Relinquishing secure agricultural tenancies for value

Hamish Lean, Head of Rural Property and Business, outlines rights regarding agricultural tenancies which are set to come into force at the end of February.

20 January 2021

One of the recommendations made by the Agricultural Holdings Legislation Review Group in 2015 was that tenants of secure 1991 Act tenancies should be given a right to assign their tenancy to a new entrant or progressing farmer, subject to the tenancy being converted into a long modern limited duration tenancy of 35 years. Landlords would have a right to object on the grounds of character, financial resources and skills and experience but otherwise could not prevent the assignation taking place. The thinking of the Group was that this would encourage older tenants without successors to be able to retire by selling on their tenancies, as well as create opportunities for new entrants and progressing farmers. Landlords would receive a benefit in that the farm would cease to be subject to a secure tenancy.

In one of the more controversial aspects of the Land Reform (Scotland) Act 2016, the Scottish Government took this recommendation but changed it substantially so that a tenant in a secure agricultural tenancy was given the right to serve a notice on the landlord, giving the landlord an opportunity to buy back the tenancy. If the landlord did not wish to do so, the tenant was given a right to sell the tenancy, as a secure tenancy, to a new entrant or progressing farmer. The Scottish Government is enacting enabling regulations to bring this right into force with effect from 28 February. Many secure agricultural tenants have delayed decisions about retirement until these new provisions were introduced and as a result, we are likely to see a number of such notices being served this year.

The procedure involves the tenant serving a formal notice with prescribed information about the tenancy on the landlord offering to relinquish the tenancy. At the same time, the tenant must send a copy of the notice to the Tenant Farming Commissioner. The Commissioner must then appoint a valuer to calculate the amount to be payable by the landlord to the tenant as compensation for the tenant quitting the tenancy. The valuer assesses the value of the land if sold with vacant possession and if sold with the tenant still in occupation. The valuer must also calculate the compensation that the tenant would be entitled to be paid for tenant’s improvements. The valuer disregards any right the tenant might have to transfer the tenancy after death or during life. The valuer also disregards from the value of the farm any added value because of the tenant’s improvements. The compensation figure that the landlord must pay to the tenant is one half of the difference between the open market value and the sitting tenant value plus the value of compensation for the improvements.  

If the landlord does not wish to pay that amount then the tenancy becomes available for sale by the tenant on the open market to a new entrant or a progressing farmer. The Regulations define a new entrant as an individual who does not hold or have a controlling interest in an existing agricultural tenancy. A small landholder, crofter or owner of more than three hectares of agricultural land is also disqualified from being a new entrant. A progressing farmer is an individual who does not hold two or more agricultural tenancies and does not hold two or more interests as a small landholder, crofter or owner of more than three hectares of land. The Regulations do not provide any valuation formula in respect of the amount that a new entrant or progressing farmer might have to pay to the tenant selling the tenancy, and this will be determined by the open market.   

The Regulations also make provision for limited partnership tenancies. General partners in such tenancies will also be able to serve a relinquishment notice on their landlord. However, if the landlord chooses not to exercise the relinquishment opportunity, the general partner is not given a right to sell the tenancy to a new entrant or progressing farmer. Accordingly, the Regulations don’t give any real opportunity to relinquish for general partners because landlords are unlikely to pay for a general partner to give up the tenancy in circumstances where they are guaranteed to recover vacant possession in any event.

If you have questions about this or another related matter, please get in touch with Hamish Lean, Head of Rural Property and Business, or your usual Shepherd and Wedderburn contact.