LEGAL BRIEFING. Land Reform and Agricultural Holdings Legislation. Land Reform (Scotland) Bill (as passed)

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1 LEGAL BRIEFING Land Reform and Agricultural Holdings Legislation Land Reform (Scotland) Bill (as passed) The Land Reform (Scotland) Bill ( the Bill ) was introduced to the Scottish Parliament in June This followed: The Land Reform Review Group Report The Land of Scotland and the Common Good A Consultation on certain recommendations from that Report A statement from the Scottish Government on its plan to develop Land Reform and to amend the law of succession in Scotland The Community Empowerment (Scotland) Act 2015 which gives further powers to urban and rural communities to acquire land, particularly abandoned or neglected land The Agricultural Holdings Legislation Review Group ( AHLRG ) Report The Bill has now passed Stage 3 of the parliamentary process and awaits Royal Assent, following which it will become law. However, only 4 sections will come into force on the day after Royal Assent (general interpretation, ancillary provisions, commencement and the short title). This means that none of the substantive legislative changes will come into force for the time being. All other provisions will come into force through Regulations and it is to be assumed that these will be phased as there is still a considerable amount of detail to be added to a number of the important provisions. For the time being, the existing legislation remains effective. However, for both landlords and tenants of agricultural holdings, we recommend that current leases are reviewed to establish whether any action requires to be taken and that early professional advice is taken on plans for future leases, as the Bill provides for new types of leases. The Bill is lengthy and Part 10, which concerns Agricultural Holdings, adds yet another layer of legislation to an already complex area of law.

2 This Briefing Note can only highlight key provisions in the Bill. Further, more detailed Briefing Notes will be prepared on the most important changes in due course. Part 1 Land Rights and Responsibilities Statement Scottish Ministers must prepare a statement of their objectives for land reform for scrutiny by the Scottish Parliament. This statement must be renewed within every 5 years and the revised statement laid before Parliament. Part 2 The Scottish Land Commission The Bill establishes a body corporate consisting of five Land Commissioners and the Tenant Farming Commissioner ( TFC ). The Commission must prepare a strategic plan setting out objectives/priorities and the cost of exercising their functions. The first plan must be submitted to Ministers within 6 months of the section coming into force and subsequent plans within 3 years of the previous plan. Ministers may approve, modify or reject the plan and, where approved, the Commission is to publish and lay the plan before the Scottish Parliament. The Commissioners must prepare a programme of work setting out proposed reviews, information on activities and timetables. The reports will be published and laid before Parliament. The functions of Land Commissioners are in relation to ownership, management and use of land in Scotland and they are to review the impact and effectiveness of any law or policy, recommend changes, gather evidence, carry out research, prepare reports and provide information. Land Commissioners must consider and advise on any matter referred by Scottish Ministers and have regard to the land rights and responsibilities statement, strategic plan and programme of work. The TFC is to prepare and promote codes of practice on agricultural holdings. These may include: rent reviews improvements by tenants the fulfilment of the obligations of landlords and tenants the conduct of agents and landlords the process of succession and assignation compensation at waygo negotiating the terms of a modern limited duration tenancy and a repairing tenancy management of sporting leases game management Promotion is through education, advice and collaborative working. The TFC is to collaborate with the Land Commissioners and may delegate functions. 2

3 The TFC can inquire into breaches of the codes where sufficient information is available and the applicant and application are relevant and must publish a report as soon as practicable after the inquiry. Such report will be admissible as evidence in Land Court proceedings and arbitration. The TFC, who will be protected from actions for defamation, will have powers to impose a penalty of up to 1,000 where there is non-compliance with the inquiry procedure, although there is a right to appeal. Part 3 Information about Control of Land etc Scottish Ministers are given power to make regulations that will provide affected parties with the right to request information about individuals that have control of land but who are not necessarily the legal owners. This may include information on the control of land, including defining persons in control and those affected by land. The Keeper of the Registers is to be given new powers to request certain information regarding proprietors of land and to enter it in the register. Part 4 Engaging Communities in Decisions Relating to Land The Bill places a requirement on Scottish Ministers to produce guidance for landowners and tenants on engaging with communities on land based decisions which may affect those communities. The Policy Memorandum ( PM ) which accompanied the Bill at Stage 1(para 167) explains that the Ministers are exploring ways in which a failure to engage might be taken into account in decisions on the award of discretionary grants in relation to land. The PM also sets out (paras ) how landowning Charities will also be expected to engage with communities. Part 5 Right to Buy Land to Further Sustainable Development The Bill introduces detailed provisions to introduce a new community right to buy land to further sustainable development. The PM (para 179) states Fundamental to this is the identification of significant harm which is likely to affect the community if the land is not transferred together with a likely significant benefit to the community if land is transferred, and where only the transfer of the land will resolve those issues. Land will include: bridges and other structures built on or over land inland waters canals the foreshore salmon fishings in inland waters or mineral rights which are owned separately from the land 3

4 Land does not include any other separate tenement which is owned separately. Certain land is excluded from the right; this includes land on which there is a building which is an individual s home. The Bill sets out the key tests, the circumstances and the process by which communities can apply to Scottish Ministers to exercise a right to buy land to further sustainable development. This right to buy can be exercised by the community body alone or in conjunction with a third party partner. Part 6 Sporting Rates The Bill ends the non-domestic rates exemptions for shooting and deer forests. It is understood that the proposed change will take effect at the next revaluation on 1 April 2017 (when properties are valued as at 1 April 2015). Smaller operations will remain eligible for rates relief, such as through the Small Business Bonus Scheme. Part 7 Common Good Minor amendments are made to the wording of the Local Government (Scotland) Act 1973 to modernise the arrangements for the disposal of common good land. Part 8 Deer Management Scottish Natural Heritage will be given powers to require owners/occupiers to develop and implement deer management plans. Additional functions will be given to deer panels to promote community involvement. Amendments are made to require a return on the numbers of deer planned to be killed Part 9 Access Rights There is no substantive amendment to Part 1 of the Land Reform (Scotland) Act The Bill makes provision for local authority review and amendment of core path plans. There is to be intimation to owners and occupiers of land which is to be included in the core paths plan for the first time. 4

5 Part 10 Agricultural Holdings The PM (para 305) explains that the AHLRG report recommended that For the package of recommendations to work the majority of the recommendations for legislative change require to be implemented together to enable the outcomes of their assessment of cumulative impact to be met, providing balance and fairness to both tenants and landlords. The AHLRG report contained 43 recommendations but the Bill, as passed, deals only with some of these and contains provisions which were rejected by the AHLRG. The Scottish Government explains in the PM (para 318) that it is simultaneously working on taking forward those recommendations that do not require legislative change and proactively considering options to take forward those further recommendations requiring legislative change in the future. Notwithstanding the AHLRG report, there will be no new vehicle for grazing, mowing or cropping lets for up to one year. Short Limited Duration Tenancies ( SLDT ) for periods of up to 5 years will be retained, as will grazing or mowing leases for no more than 364 days. Modern Limited Duration Tenancy ( MLDT ) The Bill provides that Limited Duration Tenancies ( LDTs ) already in existence will be maintained but there will be a new model MLDT. Any new lease for a term of not less than 10 years (other than a secure 1991 Act lease or a repairing lease (see below)) will be a MLDT and any lease purporting to be for a term of between 5 and 10 years will be considered to be a MLDT for a term of 10 years. A SLDT may be converted by agreement to a MLDT. A MLDT to a new entrant to farming (not defined) may contain a 5 year break clause for both parties but the landlord s right to exercise the break will be limited to: The tenant failing to use the land in accordance with good husbandry The tenant failing to comply with any other lease provision. MLDTs would have some other limited differences to existing LDTs aimed at offering increased flexibility to the parties in relation to fixed equipment, rent and purposes of the lease which meet their needs. MLDTs, which may be terminated in writing by agreement, will be subject to a double notice of termination procedure by the landlord, thus effectively giving the tenant at least 2 years notice. The tenant may terminate by a single notice between 1 and 2 years before expiry. An important difference to a LDT is that a MLDT will relocate for a further 7 year period if not properly brought to an end at expiry. Provision is made in connection with exclusions from any right of the landlord to enforce an irritancy clause in the MLDT. 5

6 Conversion of 1991 Act Tenancies into MLDTS Provisions are introduced that allow landlord and tenant to agree to convert a 1991 Act tenancy into a new MLDT with a minimum term of 25 years. Compensation will be payable on conversion for eligible improvements and also if eligible for diversification and cropping of trees. There does not appear to be any provision for landlords step-in rights prior to conversion, although s 79(3) provides a non-exclusive list of procedures which may be included in such regulations. Conversion of LDTs into MLDTs Similarly, the landlord and the tenant may agree to convert a LDT into a MLDT but the tenant is not entitled to compensation for improvements on conversion. Instead, any eligible improvements will be treated as improvements carried out under the MLDT. Repairing Tenancies The Bill provides for a further new tenancy, namely a repairing tenancy. Where land is let for at least 35 years and is not a 1991 Act tenancy and the tenant is required, during the repairing period ( 5 years or such longer period as may be agreed or as may be fixed by the Land Court) to improve the land in order to bring it into a state capable of being farmed, after the expiry of the repairing period, in accordance with the rules of good husbandry. The Bill includes provisions on: When a repairing lease may be sub-let Termination, continuation and extension Fixed equipment and schedules Resumption limitations Irritancy limitations Compensation Tenant s Right to Buy: Removal of Requirement to Register The Bill removes the requirement for a tenant to register their interest in purchasing their holding under the existing pre-emptive right to buy provisions in the Agricultural Holdings (Scotland) Act This will have the effect that all tenant farmers with secure 1991 Act tenancies will have a pre-emptive right to buy in the event of a proposal to transfer the land or any part of it to another person. While the AHLRG recommended that consideration should be given to clarifying what events may trigger the requirement to give notice to the tenant, there is no mention of this in the legislation. 6

7 Sale to Tenant or Third Party Where Landlord is in Breach of Order or Award Chapter 3 introduces a new provision to the 2003 Act enabling a tenant farmer to apply to the Land Court to order the sale of an agricultural holding where the landlord has failed to comply with obligations under a 1991 Act tenancy, has subsequently failed to comply with an order of the Land Court or arbiter appointed under provisions of the 1991 Act, to fulfil the obligations and the failure is adversely affecting the tenant s ability to farm the holding in accordance with the rules of good husbandry. In these circumstances, the Land Court will have the discretion to order the sale of the holding where greater hardship would be caused by not making the order than by making it, and in all the circumstances it is appropriate. The Scottish Ministers will, through regulations, set out the process to be followed where the Land Court orders the sale of the land comprised of a holding to a third party, including setting out that certain people, namely the tenant farmer and the landlord s immediate family, will be prevented from purchasing the property. There are detailed provisions concerning the procedure for buying and valuation, as well as where either party fails to complete the sale. Other conditions are to be attached to the sale, whether it is sold to the tenant or to a third party, including claw back provisions to protect the original landlord s interests. Rent Review Section 82 makes amendments to section 13 of the 1991 Act to change both the process for triggering and carrying out a rent review for secure 1991 Act leases and also the way the Land Court is required, on application, to determine rent for those tenancies. The current statutory formula for calculating rents will be amended to move away from open market calculations to one based on a fair rent, taking into account the agricultural productivity of the holding. Under the new test the Land Court in assessing a fair rent must, among other things, have regard to: the productive capacity of the holding (which is the income that can be generated from that particular holding with the landlord s fixed equipment by a hypothetical tenant) the open market rent for any surplus residential accommodation provided by the landlord the open market rent for any land or fixed equipment or any land forming part of the holding which is used for a non-agricultural purpose The Land Court will be given power to order a phased increase of rent where the new rent is to be 30% or more higher or 30% lower than the rent currently payable. Power will be given to Ministers to make any necessary regulations including the form and content of rent review notices and the determination of productive capacity and standard labour requirement. 7

8 Provision is also made in section 83 in relation to rent reviews for LDTs and MLDTs. Widening Class of Assignees and Successors to Agricultural Tenancies Detailed provisions are introduced in sections changing the law on succession and assignation of the tenant s interest in secure 1991 Act leases and LDTs. These widen considerably the class of people to whom a tenant farmer can assign their tenancy and who may succeed on the death of the tenant In relation to lifetime assignation or a successor who is a legatee or acquirer on intestacy, a narrower class of objections to a proposed assignee who is a near relative is introduced, namely: good character lack of sufficient resources to enable the person to farm the holding with reasonable efficiency the person has neither sufficient training nor experience (although this is caveated in the case where the potential assignee is undertaking a relevant course) Provisions are also made to deal with succession and assignation of MLDTs and repairing leases. Relinquishment and Assignation of Holdings While the Bill does not contain an Absolute Right to Buy for tenants, a late Government amendment introduced a new concept, namely that, where a tenant wishes to quit the tenancy, he may offer to relinquish the tenancy to the landlord in exchange for compensation to be fixed by a valuer appointed by the TFC. Detailed provisions cover the valuer s assessment of the land, the calculation of compensation payable and the strict time limit for preparation of the assessment notice which must be served on the landlord and tenant, with a copy going to the TFC. Either landlord or tenant has the right to appeal against the notice to the Lands Tribunal, which, in turn, may refer certain matters to the Land Court. The tenant may withdraw his notice of intention to relinquish, the landlord may accept that notice (which acceptance may be withdrawn subject to a time limit) or the landlord can serve a notice of declinature. Where the landlord accepts the offer to relinquish and makes payment, the lease comes to an end. However, where the landlord does not accept the offer, the tenant has the opportunity to assign the lease to an individual who is either a new entrant or an individual who is progressing in farming. The definitions of such individuals will follow by regulations. The landlord will be entitled to object if either the proposed assignee is not a new entrant or an individual progressing in farming or if there are reasonable grounds which will include that the proposed assignee does not have: the ability to pay the rent and for adequate maintenance of the land, or the necessary skills or experience (subject to caveats about undergoing relevant training) 8

9 Ministers are given powers to introduce regulations making provisions for partnerships which are tenants. This may, in the future, give general partners in limited partnerships certain rights. Compensation for Tenant s Improvements The Bill amends the current provisions for compensation at waygo for secure 1991 Act tenancies. There is provision for a three year amnesty period during which a tenant farmer may serve formal notice on the landlord of their intention that, in certain circumstances, specific items may be treated as a tenant farmer s improvement at waygo. The three years commences on the day the relevant section comes into force. The amount of compensation is calculated at the future event of waygo as set out in section 91(1) (this is the value of the improvement to the incoming tenant as provided for in section 34 of the 1991 Act or section 45 of the 2003 Act). A tenant will not be able to serve a valid notice in certain specified circumstances, a landlord may serve an objection notice and the tenant may then refer the matter to the Land Court. The Land Court will take into account all of the circumstances, in order to determine if it is just and equitable for the landlord to be liable to pay compensation at waygo to the tenant for that improvement. The Land Court must also be satisfied that the landlord receives a benefit from the improvement. Improvements by Landlord A landlord proposing to carry out an improvement on the holding (except for certain emergency works to services etc.) will have to give their tenant written notice in advance specifying their proposals and to demonstrate that the improvement is necessary for the maintenance of efficient agricultural production of the holding. This will enable a tenant farmer to object to the improvement if it is not necessary on agricultural grounds in order to farm the holding in accordance with the rules of good husbandry. This is accompanied by an appeals process to the Land Court. If the landlord carries out the improvement without notifying, contrary to a decision by the Land Court or in the face of an objection by the tenant without approval by the Land Court, then the improvement is not taken into account at the next rent review. The landlord will have to give the tenant advance notice of the period in which the work is intended to be carried out. This will enable the tenant to organise their business accordingly. Diversification The Agricultural Holdings (Scotland) Act 2003 provided tenants with a route to using land for nonagricultural purposes. Section 40 of that Act has been amended in relation to the use of the land where the landlord has objected, the landlord s application to the Land Court and the restriction to the number of requests by the landlord for relevant information. 9

10 Irritancy for Non-Payment of Rent This Stage 3 amendment provides that, where a lease may be irritated because of non-payment of rent, the relevant notice of irritancy cannot be given unless: the landlord has given the tenant a written demand to pay within 2 months and the demand has not been complied with Small Landholdings Ministers must review the relevant legislation governing small landholdings and report to the Scottish Parliament no later than 31 March Comment The Bill, as passed, is clearly only one step in the Scottish Government s ongoing programme for Land Reform. Once enacted, the various statutory provisions may come into force at different dates in the future. Indeed, there are many gaps which will have to be filled by secondary legislation. In relation to agricultural tenancy matters, this Bill will add to the already complex area of agricultural law and it seems that we may expect further legislation as policy is developed by the Scottish Government. The Tenant Farming Commissioner has been tasked with drafting Codes of Practice for the industry; these will take some time to develop and, indeed, the Tenant Farming Commissioner will have to be appointed. At present Andrew Thin is the Adviser but has no statutory role. Meantime the following points should be noted in relation to agricultural tenancies: The substantive provisions of the Bill will NOT come into force until such dates as are set out in regulations. Some may come into force before others. Short Limited Duration Tenancies and grazing leases have not been altered in this Bill. Limited Duration Tenancies will not be possible once the relevant provisions come into force but, meantime, can be entered into. Landlords who are considering the use of a letting vehicle are urged to take early professional advice as to the options available as well as the changes which will be introduced by this Bill. If a tenant dies before the new provisions come into force, the existing provisions as to succession will be effective in the absence of any backdated provisions to the contrary. If a tenant is considering lifetime assignation, early advice should be taken as to the timing of such assignation 10

11 If either landlord or tenant is considering whether to serve a rent review notice, early advice should be taken from a Land Agent as to the timing of such rent review given the changes which will be introduced Once the new legislation comes into force the options for letting land will be: 1. Grazing or mowing lease 2. Short Limited Duration Tenancy (may default to a Modern Limited Duration Tenancy after the term has expired and tenant remains in possession with consent of landlord) 3. Modern Limited Duration Tenancy (more than 10 years--no break) 4. Modern Limited Duration Tenancy (to new entrant a break after 5 years may be included) 5. Repairing Tenancy (more than 35 years) 6. Secure 1991 Act Tenancy Existing Limited Duration Tenancies will see out their term (unless converted to a Modern Limited Duration Tenancy). Contract farming and other similar ventures are not affected For more information or advice, contact any of the following members of our Land and Rural Business team Richard Blake, Consultant rblake@thorntons-law.co.uk Tel Linsey Barclay-Smith, Partner lbarclay-smith@thorntons-law.co.uk Tel Susan Duff, Associate sduff@thorntons-law.co.uk Tel Kenneth Mackay, Partner kmackay@thorntons-law.co.uk Tel Chris Lindley, Partner clindley@thorntons-law.co.uk Tel John Angus, Consultant jangus@thorntons-law.co.uk Tel George Dunlop, Partner gdunlop@thorntons-law.co.uk Tel thorntons-law.co.uk This Briefing Note is intended only as a general guide to the main provisions in the Land Reform (Scotland) Bill. It is strongly recommended that both landlords and tenants review the terms of their agricultural leases and take professional advice to ensure that they know whether, and, if so, to what extent their position may be affected by this important piece of legislation and whether any action requires to be taken before certain provisions come into force. Thorntons is a trading name of Thorntons Law LLP. 29 March