Commercial Considerations for Landowners Considering BNG

Understanding, balancing and optimising the commercial opportunity, and risks and rewards, is vital.

Alongside the legal obligations, you will need to consider the commercial practicalities of a new, opaque and fast moving market. We are here to help landowners navigate the complexities of developing a BNG scheme.

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Routes to market

For a landowner, there are three routes to market.

Creating a Habitat Bank
Built to order
Off-market sales

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Each route to market has costs and benefits, the real impact of these will only be determined as the market develops.

Habitat bank

Creating a Habitat Bank is likely to be the most common method of bringing a scheme to market. This requires a landowner to secure the land for BNG using a Section 106 Agreement or Conservation Covenant before the sale of units.

Pros

Least risk for developers so maximum value from sales
Can participate in the ‘spot market’ as units already exist
The costs of deploying the scheme are spread over a fixed number of units
Legal agreements can be made to ensure sales of units crystalise the 30-year agreement
Depending on when the habitat was created, the temporal risk multiplier can improve the commercials

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Cons

Full ownership of the delivery risk
Costs to secure the scheme are due before the revenue
Market risks if prices drop
There is no statutory requirement for the LPA to review the scheme

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Built to order

Developers may require some quite specific habitat types. Landowners have the option to build these as they are required. This can be done either by changing the habitats once the land is already in an existing BNG scheme, by creating a new scheme or by extending an existing agreement. Typically if an existing scheme is already in place, the process of variation will be quicker and easier, and therefore more attractive to a time-constrained developer. As a landowner, you will likely still hold the risk to ensure the habitats are created, unless this is agreed separately.

Pros

Medium risk for developers so less than optimal value from sales
Can service developers with non-urgent time scales
Potential to negotiate some value prior to deployment costs
Land is not committed until the sales are made

Cons

Less revenue per unit than habitat-banked units
Maximum temporal risk multiplier
Likely full ownership of delivery risk
Potential for use of the statutory requirement for the LPA to review the scheme as it will be connected to a development

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Off-market sales

Developers can agree off-market agreements with landowners. Typically these will be done at a significant discount to on-market agreements. Depending on the developer, they may also be willing to assume more of the delivery risk.

Pros

Minimum delivery risk for landowners (depending on the terms agreed)
Developer can cover all costs with no payments required for landowner
Can service developers with non-urgent time scales
Land is not committed until the sales are made

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Cons

Minimal value from sales
Maximum temporal risk multiplier
Potential unbudgetted liability if the developer goes into administration

BNG Habitat Banks

Bath and North East Somerset

Somerset LPA

Nutrient Neutrality

Bath and North East Somerset

Somerset LPA

Is there a minimum size for BNG scheme?

There is no legal minimum size for a BNG scheme, however, there are practical and governance reasons why larger schemes are more favourable. Firstly, there is general agreement that natural habitats have a greater impact and are more robust when they are larger. Known as the Lawton Principles from a 2010 review by Sir John Lawton, this has shaped thinking on how BNG should be delivered at both national and local levels. This could mean linking to other areas of natural habitat or being of significant size on its own.

When councils are looking at schemes, they are likely to discourage smaller sites, either by prioritising larger sites for review or through the commercial requirements of providing the Section 106 Agreement. There is a friction here, that we expect to play out differently in different LPAs, where developing a BNG scheme should be available to small landowners but is discouraged by the LPA.

There is also the cost implications of developing a scheme on a smaller scale. The price per unit will be higher and this may impact on viability if market prices drop. We are reviewing sites as small as 10 hectares as we feel the unit economics work at this level. On smaller plots, it may be better to do an off-market sale directly to a developer, with them owning some or all of the delivery risk.

What sorts of habitats can I create?

There is no hard and fast rules about what sorts of habitats you can create. The habitats should be sympathetic to the local environment, both from a biodiversity point of view and a practical perspective. The creation of habitats which do not suit the local environment will undoubtedly be more expensive to develop, take longer and have a greater risk of failure.

Should I aim for high distinctiveness excellent-quality units?

There is a danger of committing to unattainable goals. While we would all like to ensure the greatest possible impact for the environment, if you try to commit to standards which are not practical given your setting, you have a greater chance of falling foul of your legal commitments which can have a very significant impact on costs.

Can I combine BNG with other environmental land management schemes?

You cannot sell biodiversity units or combine them with other environmental payments when you’re already required to create or enhance habitat for: restocking trees Marine licensing remediation under the environmental damage regulations Sustainable Farming Incentive (SFI)Countryside Stewardship (CS)Environmental Stewardship (ES)Landscape Recovery (LR)Ensure that the enhancements for these schemes do not overlap with those for BNG or nutrient mitigation unless clearly distinguished.Selling biodiversity units on protected sites You may be able to enhance a protected site and sell the units for BNG. You must get consent from Natural England before you start work and renew consent as required. You must ensure that any protected species licences required are in place before works commence.

Can I combine BNG with other environmental land management schemes?

You cannot sell biodiversity units or combine them with other environmental payments when you’re already required to create or enhance habitat for:

Restocking trees

Marine licensing

Remediation under the environmental damage regulations

Sustainable Farming Incentive (SFI)

Countryside Stewardship (CS)

Sustainable Farming Incentive (SFI)

Environmental Stewardship (ES)

Landscape Recovery (LR)

Ensure that the enhancements for these schemes do not overlap with those for BNG or nutrient mitigation unless clearly distinguished.

Selling biodiversity units on protected sites

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You may be able to enhance a protected site and sell the units for BNG. You must get consent from Natural England before you start work and renew consent as required.

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You must ensure that any protected species licences required are in place before works commence.

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If you are considering a BNG or nutrient scheme, get in touch to understand how to ensure maximum benefit from your scheme.

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BNG FAQ

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What us a National Character Area (NCA)?

A National Character Area (NCA) is a distinct natural subdivision of England, defined by a combination of landscape, biodiversity, geodiversity, and cultural and economic activity. These areas reflect the unique character of different parts of the country, each with its own specific ecological and geographical features. NCAs provide a framework for setting conservation priorities, guiding land management, and planning biodiversity strategies. They help in understanding the different environmental and socio-economic conditions that shape the landscape and influence sustainable development and biodiversity initiatives across England.

Who needs to buy BNG units?

Developers undertaking projects that result in biodiversity loss and cannot achieve the required biodiversity net gain onsite must purchase BNG units. This requirement applies when onsite options have been exhausted, and the project still needs to meet the mandatory 10% net gain in biodiversity as stipulated by planning policies and regulations.

Are there any specific types of developments that must buy BNG units?

No, all development, including residential, commercial, and infrastructure projects, may be required to buy BNG units if they cannot achieve Net Gain onsite.

How are BNG units purchased?

BNG units can be bought from accredited habitat banks or through government schemes that offer biodiversity credits. These units represent measurable improvements in biodiversity, ensuring developers compensate for their environmental impact.

Are there any penalties for not buying BNG units when required?

Yes, failing to secure the necessary BNG units can result in planning permission being denied or legal enforcement actions, ensuring compliance with biodiversity regulations.

How is BNG taxed?

This is not tax advice, except to say… please get some!

The tax position regarding the trading of BNG units is complex. Various legal structures are being developed for the creation and sale of these units, whether directly from landowners or via intermediaries. Detailed analysis of these structures is essential to understand the tax implications. Often, simple amendments to agreements can improve a landowner’s tax position, necessitating careful review.

Confusion exists around the accounting of BNG. Transactions usually involve upfront cash receipts, requiring careful cashflow management due to the 30-year commitments. The sale of BNG units is expected to be VAT-applicable, but this is not yet confirmed, so professional advice is crucial.

The Autumn Statement indicated a further update on the taxation of environmental land management and ecosystem service markets is expected in Spring 2024. Key questions include the availability of Agricultural Property Relief (APR) for land in BNG schemes. Until further guidance is provided, clarity is awaited. Considering a 30-year agreement, land gifting and Inheritance Tax (IHT) implications require careful consideration.

Landowners or farmers considering this new income stream should seek early tax and legal advice to fully understand risks and optimise tax positions. While a BNG scheme may be suitable for some, it may not be the right choice for others.