SCOTTISH AGRICULTURAL TENANCY ISSUES

Jeremy Moody Secretary and Adviser, CAAV

(Scottish Agricultural Arbiters and Valuers affiliated to CAAV)

LANTRA FBAASS CONFERENCEDunblane – 21st January 2015

Agreements Between Farmers• Not all owners do all the farming • Can use another farmer on a contract– Specific operation - such fertilising, making silage – A whole enterprise – such as cereals; does it work for

higher value crops like potatoes?

• Enter into a partnership– Sharing profit but joint liability– Limited partnerships or LLPs?

• Share farming – splitting gross output• Let the land on a tenancy?

Why Use A Tenancy?• The tenant can operate without carrying land

in the balance sheet or on borrowings• Owners not always good at farming or want to • Means for specialist lettings – potatoes, etc• Division of risks and perspectives– Owner - long term low yield secure income of rent– Tenant takes higher risk in hope of higher return– AHLRG noted the landlord has now become seen

as a low yield high risk activity

Tenancies• Basic law is Leases Act 1449 • A lease exists where the agreement is:– for a certain period of time– For consideration

• Gives exclusive possession against the landlord

• Scottish law does not readily recognise licences

Types of Tenancies• Business/commercial tenancies– almost no statue law – near total freedom of contract in Scotland

• Residential tenancies– Various stages of statute law inc. SATs– Watch present consultation

• Agricultural tenancies – much law

Agricultural Tenancies• Specific statute law since 1875• Present law largely stems from 1949– Agricultural Holdings (Scotland) Act 1991– Detailed and prescriptive– Statutorily extended security of tenure – Rules for succession– Rent review, end of tenancy, etc– Broadly similar to English/Welsh 1986 Act

Shorter Tenancy Options

• Grazing tenancies for less than a year• Agricultural Holdings (Scotland) Act 2003

created options for – SLDTs (5 years or less)– LDTs (now 10 years or more) with rules on

termination– More freedom than under the 1991 Act but less

than with English/Welsh FBTs

Collapsing Sector• Once the dominant form of land tenure• Share of land area falling with growing speed– Area fallen by 42% since 1982 (1.3% per year)– Down by 17% since 2004 (1.7% per year)– Now down to 24% and set to fall further

• But need landowners who are willing to let – Land can only come in scale from private owners,

essentially from farmers – What will persuade a 300 acre farmer to let his land?

The Larger Issue

• The regime for the sector is a bone of contention

• In its own right and as part of land reform• Political controversy deters owners from

making long term commitments • What is good for Scottish agriculture?

Some Current Practical Issues• Rent review– How to assess?– Legal cases - “Moonzie”; Elliot – CAAV/SAAVA publication on Rent Reviews– TFF guidelines– Industry initiative

• Waygoing compensation – What is eligible? How to assess?

• Settlement of differences and disputes

Morrison-Low v Paterson• Court of Session decision commented on

many aspects of tenancy law• Key theses for valuers– Realism– Reliance on good expert witness evidence – Challenge to the profession – show methods

• Major comments on – Evidence for rent reviews– Scarcity – only leading agricultural case on this

The Core of S.13• “… the rent properly payable in respect of the

holding shall normally be the rent at which, having regard to the terms of tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing landlord to a willing tenant …”

• Disreagrding– Any effect on the rent of the tenant’s occupation– Distortion in rent due to scarcity of lets

Having Regard To …

• Information about rents of other agricultural holdings and factors affecting except any distortion due to scarcity of lets

• Current economic conditions in the relevant sector of agriculture

But No Account To …

• Any increase in rental value due to improvements – So far as made at the tenant’s expenses– But not under an obligation in the lease– Landlord’s improvement so far as they have been

grant aided– Rent not to be set higher than if the improvement

had not been made

• “High farming”

Or To …

• Dilapidations to fixed equipment or land caused or permitted by the tenant

• Any reduction in rental value due to use for a non-agricultural purpose

• Any reduction in rental value due to carrying out conservation activities on the holding

• BUT any increases in rental value due to non-agricultural use is taken into account

Some Issues For Review

• Evidence – Which comparables– What comparables v budgets?

• Scarcity• Improvements• Marriage value

Comparables• Best are new lettings under same Act• In their absence, then fresh arm’s length

lettings of other agricultural tenancies– LDTs (10/15 years+), SLDTs (<5 years) - so FBTs– To be adjusted– How to compare?– Does disregard of scarcity remove security issue?

• Then sitting tenant reviews – used as benchmark of realism

LDTs/SLDTs as Comparables• They are relevant as comparables– They may be holdings– They are evidence of the market and so expectations– As might be other lettings

• BUT how to use them?• Court of Session thought of reasons why 1991

Act tenancy might be more valuable• BUT market does not suggest that• Considered since in Elliot

Marriage Value

• In today’s world most holdings have marriage value – pervasive influence

• Part of the reasonable expectation• Recognised by Court of Session• Is taking it out of the comparable and then

allowing for it in the subject now too unrealistic?

Comparables v Budgets

• Comparables can give evidence of market behaviour

• Inform the “reasonable expectation” of the rent that would be agreed

• Budgets do not – may set a framework• What to do with the result? Not a ceiling.• Court of Session said lowest form of evidence• BUT what if only evidence left?

Budgets

• How to construct?– Establishing yields, prices and costs– Other factors, interest, etc?– Non-agricultural aspects?

• How to divide the result? – Law says nothing– What does the market say? Expectations– Rarely support for any standard split

The Problem of Volatility• Major volatility in prices of outputs and inputs

since 2006• Makes budgets very unstable• Wild variations in out-turns between years• So should we step back and think how

landlords and bidders view/frame rent bids?– Sense of the market and of economics?

• How do we provide the required evidence for that?

Scarcity• This has had very little serious attention• The English case Childers v Anker avoided it• Directly discussed in Morrison-Low v Paterson– Expects expert witnesses to advise on it with

methodology – so analysis needed

• There is case law on residential fair rents and some Scottish Land Court decisions

• Distinguish uncovenanted benefit of a tight market from amenities of property

Scarcity?• Show there is scarcity • Then assess allowance for it• Scarcity in what market? – Does s.13 presume tenancies are homogenous?– Geographic ? Sectoral?

• Evidence of number of distribution of bids• What balance shows no scarcity?• Interaction with marriage value• CAAV/SAAVA text reviews potential toolbox

Tenant’s Improvements

• How to assess increase in rental value?– Black patch – practical answer but how to assess– Comparables - better for more major works?– Budgets – but how to link to market evidence?– Cost basis - likely to be wrong

• But allow for latent value– Tummon v Barclays Bank– The value of the opportunity to make the

improvement

Some Issues

• Dwellings– the farmhouse– other dwellings

• Non-agricultural use• CAP subsidies• ….

Procedure• Take care over procedure• Time table for review• Get the s.13 notice right• Have it served properly• Note spirit of TFF guidance on timetable - – Adopt good equitable procedure in circumstances

• What is your case• What justifies it• Negotiate sensibly

How to Use LDT Rents?• “Elliot v Roxburghe Estates” • After 15 days of hearings• The main comparable was a 15 year LDT• How to apply it?• Landlord had wanted a new entrant • Court reviewed evidence on the 27 tenders• Where was the open market rent • Some bids unsuitable• Some bids uncompetitively low

Approach Taken• Evidence from managing agent handling that

letting that – Top 5 bids were not thought sustainable– She would prefer the bids ranked 6 and 10– Land Court took the higher (6)

• Adjustments for a secure tenancy?– Scarcity?– Marriage value?– Security?– Anything else

Scarcity?• Accepted there was some scarcity• What figure would be set in a balanced

market with competitive bidding?– What rent would be agreed in a reasonably

balanced market?– Excludes more than unviable bids– Not to be approached by a budget– How far would a bidder go to have “a

reasonable chance” of success?– The Court allowed a 7% discount

Marriage Value?

• Inadequate evidence• Some bids did include it• Others did not including some higher ones• It had been offered with a choice over the

farmhouse and 7 offers over the ex- scarcity value were for the full unit

• Court made no allowance

Value of Security?• Argument – is not a tenancy with statutory

security worth more than and LDT/FBT?– Then some specific Scottish law points about

potential rights to buy

• Or – The allowance for scarcity assumes market with choice (Palmer v Peabody)

• Land Court - it should be more valuable – But all evidence as to value was theoretical– Competitive bids left little room for premium– So made no adjustment – argument left for later

Some Issues

• Not all final figures explained – Why is scarcity discount 7%?– Morrison-Low expected more of an expert witness

– replicable methodology

• That the rent did not turn whether land was suitable or not for potatoes

• Realism test – review of sitting tenant rents snagged by confusion over Single Payment

Industry Initiative• 2014 - NFUS/SLE/STFA jointly recommend– A ceiling on rent increase of 1.5 times RPI– After adjusting for changes in the holding and

investment– All increases more than 30% to be phased

• NFUS, SLE and STFA panel can review cases put to it and publish conclusions

• Not binding• Lower prices ease pressure anyway?

Letting and the CAP• Area based payments act against flexibility in

land tenure• Paying people by area leads all (owners and

tenants) to stay for the money• Payments feed directly into rents • Issues over implementation of CAP in Scotland• How to handle expansion since 2013? • Windfall Profit Clause directly hits tenants who

lose enough land

Dispute Resolution• The 1991 Act requires the Land Court• Yet procedural and expensive• Land Court only decided 3 reviews since 2003– Not a sign of success but of frustrated parties– Long costly hearings– English/Welsh experience suggests there might

have been 60 to 150 arbitrations since 2003 – Alternatives – arbitration or expert determination– SAAVA offers short form model procedure

Tax Issues with Letting• Mostly issues for landowners decisions• But LBTT/SDLT is a potential tax for tenants• For landowners let land – Will qualify for APR (50% if let before September

1995) – on agricultural value– Only qualify for BPR if part of larger business but

then on market value– A problem for Entrepreneurs’ Relief– Rents will not be earned income– Raises issues over VAT

A Case for Law Reform• The industry needs the commercial and social

flexibility tenancies can offer• That would help face the challenges from world

markets over next few decades• A means to farm without buying land• 24% of land area looks less than natural level• Is that suppression warranted?• The present system is failing • Political climate is discouraging commitment

The Reform Round the Corner?• Scottish Government established Agricultural

Holdings Law Review Group• Reporting next week?• To be part of Land Reform agenda• Can its proposals be enacted by 2016

election?• What might it achieve?

What Might It Want?• Insulate the present 1991 Act sector• To reduce the contention within the industry• To allow later greater freedom for new

lettings?• Concern to promote new entrants/young

farmers?• Does not look to encourage owners to offer

land for letting

That Might Mean?• Rent reviews based on productivity?• Period for tenants to notify past improvements?• Widen compensatable improvements?• Develop rights to assign• Encouragement for new entrants?• Simplify pre-emptive right top buy• No absolute right to buy?• Keep the Land Court?

The Real Choices?• What is the best future basis for Scottish

agriculture?• What is the balance between a policy for a

commercial sector or a social policy?• Will the law be practical and apt for the

problems of today and tomorrow? • What is a positive outcome?

Thank You ...… Questions?

jeremy@caav.org.uk