The latest legislation introduced by the Land Reform (Scotland) Act 2016 came into force on 28 February 2021 and is seen as an opportunity for farmers both young and old.
With 27% of Scottish farmers aged over 65, the new arrangements are designed to offer an opportunity for farmers to consider retirement or to move on from their tenanted farm. It is also an opportunity for new, younger people to enter the industry.
The legislation enables most tenants with a secure agricultural tenancy (a 1991 Act Tenancy) to offer to relinquish their tenancy to their landlord for value. Many tenants have delayed decisions about retirement until these new arrangements were introduced and as a result, we are likely to see a number of such notices being served this year.
If the landlord does not wish to “buy” the tenancy, the legislation allows the tenant to advertise the tenancy on the open market and to assign it, for value, to a “new entrant” or “progressing farmer”.
New Entrant v Progressing Farmer
The Act defines 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 legislation does 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 procedure involves the tenant serving a formal notice 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 an approved valuer (a list of approved valuers is maintained by the Commissioner), within 28 days of receipt of a valid notice, to calculate the amount to be payable.
Once appointed, the valuer has eight weeks from date of appointment to provide a valuation according to the statutory formula. The tenant will be liable for the costs of the appointed valuer. Costs have been estimated to potentially reach £5000 subject to complexity.
On receipt of the valuation either landlord or tenant may appeal the valuation received (within 21 days) otherwise:
- Landlord can accept. Compensation must be paid within six months of receipt of valuation. The landlord does have the ability to withdraw after the 6-month period and the tenant will be free to assign.
- Landlord can reject. Again the tenant would be free to assign.
- Tenant can withdraw within 35 days of receipt of valuation. Tenant will remain the tenant under the secure tenancy and would be free to serve another notice in the future to the landlord.
The tenant has 12 months from the valuation to assign. If an assignee is identified and offer agreed in principal between the existing and proposed tenant, the landlord has 28 days to object to the assignee. Grounds of objection could include doubt over assignees ability to either pay rent or that they lack sufficient skills/expertise to manage the land.
We understand that there are a fairly large number of secure tenants ready to begin the process and serve the relevant notice and therefore the next 12 months will be of particular interest to see how many notices are served and the appetite for both landlords to “buy” back the tenancy and also the open market for assignees.
There is one issue at the heart of the legislation and that is funding for new entrants or progressing farmers who wish to take on the tenancy. Lenders (even lenders who are highly experienced in agricultural lending) will rarely, if ever, provide funding in relation to secure tenancies given the inability for a borrower to grant a standard security over the land. An incoming assignee would either require to have funds available or the ability to raise finance over existing property (which would pose an issue for new entrants given the definition noted above).
It should be noted that landlord and tenants may still negotiate relinquishment outwith the statutory process and this remains the most simple and cost effective way of achieving the negotiated surrender of a secure tenancy.
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