Our Knowledge

20.Jun.2018

Relinquishing Secure 1991 Act Tenancies

Relinquishment – a new option for agricultural tenants
One of the most controversial parts of the Land Reform (Scotland) 2016 Act, concerning agricultural tenancies, is the introduction of provisions for relinquishing and assigning tenancies. When these provisions come into force, on a date still to be determined, they will allow a tenant in a secure tenancy to offer to ‘sell back’ the tenancy to the landlord.  If the landlord decides not to buy, the tenant can sell the tenancy on the open market to a new entrant or a progressing farmer.

Relinquishment
Before being able to assign the tenancy on the open market, the tenant must serve a notice of relinquishment on the landlord, indicating that the tenant will quit the tenancy provided the landlord pays them compensation for doing so.  

The tenancy will therefore need to be valued to determine the compensation to be paid, and before any relinquishment notice can be served.  

Calculating the compensation
The amount of compensation to be paid is ascertained by calculating one-half of the difference between the value of the land to which the holding relates if sold with vacant possession (ignoring any enhancement attributable to the tenant’s improvements, to avoid double-counting); and the value of the land if sold with the tenant still in occupation.

The value of the tenant’s improvements are then added, and the value of any claim the landlord may have for dilapidations is deducted.

No account is taken of the tenant’s right to transfer the tenancy to a family member by way of a bequest or a lifetime assignation, so the sitting tenant value is calculated according to the life expectancy of the tenant. The older the tenant, the smaller the difference between the two figures will be.  

How far landlords will take up the relinquishment offer, and pay the determined value to the tenant, given that some tenancies may carry quite a significant value, is likely to depend on their personal circumstances.

This makes a secure tenancy an attractive asset to a tenant, not least for the benefit of security of tenure, but also for the potential capital that could be generated by relinquishing the lease to the landlord, or selling it on the open market.  Lifetime assignations to eligible near-relatives of the tenant farmer for a value are already being carried out, so that both parties can benefit from any subsequent relinquishment by the younger incoming tenant.  By carrying out such lifetime assignation for value, any potential disagreements on the transfer of a tenancy on the death of the secure tenant where the tenant hasn’t left a will are mitigated.

Bequests of tenancies
It is commonplace for secure tenancies to provide that the tenant is not entitled to bequeath their interest in the lease.  If a secure tenant’s will does make such a bequest in breach of the terms of the lease, the bequest will fall, and their interest in the lease will form part of their intestate estate.  The tenant's executors then have to assign the tenancy to an entitled acquirer within one year of the death of the secure tenant, to maintain the status of the lease.  

The new struggle that executors may now face, where the deceased tenant did not leave a will, is how to deal with competing eligible acquirers, who may view the lease as a commercial commodity.  The deceased tenant may have more than one family member who is entitled to acquire the tenancy, and who wants to do so on the tenant’s death, which can cause some difficult issues.

There are, of course, a number of solutions that can be reached to avoid such a situation: the most obvious being transparent and frank discussions between the family members!  The executors may ask the entitled near relative to pay the value of the tenancy to have it assigned to them.  The value would then form part of the deceased tenant’s estate and be distributed appropriately among the beneficiaries.  Or the value of the tenancy could be deducted from any other claim (for example for legal rights) that the acquirer may have against the deceased tenant’s estate.

Buy-back or new tenant?
How (and whether) tenants and landlords use the relinquishment provisions and procedures when they come into force, will depend entirely on the specific circumstances of each case.  The process of valuing the lease can be reviewed by Scottish Government, which may introduce a measure of consistency in determining relinquishment values, but inevitably the approach will vary both between landlord and tenant, and also among farming families.  

Will landlords exercise the right to purchase back the lease from their tenant? For some it may be a welcome opportunity to take the land back in hand at a value determined on a prescribed basis, but some may not be in a position to pay the relinquishment value. 

For tenants, the arrangements will provide a potential opportunity to convert their tenancy into useful capital, either by relinquishing the tenancy to the landlord or selling it to a new tenant. It is probable that a tenant may already have a lifetime assignee lined up and decide to make the lifetime assignation for value rather than initiating the relinquishment process, as a retirement package.  The value of a secure agricultural tenancy should also be taken into consideration when transferring the lease to an entitled acquirer on the death of the tenant.