How FRS 102 lease accounting changes could affect landed estates and rural businesses

For accounting periods beginning on or after 1 January 2026, businesses preparing accounts under FRS 102 will need to bring most lease arrangements onto the balance sheet by recognising a right-of-use asset and a corresponding lease liability where they are the lessee.

Although this change affects businesses across all sectors, it may present particular challenges for landed estates and rural businesses where property ownership, occupation and business operations are often spread across companies, partnerships, trusts and family members.

We have covered the wider impact of the FRS 102 changes on financial reporting in our separate article, and additionally the tax consequences of these changes.

FRS 102 lease changes: key points

For many landed estates and rural businesses, the biggest challenge will be identifying and documenting long-standing occupation arrangements, particularly where land and buildings are occupied by companies owned by trusts, partnerships or connected family members.

Which landed estates and rural businesses are affected by the FRS 102 lease changes?

A key point for many landed estates and rural businesses is that these changes may not affect every entity within a typical estate structure in the same way. In many landed estate structures, land, buildings and other assets are owned by a trust, partnership, estate or individual family members, whilst the activities are carried out through a company.

As the most significant accounting changes apply to lessees, the impact is most likely to be felt by entities such as farming companies, estate management companies, property companies, renewable energy businesses, diversified trading companies and LLPs that occupy land, buildings or other assets.

This is particularly relevant where:

• Farming companies occupy land and buildings owned elsewhere within the family structure,
• Estate management companies operate from trust-owned offices,
• Diversified businesses run from holiday cottages, wedding venues or commercial units, and
• Renewable energy businesses which use land owned by connected parties.

For many landed estates and rural businesses, the key challenge will therefore be identifying which assets are used by each entity, who legally owns those assets, and whether the relevant arrangements fall within the scope of the revised lease accounting requirements.

Related-party lease arrangements

As many lease arrangements within landed estates and rural businesses involve related parties, these arrangements require particular attention. Unlike commercial leases with third parties, agreements between connected entities or family members may not always be supported by formal lease documentation, and terms may have evolved informally over time. When reviewing related-party lease arrangements, businesses may wish to consider:

• Whether a lease arrangement exists in substance, even where no formal lease agreement is in place.
• The identity of the parties involved and whether a related-party relationship exists.
• The key terms and conditions of the arrangement, including rent payments, lease term, renewal provisions and termination rights, and whether these reflect the commercial reality.
• Whether the arrangement has changed over time and, if so, whether those changes are appropriately documented and reflected in the accounting.
• Whether lease payments are fixed, variable, below market rate, or settled through non-cash arrangements.
• The impact of the arrangement on related-party disclosures in the financial statements.

FRS 102 lease implications for renewable energy and environmental land-use agreements

The changes may be particularly relevant for estates involved in renewable energy projects. Over the last decade, many estates have entered into long-term arrangements relating to solar farms, battery storage developments, wind turbines, biomass facilities and other environmental projects.

These agreements often run for several decades and can include inflation-linked rents, profit-sharing arrangements, option periods and restoration obligations. Given the value and duration of many of these projects, the accounting impact can be significant. The accounting implications will depend on which entity controls the use of the relevant asset. Where an estate or landowning entity grants another party the right to use land, it may be acting as the lessor, for which the accounting requirements remain largely unchanged. The more significant changes are likely to arise where an entity within the estate structure is the lessee or where a wider contractual arrangement contains a lease.

FRS 102 lease reviews for estate restructuring and succession planning

The new lease accounting rules also provide a useful opportunity for estates that are considering wider structural changes. Many rural businesses continue to modernise their affairs through incorporation, trust reorganisations, family investment companies and succession planning exercises.

Property ownership and occupation arrangements are often central to these projects. Ensuring leases and occupation agreements are properly documented as part of any restructuring exercise can help avoid unnecessary complexity when implementing the new accounting requirements and may also improve governance across the wider estate structure.

How FRS 102 lease changes could affect banking covenants, borrowing and lending discussions

Although the new standard does not change the underlying economics of a business, it can significantly change how the balance sheet looks.

The changes may also affect key financial metrics. EBITDA will change because rental costs are replaced by depreciation and finance costs, whilst gearing ratios and other leverage measures may also change due to the recognition of lease liabilities on the balance sheet. Whilst this does not represent a change in the underlying profitability or cash generation, it may affect the way businesses are assessed by lenders and other stakeholders.

For businesses with agricultural lending facilities or other borrowing arrangements, this could affect measures such as gearing, net assets and banking covenant calculations. Businesses should review the terms of existing borrowing arrangements and discuss any potential covenant implications with lenders at an early stage.

How landed estates and rural businesses can prepare for FRS 102 lease accounting changes

With the FRS 102 lease accounting changes now in effect, businesses should ensure they understand how the new requirements apply to their occupancy arrangements. For many landed estates and rural businesses, the most valuable exercise is understanding and documenting property arrangements that have developed over many years.

Early preparation can help avoid delays, unexpected lease liabilities and banking covenant surprises, while ensuring that legal documentation reflects how the estate actually operates today.

For any questions relating to these changes and how they may impact your rural business, please contact Callum Miller.