The Moonzie Rent Case

4 June 2010

Read our briefing notes on a landmark case that could have considerable consequences for Landlords.

RW Morrison-Low v. The Exec. Of the Late TH Paterson

The Scottish Land Court have determined a rent of £20800 per annum (£43.88/acre) as from the 4th December 2008 for the Holding of Moonzie.

The Landlord through their Agents, CKD Galbraith had been seeking a rent of £32,000 pa (£67.50/acre), supported by comparable evidence and a Potential Earnings Capacity Calculation, undertaken by David Siddle of Andersons Northern. The Tenant had made a counter proposal of £10,266.74pa (£21.66/acre).  The rent passing was £22,000pa (£46.41/acre), agreed in 2004.

The farm comprises 474 acres of mainly Class 3(1) and Class 3(2) land. Most of the fixed equipment is provided by the Landlord including a traditional farm steading and modern General Purpose Shed. There is a substantial 5 bedroom farmhouse and 3 cottages, 2 of which are permitted to be let out.  The tenant carries on a sub-contracting business from the farm and is not thought to farm any additional land.

The Landlord was represented in the Scottish Land Court by Lewis Kermack, a Senior Associate at Turcan Connell.

The Scottish Land Court in their Order dated the 2nd June 2010 (SLC/233/08) arrived at their decision on the following basis:

The Court agreed with the Landlords that
:

  • The willing tenant is not a complete newcomer
  • The farm can be operated on the hypothetical basis he has assumed to adopt
  • The willing tenant can be assumed to have a full knowledge and understanding of the farm and its operation
  • Such a tenant would have an SFP entitlement appropriate to the farm
  • The farm could be operated using part contract labour and machinery
  • The tenant would be able to make an arrangement with a potato grower at much the same return as if there was no issue over sub-letting, subject to an allowance for setting up the agreement.
  • The tenant would make adjustments for price spikes at the time of review
  • The tenant would have sufficient capital of his own to provide necessary equipment but would borrow to cover annual variable costs. Borrowing costs would be taken into account in calculating earnings
  • Income from agri-environmental can  be taken into account
  • Cottage income can be taken into account.
  • Evidence from Limited Duration Tenancies and Short Limited Duration Tenancies was permitted subject to adjustment
  • Subject to the treatment of Single Farm Payment the rate of £65/acre for Class 3(1) and £60/acre for Class 3(2) was accepted, form the comparable evidence.
  • In relation to the comparable evidence unless specific representation was made at the time of the review such reviews would be agreed under the basis of section 13, as amended, taking into account factors affecting those rents. Any adjustments required would have to be proportionate
  • Where a rent is agreed between a Landlord and a Tenant there will be no element of  distortion due to scarcity of lets<

Agreement between the Landlord and Tenant was achieved prior to the decision on the land classification, farming system, yields, budgets including value of outputs and inputs, fixed costs, division of Net Farm Income (50:50), cottage rents and division of rents (Tenant 57.5%, Landlord 42.5%). The only area of dispute was the rates of application of fertilizer where the Court agreed with the Landlord.

Single Farm Payment

It had been the contention of the tenant that the hypothetical “willing tenant” had to be treated as a new entrant and would not have received an allocation of single farm payment, even as a new entrant, in 2008.  However, the Land Court agreed with the landlord that there was no reason to take this view and the Land Court accepted that the “willing tenant” would have an allocation of single farm payment and (albeit reluctantly) that this would be at about the parish average of £233 per hectare.

The Land Court also accepted the landlord’s contention that the “willing tenant” would claim single farm payment on the holding being rented, rather than renting “naked acres” elsewhere.

What the Land Court did not accept was that the income from the single farm payment would be treated as part of the “gross output” in any consideration of the productive earning capacity of the holding.  It was not income derived from the holding.

On that basis, the Land Court concluded that the “willing tenant” would only include £9 per acre in his offer for rent for the holding based upon the convenience of being able to claim single farm payment on the holding.

They also concluded that this justified them in disregarding any “comparable evidence” because the sitting tenants who had agreed rents had probably not analysed the gross outputs generated from their holdings in this way. 

The Land Court rejected the landlord’s arguments which sought to include SFP in the gross output.  The landlord had to rely upon analogy, based upon previous practice in relation to milk quota and to arable area aid, sheep annual premium and suckler cow premium.  The point which the landlord was seeking to make was that all of these quota had been allocated on the same basis as single farm payment – to the existing producer based upon the historic claim.  It could be demonstrated that tenants had been rented on milk quota and that income from AAPS, SAP and SCP had been included in assessments of gross outputs in previous rent reviews.

The Land Court did not find that the analogy satisfied the test for the inclusion of SFP because these others required the claimant to do something with the ground.  They could not say that the payment of SFP ‘derived from the land’.  In coming to this conclusion, they ignored the requirement of the SFPS, which was before them, that the claimant be an “active farmer” in relation to the land.

The Land Court did, however, state that if they were wrong with regard to their treatment of single farm payment the rates of £65 and £60 were appropriate rather than the rate they arrived at, based on gross output of £23 per acre with an additional £9 per acre for the convenience of not taking naked acres.

The Court is treating the Single Farm Payment as Income Support for the Farmer and not as income for Farm and cannot therefore be included as part of the income stream for the rental calculation.

Conclusion

In terms of section 13 of the Agricultural Holdings (Scotland) Act 1991, the Land Court is directed to determine the rent properly payable for the holding, if it were let in terms of the existing lease “in the open market” disregarding “any distortion in rent due to scarcity of lets”.

For the purpose of determining the open market rent (disregarding distortion due to scarcity), the Land Court is instructed to have regard (and probably equal regard) to (a) information about rents of other agricultural holdings and any factors affecting those rents  and (b) the current economic conditions in the relevant sector of agriculture.

In the Moonzie Rent Review, the Land Court accepted that the landlord had produced evidence of the rents of 5 other holdings, which were more or less comparable with Moonzie in which the rent had been fixed by agreement at about the date of the Moonzie review.  The tenant had also intended to lead evidence of the rent of three other agricultural holdings, but for various reasons, withdrew all three during the course of the proof.   The Land Court also accepted that the evidence led by the landlord on the five other agricultural holdings would, otherwise, justify a rent at Moonzie of £65 for Class 3(1) land and £60 for Class 3(2) land.

The Land Court also accepted that, where a rent is agreed between a landlord and a sitting agricultural tenant, there is no element of distortion due to scarcity of lets.

However, in fixing the rent for Moonzie, which is a substantial agricultural holding in a good location with a substantial and conveniently situated farmhouse and good quality arable land, the Land Court determined that the land should be let at an average rent of about £30 per acre.

The Court has stated:  ‘’It is clear that the issue of SFP is of critical importance not only to this case but to the level of rents across the whole tenanted sector in Scotland.  There can be little doubt that, if not all, then the vast majority of tenants who have negotiated rents since 2005 have been prepared to treat their income from this source as part of the farm income to be shared with the landlord as rent.  Where SFP is included in a budget it is typically found to be at a level which makes it the dominant element in the “profit” of the whole enterprise.  If such payments are not to be included, there will inevitably be a significant fall in rents.’’  

The question has to be asked whether the Land Court have correctly identified the “open market rent” for Moonzie when they have disregarded the actual open market which exists between landlords and sitting tenants as well as evidence of new lets at rental levels higher than agreed rents and, instead, created an artificial open market where the participants take into account factors which are ignored by actual landlords and tenants.

Further, given the views expressed by the Land Court on single farm payment, careful consideration would need to be given as to whether the approach will, in fact, alter if SGRPID depart from the historic model of SFP and move to an area based, regionalised model.

If you would like to discuss  how this outcome may affect you then please do not hesitate to contact Chris Addison-Scott at chris.addison-scott@ckdgalbraith.co.uk who was a key part of this case.

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