Offshore landownership in Scotland

Much as I often - let's be honest, nearly always! - disagree with seasoned land reform campaigner Andy Wightman's views, I'm grateful to his blog for making me engage with the topics he writes about.

For example, I'd never have got round to addressing myself to the Land Registration (Scotland) Act 2012 if it hadn't been for a post Andy wrote which made me think "Is that right? I should check it out" 

I also enjoy being able to comment on Andy's blog and engage with the other commenters there, one or two of whom have been highly influential on my thinking about land reform (and, no, I'm not talking about the Scottish Land & Estates people).

Anyway, this doesn't mean we're getting married or anything, Andy, and this post is simply to reproduce a comment I left on Andy's blog on the subject of whether the Land Reform Bill currently before the Scottish Parliament should be amended to introduce a ban on companies registered outside the EU being able to own land in Scotland:-

"The muddled thinking around this subject is extraordinary.

Ownership of land in tax havens is alleged to be responsible for tax avoidance, tax evasion, money laundering and “lack of traceability and accountability”. Let’s look at these in turn.

1) Tax avoidance. Title to land in Scotland is taken in the name of companies registered in tax havens for no more sinister reason than foreign owners wishing to avoid UK Inheritance Tax on the land. But forcing non-doms to re-register their land in another EU country (e.g. Sweden which doesn’t have IHT) doesn’t oblige them to pay UK IHT. So what’s the point?

2) Tax evasion. As pointed out when discussing Land Rental Value, you can’t hide land. So if HMRC believe an offshore landowning company is evading tax legally due, it can raise an estimated assessment. If the offshore doesn’t engage, after due process HMRC can sequestrate it. That means its land is sold to pay its tax bill. Being registered in a tax haven doesn’t give your Scottish assets immunity from debt recovery process.

3) Money laundering. No study or consultation has ever been done to see whether this is enough of an issue as regards Scottish land to merit unfocussed “cut off head to cure cold” measures like restricting ownership to EU companies. Should responses to money laundering not be co-ordinated with the law enforcement agencies? And is money laundering not reserved?

4) “Lack of traceability and accountability”. What does this actually mean? All the Land Reform Review Group said (page 35, para 3 [here]) is it’s a “particular topic that is raised” But there’s no analysis before the LRRG leaps to the conclusion that non-EU ownership should be banned merely because there’s no EU rule preventing it! The Scottish Government has responded that there’s no evidence that land owned by a company incorporated outside the EU has caused detriment to an individual or community. Whether that’s true or not, I don’t know but that’s the question that needs to be investigated before resorting to knee-jerk gesture politics of banning things just because you don’t like the sound of them.

Anyway, what are these much vaunted EU company laws under which it’s claimed “the directors are named and are legally responsible and accountable for the affairs of the company.”? [1] Is there an EU Company Law Directive to that effect and, if so, why has there been no analysis to see if it’s fit for the purpose trying to be achieved in Scotland. Whatever that is."

I'll just add that in my nearly 20 years as a rural property lawyer, it always amazed me that, despite the limitations of the Register of Sasines not being map based, land agents always seemed to know exactly who owned what and who to contact about it: this whole "lack of traceability and accountability" might be a concern up in the ivory towers but never seemed to be a problem in practice down on the farm!

Letterewe: registered in the Dutch Antilles but phone Barbara on 01445 760207 if there's anything you need to know

Footnotes
[1] Quote from Andy Wightman's evidence of the Land Registration Bill, page 5 - here

Land Reform Bill Evidence

The following is my evidence submitted in response to the Scottish Parliament's Rural Affairs, Climate Change and Environment Committee's call for evidence at Stage 1 of the Land Reform (Scotland) Bill. I've added here some additional commentary on the agricultural holdings sections which might be of more interest to lawyers than MSPs. 

Dear Committee Members

Land Reform (Scotland) Bill – call for evidence

Due to what seems like a pretty short consultation period for such a complex bill, I am only able to focus on two areas:-

1   Part 5 – right to buy land to further sustainable development

If local authorities (LAs) have rights of compulsory purchase where necessary to deliver their services, why shouldn’t community bodies (CBs) as they are, to an extent, a more localised tier of service delivery?

Viewed in that light, the tests in Part 5 (clauses 47(2)(c) & (d)) – that the purchase “is the only practicable way of achieving” a benefit to a community and that refusing it “is likely to result in significant harm to that community” – set the bar too high.

Part 5 needs to be aligned more with LAs’ compulsory purchase powers but with safeguards reflecting the fact that community bodies may lack the skills, experience and resources of an LA. And also to curb the historical tendency of “over enthusiasm” on the part of some CBs – aided and abetted by the likes of HIE, Scottish Land Fund and Scottish Government who find it politically difficult to say “no” – to take on projects which are not viable.

Case study – Achilitibuie Smokehouse

This purchase by Coigach Community Development Company under Part 2 of the Land Reform Act 2003 was sanctioned by the SG and funded by the SLF on the basis of the following proposals:-

    lease back to existing operator [unlikely since it was that operator’s decision to relocate which prompted the sale]; establish a “fine foods hub”; community workshop space (micro-brewery, artisanal bakery etc.); laundry; visitor attraction (c.f. distilleries, Baxters of Fochabers); bunk house; use the site for social/rented housing; heritage centre

Two years on from the purchase, the Smokehouse remains empty apart from office space for CCDC (which was not one of the uses invoked to justify the purchase). NONE of the proposals above has been delivered or is even in preparation.

(See http://tinyurl.com/pbxnetr and https://ccdcompany.wordpress.com/)

I don’t doubt the good faith and commitment of CCDC but the fact remains the Smokehouse was purchased (and funded) on the basis of aspirations - a “wish-list” - rather than an actual viable plan. Giving communities the chance to “have a go” like this may be OK when it’s a case of pre-empting something a landowner wanted to sell anyway but totally unacceptable for a right of compulsory purchase.

Therefore, the new compulsory right to buy for sustainable development must involve the community body having a definite plan. It must be viable, costed and funded. There should be provision for it to be assessed by an independent body drawn from a panel of people experienced in developing similar enterprises.

In essence, all the ingredients of a viable proposition should be demonstrated to be present with only the necessary land acquisition standing in its way.

Achilitibuie Smokehouse as seen on Google Streetview

2. Part 10 – agricultural holdings

I am particularly disappointed that what is a notoriously complex area of the law is being dealt with by being “tacked on” to the Land Reform Bill. There is a grave risk of agricultural holdings being lost sight of behind “sexier” aspects of (and omissions from) the bill leading to what was mentioned in para. 316 of the Policy Memorandum: “potentially rushing what was likely to be complex legislation, risking insufficient scrutiny and poor legislation." 

I was also disappointed to see Part 10 characaterised in a Youtube video put out by the committee as “new rights for agricultural tenants”. It is not. It is about re-setting agricultural holdings law to make it fit for purpose in the 21st century and reflecting a fundamental aim of the AHLRG report, namely, balance and mutuality between landlord and tenant (final report, para 67).

The following is by no means a comprehensive critique of Part 10 but just the things that have jumped out the page at me in the limited time available. And I’m afraid the following comments are inevitably a bit technical!

2.1   Modern limited duration tenancies – new entrant break clause at year 5 (bill clause 76(2) inserting new s.8D into 2003 Act)

The bill doesn’t implement the AHLRG’s recommendation on this.

This is because it doesn’t give the landlord a break. It gives him an irritancy (forfeiture clause) which is legally much more onerous. Irritancies have always been possible in agricultural leases so the bill adds nothing and does not achieve the policy aim of giving landlords additional confidence to let to new entrants long term.

It also fails to deliver the AHLRG’s aim of balance and mutuality because, while the bill gives the landlord an irritancy (the right to attempt to make a case against the tenant), it gives the tenant a break (the right to walk away, no questions asked). Failure of reciprocity.

[Additional comment: The AHLRG final report recommended (paras. 231-233, recommendation 24) that new 10 year "modern limited duration tenancies" be able to include a break clause at year 5 to give landlords additional confidence to let land on a long term basis to new entrants with no track record. In the property industry, a "break clause" is generally understood to be one allowing a party to lease to terminate it prematurely "with no questions asked", so to speak. 

Why I say that bill clause 76(2) gives the landlord (but not the tenant!) an irritancy rather than a break is that the landlord's "break" (new section 8D(6)) is only exercisable in the event of the tenant being in breach of the lease which may be difficult to prove. 

Having said that, it would appear that this irritancy is enforceable no matter how trivial the breach and the tenant has no right to purge it (keep the tenancy being remedying the breach). Note that bill clause 78 is introducing a statutory right to purge irritancies of MLDTs within a year: see 2.3 below.]      

2.2   Modern limited duration tenancies – fixed equipment obligations (clause 77 inserting new s.16A into 2003 Act)

An error in the drafting of this clause means that, while the landlord is obliged to provide certain fixed equipment (buildings and other farm infrastructure like fences, drains etc.) with a lease, there is nothing to say what condition it should be in.

In order to prevent people being embroiled in expensive Land Court cases, wording needs be added to the effect the fixed equipment provided must be “reasonably fit purpose” (or some other objective criteria).

[Additional comment: Since 1948, landlords have had the statutory obligation when renting agricultural land to provide with it a certain amount of fixed equipment (farm buildings (including farmhouse) and farm infrastructure such as fences, drains, roads etc.) in good condition at the commencement of the lease. That was reasonable so long as the paradigm let was an entire farm but tensions emerged when lets increasingly tended to be of additional land to established farmers: was it necessary for the landlord to provide a full suite of fixed equipment on the land being let (including a house?) when the tenant was likely already to have much what he needed on his own farm nearby?

An attempt was made in 2011 to address this in relation to limited and short limited duration tenancies introduced by the 2003 Act. Article 9 of The Public Services Reform (Agricultural Holdings)(Scotland) Order 2011 (here) amended s.16 of the 2003 Act such that the fixed equipment (FE) to be provided by the landlord of an S/LDT was to be such as to allow the tenant to farm the land efficiently (i.e. meaning in effect that, if the tenant as a matter of fact had his own FE elsewhere, then that wouldn't be needed to be provided again with the lease in question: the previous wording had referred to a hypothetical occupier who might or might not have his own FE). 

In order to prevent disputes breaking out later, the 2011 order also required parties to S/LDTs to agree at the outset what was actually needed by way of FE in the context of any particular lease and what condition the landlord was required to put it in. But of course you can't compel people to agree with other and there has to be a dispute resolution mechanism. In the context of agricultural leases, that is the Land Court but the legislation has to provide the LC with an objective criteria by which to judge the issue. As regards the question of what FE is required, that's provided in s.16(1)(a)(i) of the 2003 Act (as amended by Art. 9 of the 2011 Order) as being such FE "as will enable the tenant to maintain efficient production as respects the use of the land as specified in the lease" (Note in passing a flaw there: what if the lease doesn't specify a use of the land? Perhaps because there is no written lease. That could be got round by rewording it as "use of the land as contemplated by the lease".)

But as regards the condition of the FE to be provided, s.16(1)(a)(ii) of the 2003 Act (as inserted by the 2011 Order) refers to subs. (2) which just talks about the parties' agreement. And that brings us back to what happens if they don't agree: the LC is given no backstop criteria by which to resolve the matter.

The point here is that clause 77 of the Land Reform Bill dealing with MLDTs simply repeats the wording of the 2011 Order for S/LDTs with all the flaws inherent in it as mentioned above.]        

2.3   Modern limited duration tenancies – irritancy clauses (bill clause 78 inserting new s.18A into 2003 Act) 

This clause (18A(6)(b)) gives tenants a 12 month period to remedy any breach of the lease before the landlord can invoke irritancy (forfeiture of the lease). And 18A(7)(b) allows tenants to apply to the Land Court to extend that period.

In the interests of balance and mutuality, landlords should have the equivalent right to apply to shorten it: 12 months is an unusually long period to allow a breach of a lease to continue.

2.4   Conversion of 1991 Act tenancies to modern limited duration tenancies (cl.79) 

Conversion to MLDT gives the tenant much broader rights of assignation (to non-family members) than are available in a 1991 Act tenancy but with the quid pro quo that an MLDT is necessarily of finite duration. The crucial aspect of a “converted MLDT” is therefore its duration. That should be a matter for the full scrutiny of primary legislation rather than left to regulations. This should, therefore, be kept for the second round of primary legislation to implement the remainder of the AHLRG’s recommendations not being taken forward by the present bill as contemplated by the policy memorandum.

2.5   1991 Act tenancies – new rent review criteria (cl.82 inserting new schedule 1A into 1991 Act 

Again, the bill doesn’t implement the AHLRG’s recommendation on this.

This is because the AHLRG recommended (final report, para 114; recommendation 3) that rents be determined on the basis of the productive capacity of the holding. But what the bill says (schedule 1A, paras 7(3) & (4)) is that the rent will be the fair rent having regard to productive capacity.

What that means is that productive capacity is merely a default presumption for the rent subject to appeal to the overarching criteria of fairness. In other words, either party could argue to the Land Court: “The rent on the basis of productive capacity would be £X but in the particular circumstances of my farm that would not be fair because of XYZ so I request you to fix a lower [or higher] rent of £Z which would be fair.” 

That’s fine except it’s not what the AHLRG recommended. And appeal to the nebulous and subjective concept of fairness drives a coach and four horses through the AHLRG’s aim of “full transparency and objectivity” in relation to rent review (final report, para. 115).

  

Stenness, Orkney - Copyright Murray Foote

      

Devolving the Crown Estate: clause 31 of the Scotland Bill

The following is the text of a note I had the presumption to send to the members of the RACCE Committee recently:-

To the members of the Scottish Parliament Rural Affairs, Climate Change & Environment Committee

Devolving the Crown Estate: clause 31 of the Scotland Bill

Dear Members

I watched the Committee’s session on 17 June [official report here] and write as a retired lawyer in an attempt to clarify some of the legal aspects and dispel some of the misunderstandings around whether clause 31 is unnecessarily complex or restrictive.

1. What is the Smith Agreement on the CE? - conditionality

If all Smith had said was “The Crown Estate in Scotland will be devolved. Full stop.”, there would be a lot of force in the argument that all clause 31 need do is simply repeal the CE reservations in the Scotland Act 1998 (Schedule 5, paras. 1(3) and 3(3)(a)).

But Smith said more than that – it also includes the following paragraphs:-

33. Following this transfer, responsibility for the management of those assets will be further devolved to local authority areas such as Orkney, Shetland, Na h-Eilean Siar or other areas who seek such responsibilities. […]

34. The Scottish and UK Governments will draw up and agree a Memorandum of Understanding to ensure that such devolution is not detrimental to UK-wide critical national infrastructure in relation to matters such as defence & security, oil & gas and energy, […]

In other words, transfer of the CE to Scotland is not unconditional. This is why clause 31 is more involved than a simple repeal of the reservations. It needs to contain mechanisms to ensure these conditions are duly implemented.

2. Transfer scheme

The mechanism adopted is “The Treasury may make a scheme transferring” the Scottish Crown Estate (SCE). Thus, the Treasury is not obliged to effect the transfer until it’s satisfied Scotland has implemented the conditions mandated by Smith.

Note that the scheme must be approved by the Scottish Ministers (section 90B(13) of the SA98 as inserted by cl.31(1) of the bill). So the Treasury can’t impose a scheme of transfer on the SMs they don’t like.

Of course, you could argue the word “may” doesn’t oblige the Treasury to effect any transfer even if Scotland has implemented the Smith conditions. That’s true as a matter of law. But the counter argument is that, if the transfer were made without first securing the conditions, Scotland could (in theory) welch on them later.       

3. Paragraph 33 (sub-devolution) – is it a condition at all?

Watching various parliamentary sessions, it’s become clear to me there might be a confusion between whether the Smith Agreement is:-

A. The SCE will be devolved on the strict understanding it must immediately be sub-devolved from Edinburgh to Orkney et al

or

B. The SCE will be devolved and, whilst there’s been talk of further sub-devolution which we (although it’s none of our business) would not disapprove of, the Scottish Parliament will be at liberty to do – or not do – whatever it sees fit with the SCE (including retaining it fully centralised in Edinburgh).  

If the correct interpretation of Smith is the latter, that means there is only one condition to be implemented, para. 34 (safeguarding UK-wide defence, security and energy interests). Therefore, skip paragraphs 4 to 8 below and go straight to 9.

4. If it is a condition of Smith, how does Scotland go about implementing para. 33 (sub-devolution)?

Clause 31(7) gives the SMs power to make a Scottish Statutory Instrument (Order in Council) subject to affirmative resolution in the SP on the subject. This can be done even ahead of the SCE being transferred and devolved.

(At the risk of straying out of my self-set remit of legal explanation into politics, one can’t help wondering if the Scottish Government shouldn’t be devoting more energies into working up a scheme of sub-devolution as they’re empowered to do under 31(7) rather than fighting a rather sterile battle with London over the structure of the clause!)

5. Myth buster #1 – clause 31 binds the SMs to manage the SCE in accordance with the Crown Estate Act 1961 (CEA61)

It doesn’t.

Clause 31(5) applies CEA61 to the SMs’ management of the SCE only as an interim default position in the event the transfer takes place at a time when the SMs have not yet made alternative arrangements in an SSI for sub-devolution under cl.31(7) & (8) (for example because London waives compliance with the Smith condition of sub-devolution (para 33) if it transpires there is not, after all, political appetite for it in Scotland).  

In this scenario – assumed to be unlikely but it’s the mark of good legislation that it covers all angles – the Scottish Parliament would still at a later date have power to amend/repeal section 31(5) if circumstances changed. (This is because the SCE would by then be devolved (see para. 7 below) and s31(5) is neither an amendment of SA98 (which is generally protected from modification by the SP) or included amongst the other enactments in Schedule 4 of SA98 which are so protected).

In any scenario, note also how clause 31(6) explicitly says 31(5) (applying CEA61 to SMs’ management of the SCE) is subject to any OIC (SSI) under 31(7) (power of SMs to make alternative arrangements). 

6. Myth buster #2 – clause 31 binds the revenues of the SCE to be paid into the Scottish Consolidated Fund (precluding any revenues flowing to local authorities under sub-devolution)

It doesn’t.

Clause 31(11) (amending the Civil List Act 1952 (CLA52) to direct the revenues from the SCE into the Scottish Consolidated Fund) is also merely a default position which applies unless and until the SP legislates otherwise.

The SP will have power to legislate because revenues from the SCE will no longer be reserved (see 7 & 8 below) and the CLA52 is not listed as protected from modification by the SP in Sched. 4 of SA98.

The same considerations apply as with para. 5 above (SMs bound into Crown Estate Act 1961 only as a default position) except that, if I were being hyper-critical of the drafting of clause 31, I would have preferred to see cl.31(11) explicitly mentioned in cl.31(6) (default positions subject to alternative SSI made under 31(7)) along with 31(5) (SMs to manage under CEA61).                 

7. Myth buster #3 – clause 31 transfers the management of the SCE to the SMs but doesn’t devolve it.

It does devolve.

Clause 31(2) amends the definition of the Crown Estate for the purposes of Schedule 5 (reserved matters) of the Scotland Act 1998 to become “the Crown Estate (that is, the property, rights and interests under the management of the Crown Estate Commissioners)”. After the transfer to the SMs, the SCE will not be under the management of the CECs and thus will no longer be reserved.

This way of expressing matters (as opposed to simply repealing the paragraph (3(2)) of the Sched. 5 of SA98 which declares the reservation hitherto of the CE) has been chosen in order to permit the CECs after the transfer to acquire new property in Scotland on a reserved basis. (I realise that’s a controversial point but as it’s a matter for political decision I don’t propose to comment on it here.)

7A. UPDATE 27 June – But won’t the scheme to be made by the Treasury contain the arrangements for sub-devolution?

No. The sub-devolution arrangements will be contained in an SSI to be made by the SMs under cl.31(7) subject to affirmative resolution in the SP (and with the SP having devolved legislative competence to change these arrangements in the future).

It would be quite wrong (politically speaking) for the Treasury to have a hand in crafting the sub-devolution, but in his evidence to the D(FP) Committee on 25 June, John Swinney betrayed that he possibly imagined this might be the case when he said:

"There is an important question about whether a function or a scheme is being devolved. If the function is being devolved, it is up to us to design the scheme. If the scheme is being devolved, it will determine the basis on which some provisions are taken forward. It is up to this Parliament to decide how we intend to progress and advance those questions. An open approach is therefore essential in order to give Parliament as much flexibility as it chooses to exercise."

Perhaps the easiest way to look at it is by saying that two things are happening: (1) transfer of management of the SCE from the CECs to the SMs; and (2) devolution from Westminster to Scotland of jurisdiction over the SCE going forward. Step (1) is effected by the Treasury scheme while step (2) is effected by repeal of the CE reservations.

8. A flaw in the bill

Even Andy Wightman now accepts that clause 31 as drafted effects devolution. He has, however, rightly pointed out a possible drafting error. This is that clause 31 contains no amendment of para. 3(3)(a) of Sched. 5 of SA98 which reserves “the hereditary revenues of the Crown [i.e. the Crown Estate], other than revenues from bona vacantia, ultimus haeres and treasure trove”.

I suspect that’s a cock up rather than a conspiracy which could be corrected by an amendment to replace the words “other than revenues from bona vacantia, ultimus haeres and treasure trove” with “so far as under the management of the Crown Estate Commissioners”. (See para. 7 above.) 

9. Paragraph 34 of Smith – condition safeguarding UK-wide defence, security and energy interests

The wording in Smith on this is that a Memorandum of Understanding will be agreed.

What happens if the SCE is handed over to Scotland unconditionally by simply repealing the reservations and then such an MoU were not agreed due to intransigence on the part of Scotland?

Clause 31 as presently drafted is a lawyer’s attempt to square that circle so that, if everything falls out of bed, we remain where we started rather than either side having lost its hand – it “fails safe”.  As a matter of law, the clause works (subject to point 8 above). It may betray a lack of trust but that cuts both ways as witness the Devolution (Further Powers) Committee’s recommending that the wording be amended from “may” make a scheme to “shall”.

10. Fort Kinnaird

The Crown Estate doesn’t own Fort Kinnaird.

As I understand it (but by all means ask the CE to confirm) FK is owned along with two other shopping centres in England by a limited partnership called The Gibraltar Limited Partnership (TGLP) which is incorporated in the UK (not Gibraltar) with its registered office in London. The CE is a 50% partner in TGLP along with a specialist retail property unit trust called the Hercules Unit Trust.

In view of the CE’s indirect interest in FK (which is a bit like saying just because you own shares in Virgin doesn’t mean you own any aeroplanes or record shops) as part of a UK wide portfolio, the view has been taken it wasn’t one of the CE’s “economic assets in Scotland” (to use the words in para. 32 of Smith) to be devolved.

But that’s a bit of a moot point. I bet FK didn’t come up in the Smith discussions so it’s simply a matter for agreement between the Scottish and UK governments now that it’s been raised whether the CE’s interest in FK should be devolved along with the assets in Scotland it owns outright.

10A. UPDATE 27 June – more about Fort Kinnaird

Andy Wightman attempted to suggest in his blog that the CE did own an interest in FK because TGLP is an English partnership: as these don’t have separate legal personality distinct from their partners as Scottish partnerships have (like a company having its own legal personality distinct from its shareholders), their property, Andy suggested, is owned by the partners themselves (as opposed to by the partnership).

This is, with respect, a misunderstanding. Title to an English firm’s land is held by trustees (often, but not necessarily, the partners: in the case of TGLP, my understanding is that the CE is not one of the trustees) who hold it in trust for the partnership purposes (Partnership Act 1890, s.20). What this means in practice was summarised in a 1997 Court of Appeal case called Popat v Shonchhatra as follows:

“While each partner has a proprietary interest in each and every asset, he has no entitlement to any specific asset and, in consequence, no right, without the consent of the other partners or partner, to require the whole or even a share of any particular asset to be vested in him. … It is only at that stage [division of partnership assets upon dissolution of the firm] that a partner can accurately be said to be entitled to a share of anything, which, in the absence of agreements to the contrary, will be a share of cash.”

That said, there is undoubtedly in lay-person’s terms a “Scottish dimension” to TGLP. It occurs to me, though, that, as FK is not one of the ancient possessions of the Crown in Scotland (like the sea bed and foreshore etc.), it may be that Scotland’s “moral” claim to FK could be pretty weak if, for example, it emerged that the CE’s investment in TGLP was funded from the proceeds of sale of property in England (I’m not suggesting it was). But even if that’s a non-point, how does one calculate the share ascribable to FK of the CE’s share in TGLP? It just goes to show that things are necessarily more complex than simply deleting the CE reservations in the Scotland Act.             

Feel free to contact me for any clarification on any of this.

You are welcome to make this public.

Neil King

21 June 2015