Agriculture update

The Agricultural Holdings Act 1986 does not apply to Scotland, which since 1948 has had its own separate regime, and therefore Scottish cases seldom capture the attention of practitioners south of the border. The case of Morrison-Low v The Executors of Paterson [2012] CSIH 10 is a major exception to this rule, as it deals with a question that has taxed the minds of lawyers and surveyors specialising in farm tenancies ever since the single payment regime was introduced in 2003 and took effect in 2005. Even though a decision of the three Scottish law lords, hearing an appeal from the Scottish Land Court, is not binding on the rest of the UK, and even though Scotland’s agricultural holdings legislation contains its own separate provisions as to rent, the decision is likely to be at the very least highly influential when cases come to be considered under the 1986 Act.

Morrison-Low addresses the difficulty of fitting a European subsidy regime into the legal context of a system of security of tenure for farmers which dates back to 1948, when there was no thought that the countries of war-torn Europe would be joining together to subsidise each others’ farmers.

The difficult history of this process has been in part responsible for the way in which the positions of landlords and tenants have sometimes become entrenched. In 1984, milk quotas were introduced, in a form which attached them to the land. As a result, those tenants who left their holdings between 1 April 1984 and 25 September 1986, when the Agriculture Act 1986 came into force, saw the valuable quota pass into the hands of their landlords, who were under no obligation to pay any kind of compensation. Memories of the unfairness have lingered on, and, when the single payment regime seemed to fall outside the scope of things to be considered in a rent review under the 1986 Act, there was talk, in some circles, of payback time for agricultural tenants.

The problem

The rent review formula for a tenancy governed by the 1986 Act is contained in schedule 2. It was introduced in 1984 as part of a compromise between the two sides of the industry and was intended to take rents set for agricultural holdings away from an open market basis and to link them to the productivity and profitability of the land in question. An arbitrator appointed under this regime has to assume a hypothetical willing and prudent landlord and tenant, and a new letting of the actual holding, taking into account the productive capacity and related earning potential together with a smattering of things to be considered or disregarded.

For many earlier forms of subsidy, the payment was based on the amount of produce grown or the amount of land farmed or set aside, and therefore when a tenant took up occupation of the land it would follow that his agricultural activities would lead to the receipt of subsidies, which were therefore properly to be taken into account. Subsidies of this sort fell foul of World Trade Organisation rules and a totally new regime was introduced, granting single payment entitlement (SPE), which was based on the particular farming history of the individual tenant. It was therefore possible to think of a tenant coming to a farm with very high-quality SPEs, with only basic ones or with no SPE at all. For the purposes of the statutory rent review formula, the arbitrator has to view a hypothetical tenant and therefore the level of entitlements enjoyed by the actual tenant was not relevant. As these rights are not in any way attached to the land, then it was open to those representing tenant farmers to put forward the argument that the rent review should be carried out with no regard whatsoever to rights under the single payment regime. As most farms are not profitable without subsidy, this had the potential to bring rent levels crashing down.

In the Morrison-Low case, the annual rent of the holding was £22,000. The landlord proposed an increase to £32,000 but the tenant, on the basis of disregarding the subsidy, proposed a reduction to £10,266.74.

The rent formula for cases of this sort in Scotland is an open-market formula but with provisions designed to eliminate scarcity value. The Agricultural Holdings Act for the remainder of the UK, until 1984, worked on an open-market basis. The current formula contains no reference to the open market and combines the starting point of willing and prudent parties with qualifications intended to eliminate elements relating to scarcity and to emphasise the importance of the money that a tenant could make from farming the holding. In his judgment, Lord Justice Clerk was at pains to make his starting point the fact that the Scottish rent review system is an open-market one, albeit with qualifications attached. It remains to be seen whether the difference between such a system and the hybrid system of schedule 2 of the 1986 Act is substantial enough to lead to a different conclusion.

Lord Justice Clerk started from the point of view that, in an open-market system, it had to be acknowledged that rents were set in the climate of subsidies whose details changed from time to time but whose level remained much the same. He could not see how a technical change of this kind would alter the offer which a willing purchaser would make.

The evidence adduced for the tenant was that in all of the rents of 50 comparable farms, SPE was a material element. The tenant therefore sought to disqualify them from consideration as they were tainted by an aspect which fell outside the statutory formula. Lord Justice Clerk noted that there was no evidence that SPE was excluded as a consideration in real world reviews. The lower court had found that most hypothetical bidders could be assumed to have sufficient SPE to cover the holding for which they were bidding. This finding bridges the apparent gap between the real world and the hypothetical nature of the proposed tenant. Once that leap has been made, then it seems that the result is unlikely to depend on the differences between Scotland’s qualified open-market formula and the hybrid approach of the 1986 Act.

It is possible to detect a level of judicial impatience with an attempt to settle the rent on a basis that could be seen as over-technical. In addition to the argument that subsidies are merely part of the background against which rents are fixed and that no real bidder would change his behaviour because of a technical change in the subsidy regime, Lord Justice Cross goes on to include a paragraph under the heading: ‘Is the result realistic?’ He notes that the decision of the lower court would produce ?a rent of £30 per acre for the agricultural land, whereas sitting tenant rents on comparable holdings were being agreed in the £60 to £65 range. The gap itself should have called into question whether the finding was realistic.

The Scottish decision is much in line with the actual practice of most rents agreed since the introduction of SPE

In the case of J W Childers v Anker [1996] 1 EGLR 1, the Court of Appeal was faced with a similar issue in the form of the income flowing from a management agreement, which the tenant had obtained and which therefore might not be assumed to be the property of a hypothetical tenant for rent review purposes. It decided that the income from such an agreement could be taken into account as it flowed as much from the quality of the actual land as it did from the identity of the tenant.

Until the same issues as were the subject of the Morrison-Low case come before a court in the context of the 1986 Act, there is scope for an element of doubt, but, considering the robust approach of both the Scottish Court and the Court of Appeal in Anker, it will be a brave tenant who decides to pursue an extreme form of the argument which seeks to have an agricultural holding rent determined without regard to the availability of SPE.