Posted: Thursday 29 March 2012
On 9 February 2012, Lord Gill (the leading commentator on the Agricultural Holdings legislation prior to his elevation to the bench and now the Lord Justice Clerk), the second most senior judge in Scotland, issued his opinion in respect of the long-awaited appeal in what is commonly known as the Moonzie Rent Review.
Moonzie Farm in Fife is let on the basis of a secure 1991 Act tenancy, the landlord being Mr Morrison-Low and the tenant being the Executors of T H Patterson. The landlord and tenant are no strangers to the courts and the legal profession, as a whole, are indebted to the litigants for having helped to clarify the law on a number of important issues, not least the current matter in dispute, whether the tenant’s Single Farm Payment (“SFP”) should be taken into account in determining the rent for the purposes of a rent review in terms of Section 13 of Agricultural Holdings (Sc) Act 1991 (“1991 Act”) as amended by the Agricultural Holdings (Sc) Act 2003 (“2003 Act”). The rent for Moonzie Farm was to be reviewed with effect from 4 December 2008. At that time the passing rent was £22,000. The landlord proposed that the reviewed rent should be £32,000, an increase of approximately 45%. The tenant proposed that the reviewed rent should be approximately £10,300, a reduction of approximately 53%. Consequently, on a passing rent of £22,000 there was just over £21,000 between the landlord’s and tenant’s respective professional advisors!
On 2 June 2010 the Land Court determined that the reviewed rent should be £20,800, a slight reduction in the passing rent of 5% and (for the cynics amongst us) not a million miles from being very close to halfway between the landlord’s and the tenant’s respective positions! The landlord appealed, with the main point of appeal being the extent to which SFP should be taken into account for the purposes of a rent review in terms of Section 13 of the 1991 Act as amended.
The Court of Session basically overturned the Land Court’s view that SFP was irrelevant to a rental valuation (having said that, the Land Court did concede that SFP was relevant to the extent of allocating a sum equivalent to the rent which the holder of SFP would have to pay in order to rent “naked acres” for the purposes of triggering his SFP – although the practice of renting naked acres is perfectly legal, it is perhaps surprising that the Land Court went as far as it did in giving tacit approval to this much criticised practice, one which is unlikely to continue for much longer). The Court of Session concluded that the Land Court had misdirected itself in deciding the issue on considerations, such as whether SFP belonged to the farmer or landowner, whether it was an asset attached to the farm and whether it should properly be seen as part of the earnings of the farm. Such issues were largely beside the point. The fact is that in modern times open market rents have been set in a subsidised market place and SFP is a producer-support subsidy. Consequently, without evidence to the contrary, the Land Court was not in a position to conclude that in an open market competition, SFP would have no influence on the amount of the successful bid.
Having clarified the importance of SFP, the Court of Session went on to provide some much needed clarification as to the operation of the rent review provisions of Section 13 in particular:-
1. The Court highlighted the poor drafting of the 2003 Act which amended Section 13 of the 1991 Act and the fact that the poor drafting had contributed in no small way to the current difficulties experienced by those who have to work with the legislation – a not uncommon complaint of the legislation emanating from Holyrood;
2. The Court reconfirmed that the basis of a Section 13 rent review means that of open market value and that there is a clear priority of evidence that can be used to establish open market value, namely:-
(i) Rents set in open market lettings on 1991 Act tenancies of comparable holdings, as adjusted to take account of certain factors including the physical characteristics of the holdings and the provisions of the leases, disregarding the sitting tenant factor but taking into account scarcity of lets. The Court, however, admitted that there are likely to be few comparables in this category;
(ii) In the absence of comparable 1991 Act tenancies, the next best evidence will be rents achieved in open market lettings of limited duration tenancies and that notwithstanding the poor drafting of the 2003 Act which suggested such tenancies could not be considered;
(iii) A more indirect and less satisfactory indicator of open market value is evidence of rent reviews agreed between landlords and sitting tenants under existing 1991 Act tenancies of comparable holdings. In the Moonzie case, this was the main source of evidence led on behalf of the landlord, with the landlord’s agent personally having been involved in more than 50 rent reviews in 2008 on which agreement had been reached. However, the Land Court were unwilling to rely on this evidence due to a question mark as to the agent’s methodology in agreeing those rents;
(iv) The valuation of an open market rent on the basis of a farm budget should be the method of last resort. The Court was firmly of the view that while profitability of the holding is a relevant consideration, the question of profitability must invariably be subsidiary to the open market criterion. To quote Lord Gill “…it is conceivable that open market bidders might offer a greater rent than a budget would justify if they took a certain view of market trends, particularly since the successful bidder would have the safety net of periodic rent reviews under Section 13”. The Court took the view that the Land Court, by concentrating on farm budgets, had lost sight of the hypothetical open market;
3. Refreshingly, the Court also made it clear that at the end of any valuation exercise, the valuer should examine the result in its whole context. In the current case, if the cottages were left out of account, the rent would be equivalent to about £30 per acre. However, on the undisputed evidence for the landlord, sitting tenant rent reviews on comparable holdings were being concluded around the relevant date in the range of £60 - £65 per acre. On those facts alone, the Land Court should have considered whether its valuation was realistic.
The Court of Session has now referred the matter back to the Land Court to fix the rent for Moonzie Farm as at 4 December 2008.
Needless to say the fact that the Court of Session overturned the Land Court so convincingly has provoked strong opinions from both sides of “the great divide”. The commentators on the “landlords' side” expressing vindication for their position while the commentators on the “tenants' side” expressing dismay, quite rightly, at the different approaches adopted by the two Courts but also questioning whether Section 13 is “fit for purpose”. Given the Scottish Government’s stated aim of making more land available to new entrants and that it is an essential part of that strategy that landowners feel comfortable that they will receive an acceptable return on their investment in terms of a realistic rental, one would have thought the Court of Session’s decision in Moonzie was a step in the right direction. However, when addressing the NFU Scotland’s AGM on 14 February, the initial response of Cabinet Secretary for Rural Affairs and Environment, Richard Lochhead, was to seek a meeting with the Tenant Farmer’s Forum as a matter of urgency to discuss how best to take forward a focussed set of priorities and set a strict timetable for action! Can we therefore expect more legislation and therefore potentially more uncertainty?
As long as there are two sides to any issue there is scope for disagreement and therefore the requirement for a means of resolving that disagreement. In terms of rent review, pre-2003, most rental disputes were determined by arbitration and this was criticised for being unnecessarily complicated, costly and time consuming. Hence the amendments brought in by the 2003 Act to make the Land Court the first port of call for rent review disagreements and thereby address these complaints!
Therefore perhaps a word of caution for our legislatures: on the evidence available to the Land Court, essentially rents agreed between landlords and sitting tenants under existing 1991 Act tenancies, the agricultural community appeared to accept that SFP should be taken into account in determining rent reviews and therefore the Court of Session were merely confirming the de facto position. The fact that the parties in Moonzie are no strangers to resolving their differences through the courts should not result in a knee jerk reaction requiring more legislation, particularly given the Court of Session’s helpful clarification on a number of issues, including those which arose from poor drafting of the amending legislation in the first place!