner,” says Mr Butler.
