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Passing the baton to the next generation

Wattie Barbour and Patricia Sanderson act for a client who has a small estate near Pitlochry. Patricia outlines how selling a 1991 Act Tenancy can prove a success for both tenant and landowner.

The provisions of the Land Reform (Scotland) Act 2016 are about to come into force.

A large part of the Act is dedicated to reforming agricultural tenancies and introduces the ability for existing 1991 Act tenants to "sell" their interests to an incoming tenant. Although it has received Royal Assent, the Act is not yet live, but this will happen imminently with provisions being introduced in stages.

It is in this context we outline the situation that faced one of our clients and how this was resolved to the mutual satisfaction of all parties. Furthermore, it could be a useful template for others.

The client owns a small estate near Pitlochry with one let farm, some seasonally let grazing and several residential buildings, including two properties that are run as self-catering accommodation by the estate tenants.

The farm tenants, who had been on the estate since the 1950s, approached our client prior to the Land Reform Act being passed, intimating their intention to retire. Although they did not give formal notice they started scaling back in various ways, including selling off their own land and surplus equipment.

The Land Reform Bill was brought forward and the tenants were advised that there may now be the potential to receive a payment for their interest, from either the landlord or an incoming tenant rather than simply returning the farm with vacant possession to the landlord on retirement.

The client did not want the tenants to retire. He held them in high regard, like the status quo of having tenant farmers in place and, in any case, he did not have the funds to buy their rights from them. The tenants understood this and embarked on trying to find potential successors to their tenancy who were willing to pay them to acquire their interest in the lease. A few months later, a locally respected farmer expressed his interest in taking over the farm and, despite the Act not being live, we began negotiations based on what we knew would eventually happen.

The successors to the tenancy are local and have a great reputation, so the client was quite happy and essentially took a back seat while the existing and potential tenants discussed terms - including monetary compensation.

Once the basic terms were agreed, the final proposal was put to to the client for his approval. At this point, he expressed his nervousness about agreeing to a new lease continuing in perpetuity given the uncertainty over what future agricultural legislation might be introduced, so we agreed that the client would accept the terms, provided that the new tenancy was a long Limited Duration Tenancy (LDT) and not a new '91 Act Tenancy. The term of the LDT offered was 35 years, which would take the new tenant to retirement age.

None of the advisors and parties involved had experience of a situation like this and there was no precedent for the processes involved in signing over a tenancy to a new party while simultaneously terminating the existing arrangement, what tenancies should be "sold" for, or who is eligible to "purchase" them (the definitions of "new entrant" farmer and a farmer "who is progressing in farming" have not been detailed in the Act, but successors need to fall into one or both of these categories).

There was a moment where all three parties needed to simultaneously sign documents and none of the lawyers wanted their clients to sign first. The outgoing tenant had to agree to give up their tenancy so the landlord could agree to enter into a new agreement with the new tenants as soon as the unit became vacant, and the new tenant needed to sign a LDT prior to paying the outgoing tenant any compensation. Fortunately, all parties wanted the succession to work and there was never any risk that anyone would pull out at this stage.

In total seven parties were involved in the negotiation - two farmers, three solicitors, the client and the team at Galbraith - yet there has been no animosity or antagonism, just active and positive negotiation based on what we knew was coming in terms of legislation, while accepting that nothing we were doing was already enshrined in law.

By the end of November, the old tenants had moved on (and by all accounts are very much enjoying their retirement) and the new tenants had already started making improvements to the farm. They made a point of introducing themselves to the other residential tenants on the estate and have settled in really well.

The client is delighted that he now has another tenant in place so the status quo is maintained but at the same time he now has comfort in knowing that the lease over his farm has an expiration date so the next generation of landlord and tenant will be able to decide between them the best way forward for the farm in 35 years' time.