One of the most unexpected and potentially serious issues arising in the Scottish agricultural sector is the affect on rent reviews in view of the fact that Single Farm Payment entitlements are owned by farm tenants. The matter is to be tested by the Scottish Land Court in March 2006 and the outcome is likely to have far-reaching implications for the let land sector.
In this case CKD Galbraith is acting for the owner of a let farm in Fife. The case arises from the landowner's decision to review the rent for the first time since decoupling.
The tenant's case is that at rent review the rent should be fixed on the hypothesis that the SFP entitlements belong to the tenant and that the income derived from them should not be taken into account when fixing the rent at review. Without taking account of SFP entitlements, potential income derived from the farm is less and, as a consequence, the rent should be fixed at a lower level than would otherwise be the case.
The landlord's case is that the SFP entitlements are not tenant's capital; it is a right which has been allocated to the occupiers of agricultural land who were claiming subsidies in the reference years 2000-2002. In this case the farm was occupied by the tenant during the reference period but the allocation to him of the SFP entitlements was only as a result of his occupation of landlord's fixed equipment, landlord's buildings and the landlord's ownership of the land. The basis on which payment of the subsidy is secured is, therefore, the landlord's fixed equipment, improvements and land. Consequently, the fact that the tenant benefits from the SFP entitlements should be taken into account at rent review.
In the course of considering the different viewpoints, the Land Court will also have to consider the following issues:
- The concept of both tenant and landlord acting reasonably. A prudent hypothetical tenant would expect to pay a rent which was sufficiently high enough to attract the landlord, acting reasonably, to let the land to him. The prudent tenant would, therefore, take account of the receipts which are available to him from SFP as a result of his occupying the land.
- The rents fixed during 2003-2004 (before the introduction of SFP) and rents fixed 2004-2005 (following the introduction of SFPs). It is our experience that the level of rents have not changed following the introduction of SFP which would confirm our view that tenants do not consider SFP to be an off-farm subsidy which is not taken into account when offering for land to rent.
The Land Court will decide these issues. It is CKD Galbraith's view that if Single Farm Payments were to be discounted from a calculation of rents at review it would have a significant effect on the let land sector. Land owners would be very reluctant to offer holdings to let if they were to be substantially disadvantaged on existing let holdings.
For further information on this issue please contact Chris Addison-Scott.