Friday, 25 October 2024

Lease basics: Orr v UK Agricultural Lending Ltd

An Outer House decision in which an agreement calling itself a lease was held not to be one for want of common law cardinal elements of a lease.

Sunwick Farm

In Orr & others v UK Agricultural Lending Ltd [2024] CSOH 93 the pursuers (Scottish word for plaintiffs) were Alexander Orr, his mother and a family company who all occupied (but didn’t own) Sunwick and Houndwood Farms in Berwickshire. They sought an interdict (Scottish word for injunction) to prevent UK Agricultural Lending Ltd, a heritable creditor secured on the farms (mortgagee), from removing (evicting) them in the course of calling up the security (repossessing the farms to sell them with vacant possession). This was on the basis that Alexander Orr claimed to have a lease of the farms from a previous owner of them, a company called Hamilton Orr Ltd (HOL). The defenders (defendants), the heritable creditor on the farms, counterclaimed for reduction of the lease (have it declared null and void) and for decree of removal (eviction) of the Orrs from the farms.

The terms of the lease Alexander Orr claimed to hold may be given in full (subject to some immaterial abbreviations):-

Lease for 10 years to Duncan Alexander Andrew Orr regarding the whole of Title BER2353 Sunwick Farm and Houndwood Farm […].

I, Martin Frank Frost on behalf of the directors and shareholders of, and as director and Chairman of [HOL, the company which owned the farms at the time], grant Duncan Alexander Andrew Orr in accordance with previous agreements with the shareholders of [HOL], a lease for the occupation of Sunwick Farm and Houndwood Farm. Sunwick Farm in its entirety to include the farmhouse, out buildings, land and machinery and livestock not accredited to any other company without agreement, with the exception of all Sunwick Cottages and land belonging to Janet Orr Frost namely Title BER7040. All land at Houndwood with the exception of the forestry belt.

This lease granted for the term of 10 years starting 20th September 2016 with the view that Duncan Alexander Andrew Orr will have the opportunity and ability to purchase both properties at the earliest. The farms thus after said term be returned to [HOL].

The conditions are:

1. That DAAO undertakes to make the farms profitable and agrees that he shares 50% of his profits with [HOL] within lease timescale.

2. That DAAO undertakes to purchase the farms at the earliest opportunity.

3. That DAAO undertakes to give annual reports of progress to the company secretary or any director of any [HOL] director (sic) or shareholder who wishes an update.

4. That DAAO undertakes to have no hold on Harcarse Hill Farm or its assets through the occupancy of this lease.

5. That DAAO undertakes to absent himself, or refuse to become involved, in any legal action against any director or employee of Avocet companies.”

Cardinal elements of a lease
As is well known, four so-called cardinal elements must be identified and agreed for an agreement to be a lease. These are the parties (identification of landlord and tenant), subjects (the property let), term (duration), and rent. And a further requirement for it to be a lease is that the tenant must have the exclusive possession of the subjects. Only if it is a lease – i.e. all four cardinal elements are agreed and the tenant has exclusive possession – will the tenant get a real right, that is to say he will be able to remain in possession of the subjects for the full term notwithstanding changes of ownership of the subjects or a heritable creditor seeking to repossess them during the term. (If an agreement lacks any of these ingredients, it may nevertheless still be valid as against the original owner of the subjects who entered into it so long as he continues to own them but not against any subsequent owner (or heritable creditor) coming in during the term who will be entitled to evict the tenant notwithstanding that the term still has time to run.) 

 

Rent
As can be seen from the alleged lease quoted above, there was no difficulty about three of the cardinal elements: parties, subjects and term. The issue arose over the rent, agreed at 50% of the profits of the farms. It is perfectly permissible for a rent to be expressed as a share of profits from the subjects (as opposed to a fixed periodical sum) but the problem here was that the agreement contained no mechanism for determining what the profits were in case of dispute between landlord and tenant (for example that they be determined by an independent accountant). Therefore, there was, in effect, no agreement about the rent and so that cardinal element was missing. In the words of Lord Braid (para. [73]):


It is immediately apparent that the lease contains no machinery by which any sum due could be fixed. The gaps are far beyond the power of the court to fill by means of implication of terms: cf Crawford v Bruce 1992 SLT 524 at 532. I therefore conclude that the agreement cannot be a lease enforceable against third parties, in that it does not provide for payment of a rent. (An alternative analysis, leading to the same result, is that the provision for rent is simply void for uncertainty.) This conclusion is reinforced by my finding, above, that no rent was as a matter of fact paid, whether by sharing of profit or otherwise.        

Exclusive possession
There was another problem with the agreement being a lease: the ‘tenant’, Mr Orr, didn’t have exclusive possession of the farms. The facts in this regard established at the proof (trial) were (para. [66]):


Alexander Orr was (or rather, continued to be) employed by one of the [Landlord’s group] companies … as farm foreman and … he worked at the [farms] in that capacity rather than as a tenant … . Whether or not he (or his company) also possessed the [farms] in the pursuit of his own (or his company’s) business, he (or his company) did not have exclusive possession because the [farms were] also possessed by [the Landlord] who installed hydroponics on [them] in connection with its own business and who kept an admittedly small number of cattle on [them]. The evidence that rent was paid by way of deduction from Mr Orr’s wages, which was not vouched, I do not accept, and in any event that was not what the lease provided for by way of rent … . No accounts were ever produced, [nor were the farms] ever made profitable, nor was any rent ever paid. Not only was there no apparent sign to the outside world that Alexander Orr occupied the farm as tenant, nor did he make mention of the existence of the lease on several occasions when it would have been natural that he do so … .

Against that factual background, Lord Braid opined (para. [74]):

The second requirement where the pursuers face a difficulty is the requirement that the tenant have exclusive possession of the subjects: see Millar v McRobbie 1949 SC 1. The need for possession is explained in Rankine [a classic textbook on leases] at page 137 as being the “only means whereby at common law a singular successor or creditor of the landlord...can become acquainted with the existence of a lease and be enabled to learn its stipulations.” Having found as a fact that Alexander Orr did not have exclusive possession - see, again, para [66] - quite simply, the agreement could not be a lease, whatever else it was.

(It's not entirely clear whether Lord Braid is basing his decision on the fact that Alexander Orr didn’t have exclusive possession of the farms (because he shared them with the landlord’s hydroponics and “admittedly small number” of cattle: see para. [66] quoted above) or whether he had no possession of them at all (because his role on the farms was not as tenant but as their owner’s employee). But as the greater (no possession at all) obviously includes the lesser (only non-exclusive possession shared with the landlord) here, the result is the same: the agreement is not a lease.)

Good faith and ‘sham’
Although not the focus of this note, it’s worth noting that the alleged lease was granted after the standard security (mortgage) to the defender. As the ‘lease’ hadn’t been agreed to by the creditor (mortgagee), that meant that, even if it were a true lease, it still wouldn’t have protected the tenant, Alexander Orr, from being evicted by the creditor seeking to repossess the farms unless he had been in good faith – i.e. he hadn’t known of the existence of the standard security. Lord Braid found as a matter of fact that Mr Orr did know about it (or, at the very least, and which amounts to the same thing, should have known about it: paras. [76]-[79]).

The defenders, the heritable creditor seeking eviction of the Orrs so they could repossess and sell the farms with vacant possession, also ran an alternative argument that Alexander Orr’s alleged lease was a ‘sham’ designed for the ulterior motive of frustrating their rights under their security and, as such, a nullity. The possibility of agreements being null and void as ‘shams’ was much talked about in the last quarter of the 20th century in the context of elaborate paper exercises to try and circumvent  agricultural tenants’ security of tenure (limited partnerships if you’re old enough to remember them) but the plea never really gained much traction in Scotland. And Lord Braid had little difficulty dismissing this argument in Orr: “it is likely that the parties did intend that the ‘lease’ should have some contractual effect” (para. [71]).  

The Berwickshire Merse from above

Analysis/takeaway
I can’t help thinking Lord Braid was a bit quick to rule the rent provision in the lease void from uncertainty simply because it didn’t contain a mechanism to resolve any dispute about the amount of the profits the landlord was to receive 50% of by way of rent (for example that the profits be determined by an independent accountant). Was he right to say (para. [73]):


The gaps [i.e. absence of mechanism to fix the amount of profit] are far beyond the power of the court to fill by means of implication of terms

in the context of this short, ‘home made’ lease (as opposed to lengthy document prepared by lawyers who can be assumed to have covered every base)?  I’m retired and don’t have access to a law library to look into this but is the ‘officious bystander’ test not still good law? If it is, if an OB had suggested to Alexander Orr and Martin Frost (the director of the landlord company) as they were about to sign the lease: “shouldn’t there be something in there about an independent accountant fixing the profits if you two can’t agree them?” wouldn’t they have “testily suppressed him with a common ‘Oh, of course!’”? (That last quotation is from MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2KB 206 which I found by googling ‘officious bystander’. For any non-lawyers still reading this, it’s one of the tests for when it’s legitimate to imply a term in a contract. An implied term of a contract is one which is taken as read without having to be explicitly written into the contract.) The Orrs were not represented by counsel and I strongly suspect that, if they had been, the legitimacy of implying a term into the lease to provide for a mechanism to determine the profits in the event of disagreement would have been pressed much harder. (It doesn’t look as if Mrs Orr, who conducted their case, took the point at all as is entirely understandable given that she’s not a lawyer.)

As it’s just an Outer House decision (meaning it has little value as a binding judicial precedent), I can’t really see Orr entering the canon on implied terms in contracts. But what I think the real takeaway of the case is that it’s a reminder that, just because an agreement calls itself a lease, that doesn’t necessarily mean it is one. And that, although it can seem like it’s been totally hidden under layers of statutory accretion (Rents Acts, agricultural holdings et al), the basic common law of leases – the need for a rent and exclusive possession by the tenant – can still be the decisive factor in the outcome.

Houndwood

Sunday, 14 April 2024

Land Reform Bill #3 - compulsory lotting of sales over 1,000ha

Picture credit: Scottish Borders Council

In essence, this section of the bill requires that, unless the Scottish Ministers (SMs) agree otherwise, sales of land over 1,000ha must be in lots (parts) decided by the SMs. And that no two (or more) of the lots may be bought by the same person or by persons who are “connected” to each other.

The detail of this is inevitably pretty dry and technical so, if you don’t fancy it, you could safely fast forward to paragraph 14. “Comment” below.

1. Structure of the bill
For anyone wanting to ‘follow along’ the detail of the procedures I’m about to describe, the relevant section of the bill is section 4 (pages 15-25) which amends the
Land Reform (Scotland) Act 2003 (LRA03) by inserting into it a new Part 2A with 23 new sections (ss.67C-67Y). Except where otherwise noted, references hereafter to sections are to these new sections being inserted into LRA03 rather than to sections of the bill.

2. Sales affected #1: sales over 1,000ha
The new lotting provisions of the bill apply to all sales of land over 1,000ha (s.67G(2)) whether that is the whole or only part of an estate. Thus, imagine a 1,500ha estate: the lotting provisions will not apply if the owner is selling only 800ha but they will if he is selling 1,200ha (or the whole).

3. Sales affected #2: sales over 50ha
Under s.67G(3), the sale of land over 50ha is also subject to compulsory lotting when it forms part of a “large holding of land” (LHL: basically land over 1,000ha but see
here for the exact definition) other parts of which of a size such that the >50ha area plus these other parts exceed 1,000ha are already on the market. Thus, imagine an LHL of 1,500ha of which 800ha is already on the market (which wouldn’t have involved lotting) and the owner then decides to sell a further 300ha: the sale of the 300ha will be subject to the lotting provisions.

Although the explanatory notes to the bill don’t say so, I think this is an anti-avoidance measure to prevent the sale of more than 1,000ha to the same person being achieved by two staggered sales to him, each of less than 1,000ha which would not otherwise be caught by the new lotting provisions. Except it doesn’t look to me from the wording of s.67G(3) like the original 800ha in the example would be retrospectively brought into lotting so I wonder how effective it really is as an anti-avoidance provision.

And there’s another issue here, I think. S.67G(3) doesn’t actually mention other land belonging to the same owner already being on the market, it refers (s.67G(3)(c)) to other land in respect of which a “notice of intention to transfer” (NITT) has been given under s.46C of LRA03. An NITT is the notice the owner of an LHL has to give the SMs when he wants to sell part (or the whole) of it – it sets in motion the new community right to buy opportunities in s.2 of the bill which I wrote about here. Now consider the following scenario: Mr A, the owner of a 1,500ha LHL, wants to avoid having to sell it in lots so he gifts 501ha to his wife. That gift doesn’t require an NITT because it’s an exempt transfer (s.46H(2)(b) on page 12 of the bill cross referring to s.40(4) of LRA03). Therefore, s.67G(3) will not apply – no lotting is required, in other words – when Mr A markets his remaining 999ha jointly with his wife’s 501ha with the intention that both parts be bought by the same person. (There would be a similar result if the 1,500ha LHL belonged to A Ltd and 501ha was first transferred to group company B Ltd. That's because transfers between group companies are also exempt under s.40(4)(e) of LRA03.)        

4. Contiguity required?
In my article on the definition of >1,000ha “large holdings of land” (
here), I pointed out that it’s not an LHL for the purposes of the new community right to buy (CRTB) opportunities in the bill (discussed here) if it’s composed of discontiguous blocks of less than 1,000ha separated by land (however narrow: could be a railway or motorway) in third party ‘unconnected’ ownership. Does that also apply to the lotting provisions? I don’t think it does. S.67G(2) simply says “land that exceeds 1,000 hectares in area”. Absent any mention of contiguity, I think we must assume it’s not required. Thus, imagine a 1,200ha estate composed of two discontiguous blocks of 800ha and 400ha. It’s not an LHL for the purposes of the new CRTB provisions in the bill but (if I’m right about contiguity) it will be covered by the lotting provisions if the owner is planning to sell the whole.

But then go back to s.67G(3), the >50ha thing discussed above. Discontiguity may not disapply lotting but it may open up a lotting avoidance route. Using the last example again, the seller sells the 800ha block: the estate isn’t an LHL so the CRTB provisions aren’t triggered and thus he doesn’t need to give the “notice of intention to transfer” under s.46C referred to in s.67G(3)(c) & (4) (an NITT under s.48 is only when there’s already a community interest registered; let’s assume there’s not). Therefore, one of the requirements of s.67(3) (the >50ha thing) is not present with the consequence that there would seem to be nothing stopping the seller later selling the 400ha block to the same person who bought the 800ha which might, of course, have been pre-arranged.

I may be wrong about all this but if I were an MSP scrutinising the bill as it passes through Parliament, I’d make a point of quizzing the Scotgov officials about what exactly s.67G(3) is trying to achieve? And if it’s trying to close avoidance loopholes, whether it does that effectively or leaves open the avoidance scenarios I’ve described in this and paragraph 3. above.

From hereon, I’m going to assume the simple case of an owner wishing to sell a single, contiguous block of more than 1,000ha. It doesn’t matter whether that is the whole or just a part of his estate.

5. Transactions not affected: “exempt transfers”
There are some transactions with >1,000ha areas which are not affected by the lotting provisions of the bill.

These are called “exempt transfers” (s.67C(b)) and are defined in s.67J. That in turn cross refers to s.40(4) of LRA03 (which is the list of transactions permitted when there is a community interest registration without triggering the right to buy). The most significant of these are:

5.1 transfers “otherwise than for value”, That includes gifts. But a transaction where no money changes hands may still be affected: for example, exchanges of land (‘excambions’ in Scottish legal parlance) or transfer to a company in exchange for shares. That’s because the land received in exchange or the shares are both “value”. This exemption also includes transfers upon inheritance.

5.2 Sales to statutory undertakers and sales by agreement which could have been achieved by compulsory purchase. These are normally of small areas far less than 1,000ha which wouldn’t engage the lotting provisions anyway such as plots for road widening or other public utilities. But it could be relevant in the >1,000ha stakes. I’m grateful to Andy Wightman’s blog (here) for drawing my attention to the recent purchase by Forestry and Land Scotland (the new name for the Forestry Commission in Scotland) of 6,680ha Glen Prosen Estate in Angus: because it could have been achieved by compulsory purchase (Forestry and Land Management (Scotland) Act s.19), that sale would not have been subject to lotting had it taken place after the bill comes into force.  

5.3 Sales to companies in the same group. These are defined (s.41(1) of LRA03) by reference to s.170 of the Taxation of Chargeable Gains Act 1992 (s.46K(5)(a)(i) & (b)). I think that includes companies where one is a subsidiary of the other and also companies who are both are subsidiaries of a third but I’d need to speak to a corporate tax lawyer to be sure of that: meanwhile people owning land over 1,000ha through the medium of a UK company should be on the alert. 

5.4 Transfers consequent upon changes in partnership or trusteeship.

There are other exemptions of less importance and note that gifts, sales to group companies and partnership/trusteeship changes can’t be used as part of a scheme to avoid the new rules: see the anti-avoidance provision in s.67E. So you couldn’t sidestep lotting by gifting the land to the ‘purchaser’ and selling him a pencil for £5 million. (Note that I don't believe this would prevent either of the two potential avoidance scenarios I described in paragraphs 3. and 4. above. That's because the initial transfer of 501ha to Mrs A (or A Ltd) in the scenario in para. 3 and the sale of the first 800ha block in the scenario in para. 4 are both permissable, not because they're exempt, but because they're both less than 1,000ha.)

6. “Lotting decisions”
Going back to the simple example of an owner wishing to sell an area greater than 1,000ha (whether it’s the whole or a part of his estate), under s.67C, he may not do so without first having obtained a “lotting decision” from the Scottish Ministers (SMs).

These are governed by s.67N and are a decision that the land may be sold as a whole or must be sold in lots and, if the latter, what the lots are to be. Note that, although it tends to suggest the latter, the expression “lotting decision” in the bill applies equally to a decision that the land may be sold as a whole as it does to a decision that it be sold in lots. However, although these are not terms found in the bill, I’m going to refer when desirable for clarity to ‘no lot decisions’ and ‘multi-lot decisions’. But if I just say “lotting decision” (LD), you can take it the point applies to either type.

Miscellaneous points about lotting decisions:-

6.1         the SMs may only make a multi-lot decision (MLD) if

they are satisfied that ownership of the land … would be more likely to lead to its being used (in whole or in part) in ways that might make a community more sustainable than would be the case if all of the land were transferred to the same person. (s.67N(1))

Neither the bill nor – I think – LRA03 (remembering that the bill consists of amendments to it) defines “community” so the implication is that the community the likely greater sustainability of which militates in favour of an MLD need not necessarily live on the land: it could be somewhere else. Note also the considerations in s.67N(5) the SMs must have particular regard to in deciding to make an MLD (frequency of land coming on the market in the community’s vicinity and concentration of landownership there).

6.2         Under s.67N(4), the SMs may not make a lotting decision without first receiving and taking into account a report from the Land and Communities Commissioner (LCC). This is a new member of the Scottish Land Commission being created under s.6 of the bill (page 25) analogous to the existing Tenant Farming Commissioner. His principal function will be to police the new community engagement obligations in section 1 of the bill. These LCC reports are covered in s.67O and, although it doesn’t say so in terms, presumably they will cover issues such as local community sustainability, land turnover and concentration of ownership etc.

6.3         Under s.67U, the owner can appeal to the Court of Session against a multi-lot decision (MLD) on the basis that the SMs have laboured under an error of fact (for example, about local community sustainability, land turnover and concentration etc.), an error of law (can’t think of an example of that) or that the MLD is “unreasonable”. I think an appeal would be allowable here about either it being a multi-lot decision as opposed to a no lot decision or about the lots decided by the SMs in an MLD. If the CoS upholds the appeal, it’s sent back to the SMs to redecide: the court can’t substitute its own alternative decision.  

6.4         A lotting decision lasts for for five years (s.67F(4)(b) & (5)(b)). That’s the owner’s window within which to sell the land failing which he has to apply for a new LD. They also cease to have effect when the land they relate to (or a part of it) is sold within the five years (s.67F(4)(a). Thus, suppose there is a no lot decision (NLD) for 1,200ha and it’s sold as a whole in year one: the purchaser can’t use the original NLD to sell the land as a whole again within the remainder of its five years: he has to apply for a new LD (which involves the possibility that the new one might be a multi-lot decision this time).

6.5         Under s.67M, the SMs may (note, not must) make a no lot decision (NLD) if satisfied that the owner wants to sell the land to avoid or alleviate financial hardship and that having to wait for a lotting decision in normal course under s.67N. would cause or worsen the hardship. In this case a report from the Land and Communities Commissioner is not required. S.67M is headed “Expedited lotting decision where owner facing hardship” and no doubt these NLDs will be produced quicker as there’s no need to wait for the LCC report or ponder over lots etc. But s.67M doesn’t contain any time limit within which the SMs must produce a hardship NLD (nor does s.67N for a standard ‘non-hardship’ lotting decision of either type). An s.67M hardship NLD lasts only one year (s.67F(4)(b) & (5)(a)). In the event of the SMs not agreeing to a hardship NLD, the owner may nevertheless still be entitled to compensation from them under s.67V for losses caused (see paragraph 12. below).          

7.            I have a no lot decision – can I sell in lots anyway?
Yes. That’s because the wording employed in the bill for NLDs is that the land it applies to “need not be lotted” (e.g. s.67F(1)(b)) or “need not be transferred in lots” (e.g. s.67M(1), 67N(3) and 67R(4)(b)). So the owner can sell in lots chosen by him if he wants.

8.            Procedure following multi lot decision
The key section here is s.67D. Unless it’s an “exempt transfer” (see above), the owner can’t sell the land except in the lots specified in the MLD. Nor can he sell a part of a lot (s.67D(1)(i)) unless the SMs otherwise agree (s.67D(2)). Moreover, no two (or more) lots can be sold to the same person or to “connected persons” (no provision for SMs waiver of that).

9.            “Connected persons”
This is defined in s.67I. There are two categories: group companies as defined by
s.170 of the Taxation of Chargeable Gains Act 1992 and persons one of whom has a “controlling interest” in another (s.67I(2)(b)) as defined in the The Land Reform (Scotland) Act 2016 (Register of Persons Holding a Controlled Interest in Land) Regulations 2021 (RCI Regs). These are the regulations that set up the Register of Persons Holding a Controlled Interest in Land (known as the RCI for short: see here) of people requiring to be disclosed as having a hidden degree of control over the people registered as owners of land in the Land Register. These are the same definitions of “connected persons” as are employed in other parts of the bill which I discussed and critiqued here (scroll down to the heading “The detail: connected persons”). A few points from there which are of particular relevance to lotting are:-

9.1         Spouses and family members are not “connected” solely by virtue of their marriage/relationship. Therefore, it’s tempting to think that a person wanting to buy the whole of an estate lotted in three could buy one lot himself and have his wife and brother buy the other two lots. But if there was any sort of pre-arrangement between them – even if not in writing – that wife and brother were buying solely as his nominees then that would be caught by Part 1 of Schedule 1 of the RCI Regs and thus they would be deemed to be “connected” by their arrangement rather than their relationship.

9.2         If I’ve read the RCI Regs correctly (and they’re not an easy read even for lawyers), the relationship between a UK company and its shareholders and directors is not a “connection”. Therefore, there seems to me to be nothing to prevent lotting of an estate into two being sidestepped by Mr A buying one lot and A Ltd in which he is the sole shareholder and director buying the other. (And the same for an estate lotted into more than two being bought by Mr A and A Ltd, B Ltd, C Ltd etc. in which he is sole shareholder and director.)

10.         Review of lotting decision
Under s.67P, the owner may request the SMs to review a lotting decision after a year (and then, if the owner so wishes, at yearly intervals thereafter: s.67P(3)(c)).

No new report from the Land and Communities Commissioner is required at review but the SMs must seek the advice of “a person who appears to them to be suitably qualified, independent and to have knowledge and experience of the transfer of land of a kind which is similar to the land to which the lotting decision would relate” (s.67R(7))

It’s possible to request review of a no lot decision (NLD) although why an owner in possession of an NLD, which, as we’ve seen, gives him complete freedom of action, would want to do that is not clear. Presumably the most likely scenario for requesting a review is when an owner feels that a multi-lot decision (MLD) is blighting the sale of his property. The SMs could replace it with an NLD or an MLD with different lots (s.67R(4)) but they’re not obliged to do either of these things. Note the potential for the owner to claim compensation from the SMs for loss caused by an MLD in the event of their not budging on one at review (s.67V(1)(c) – see below).   

11.         The SMs’ power to offer for the land at review
Under ss.67P(2)(b), 67S and 67T, the SMs have power at a review to offer to buy at valuation any of the lots if (and only if) they are satisfied that 

it is likely that the fact that the land [to be offered for] has not been transferred since the lotting decision was made is attributable to the land being less commercially attractive than it would have been had the lotting decision not prevented its being transferred along with other land.

However, as there’s nothing in these sections obliging the SMs to buy any blighted lots, I’m not going to dwell on this further.

12.         Compensation
Under s.67V, an owner is entitled to compensation from the SMs for loss and expense:

12.1       incurred in complying with the procedural requirements of lotting (s.67V(1)(a)). I’m not sure if that would include extra loan interest racked up while waiting for a lotting decision;

12.2       attributable to a potential sale of the land being thwarted by the need first to obtain a lotting decision and the delay inherent in so doing (s.67V(1)(b). Presumably that would cover a very attractive offer from someone in a hurry who couldn’t wait; and

12.3       attributable to a multi lot decision (s.67V(1)(c)). This should cover the cases of an estate where the value of the whole is greater than the sum of its parts or, in the case of one likely to have been sold in lots anyway, the lots determined by the SMs are not those which would have maximised value.  

13.         Heritable creditors
Apart from the fact that they can’t apply for a s.67M hardship no lot decision, all of this applies as much to heritable creditors (mortgagees) selling land as it does to the owners. This is a point tending to the marketability of land over 1,000ha which will have to be reported to lenders effective today.

14.         Comment
The following are a number of comments about the lotting provisions of the bill. These are in no particular order of importance and some of them I’ve already touched on:-

14.1       S.67G(3) and lotting of areas over 50ha (as opposed to the usual 1,000ha). See paragraph 3. above. Is this an anti-avoidance measure to prevent the sale of more than 1,000ha to the same person being achieved by two staggered sales to him, each of less than 1,000ha which would not otherwise be caught by the new lotting provisions? And if it is, is it the intention that the first such sale of less than 1,000ha is not retrospectively brought into lotting? And does it prevent the lotting provisions being sidestepped by the owner of >1,000ha first dividing it up into <1,000ha blocks by way of exempt transfer(s) to family member(s) or group company(ies) and then jointly marketing the whole? And see next paragraph.

14.2       Do the more than 1,000 hectares the sale of which triggers lotting have to be contiguous? And if not, does that re-open the staggered <1,000ha sales avoidance route s.67G(3) may be trying to close? (See paragraph 4. above.)

14.3       Although there is a criterion for deciding whether to issue a multi lot decision (MLD) as opposed to a no lot decision (greater likelihood of community sustainability: see 6.1 above), in the event the Scottish Ministers (SMs) have decided an MLD is appropriate, there is no criterion in the bill for what the number and layout of the lots should be. Presumably it’s intended to be that most likely to conduce to greater community sustainability but that really needs to be said explicitly in the bill.

14.4       When deciding upon a community interest registration, the land owner is to be invited to give his views on the application and the SMs are required to take these views into account (s.37(5)(b) & (10) of LRA03). And when land is being valued for the purposes of a community right to buy, the owner and the community body are to be invited to make representations to the valuer who is obliged to consider them (s.60(1) of LRA03). But there's no provision in the bill for the owner or the community to be able to make representations to the SMs or the Land & Communities Commissioner (LCC) in relation to the lotting decision process. So there needs to be, both at the outset of the process and then perhaps for both parties to be able to comment on drafts of the LCC’s report to the SMs and then of a multi lot decision (MLD). The same should apply at review of an MLD (except in that context, for draft LCC report read the independent professional advice the SMs are required to seek: see para. 10 above.)  If for no other reason, the suggested owner/community input might protect the SMs against an appeal by an owner to the Court of Session against an MLD (see para. 6.3 above) based on a simple error of fact on the part of the SMs, LCC or independent professional.

14.5       On the subject of appeals, is it appropriate that the appeal against an MLD is to the Court of Session (CoS) as opposed to, say, the Lands Tribunal? The draftsman’s thinking may have been that s.67U (see para. 6.3 above) is effectively a statutory restatement of the common law right to judicial review (JR) of any ministerial decision so the CoS is the appropriate forum as it's the court which entertains common law JRs; and that the owner’s primary protection against MLDs he doesn’t like is the annual review process. But even so ...       

14.6       Although the SMs have power to agree to a lot in a multi lot decision (MLD) being sold in parts (s.67D(2): see para 8 above), there is no corresponding power to agree to two lots being sold together. Imagine the following scenario: included in an estate is a small 20ha farm with its derelict house. The land of the farm is one lot of an MLD and the house another. Now it could be equally conducive to local community sustainability that these two lots are bought by the same person (a new entrant to agriculture or aspiring small holder etc.) as them being bought by different people but the former course is not possible as the bill is presently drafted. Thus, there needs to be a corresponding provision that the SMs can agree to two (or more) lots of an MLD being sold to the same person. Indeed, I would envisage such agreement(s) being issued at the same time as the MLD itself so that the SMs are saying, in effect, that parts of the estate can be sold separately in the lots specified in the MLD or together where either option would be equally conducive to community sustainability.

14.7       In cases where a sale in lots is required, no two (or more) lots can be bought by the same person or by “connected” persons as defined by reference to the RCI Regs. That definition appears to leave an obvious avoidance loophole: see para. 9 above.

14.8       S.67M headed “Expedited lotting decision where owner facing hardship” (see para. 6.5 above) appears to be a tacit admission that obtaining an LD may be a lengthy process.

There are no time limits in the bill but I understand anecdotally that the SMs routinely overshoot the time limits in LRA03 for processing the community right to buy, for example. Perhaps the thinking behind the absence of time limits in the lotting process is that the owner has the right to apply for (but not to receive) an expedited hardship no lot decision and/or the right to compensation for losses incurred in having to submit to the process (s.67V: see para. 12 above). But perhaps experience shows the SMs need a hard deadline by way of a provision to the effect that, if they haven’t issued a lotting decision, either for the first time or at review, within a set period (3-4 months, shorter at review?), they will be deemed to have issued a no lot decision.                                    

14.9       Finally, a small point, and probably an oversight by the draftsman, but it needs to be stated in s.67R(7) that, before deciding upon a review of a lotting decision, the SMs must not only seek the advice of an independent professional but also take the advice received into account. (See para. 10 above.)

               

Wednesday, 3 April 2024

Land Reform Bill #2 - new community right to buy opportunities on large estates

picture credit Caroline Legg

In essence, this section of the bill imposes a pause of up to 70 days on all sales of large estates (greater than 1,000ha) – or of any part of one, no matter how small – to allow local communities to be informed of them and give them a window in which to invoke the statutory community right to buy the land (which has existed since 2004) if they wish.  

Background: the community right to buy
To understand the new procedures, we first need to remind ourselves of some of the detail of the community right to buy (CRTB) which was introduced by Part 2 of
the Land Reform (Scotland) Act 2003 (LRA03). If you’re already familiar with this, you can skip to the paragraph below headed “Structure of the bill”.  

A community body (CB) may apply to the Scottish Ministers (SMs) for permission to register their interest in a piece of land (of any extent, however large or small). If the application is approved by the SMs and the interest registered, the owner of the land can’t then sell it without first offering it to the CB at valuation under the procedure in Part 2 of LRA03. (In fact, the owner is prohibited from selling (or even marketing) the land from the moment the application to register the community interest in it is made although that prohibition flies off if the application is subsequently refused: s.37(5)(e))

The CRTB is not, therefore, a right of compulsory purchase – i.e. to buy the land even when the owner doesn’t want to part with it – it’s a statutory right to pre-empt a sale the owner is making anyway but with the important difference from normal rights of pre-emption that the CB’s right is to buy the land at a valuation fixed by a valuer rather than to match the highest price offered in the market.     

“Late applications”
Applying to register a community interest isn’t simply a question of filling in and submitting a form. It involves making a case to the SMs demonstrating why any purchase by the CB would be compatible with sustainable development and that there is sufficient local support for it (s.38(1)(b) & (d). So it could happen that land a CB is interested in has already been sold by the time it has completed (or even begun) the preparatory work necessary before submitting their application to register their interest in it. That doesn’t stop them continuing with their application but the next sale of the land it would give them the right to pre-empt might not be for many years: they’d have missed the boat, in other words. LRA03 anticipated this problem and provided (
s.39) for an expedited procedure for what it called “late applications” to register an interest in land already on the market. The Community Empowerment (Scotland) Act 2015 amended s.39 to add a requirement that a CB making a late application must show that there has been some preparatory work towards applying for a registration (or a good reason why not) and that the owner had not offered the land to the CB in the last 12 months (see s.39(3)(a)-(ab), (3A) & (6) of LRA03). When a late application to register is submitted, the land owner must suspend the sale he has embarked upon until the application is decided.    

Whether following a late or ‘timeous’ application, if registration of the CB’s interest in a piece of land is approved by the SMs and the owner then wants to sell it at any time while the community interest registration (CIR) remains in force (5 years, subject to renewal), he must give the SMs a “notice of intention to transfer” under s.48(1). That triggers the CB’s the right to buy the land at valuation. (There are some transactions by the owner with land subject to a CIR which don’t trigger the right to buy: I’ll come to these exceptions presently.)

The existing procedures described above are ‘reactive’ in the sense that the onus is on CBs to act. And in the case of a private sale (one not preceded by a public marketing campaign), the CB may not know a sale of the land they’re interested in is in the offing so even the late application procedure doesn’t help them. The present bill aims to make the process more proactive in the case of large estates (over 1,000ha) by encouraging and providing windows of opportuny for CBs to act in the case of all sales, public or private, of (or from) such estates.

Structure of the bill
For anyone wanting to ‘follow along’, the relevant section of
the bill is section 2 (pages 8-14) which amends LRA03 by inserting into it a new Part 2A with thirteen new sections (ss.46A-46L) plus a new s.39ZA into existing Part 2. The detail is as follows (except where otherwise noted, references hereafter to sections are to these new sections being inserted into LRA03 rather than to sections of the bill):

“Large holdings of land”
The first point to note is that the new procedures in the bill apply only to what it calls “large holdings of land” (LHLs). Under s.47K, these are estates over 1,000 hectares (2,471 acres). See
here for more detail on that including when a >1,000ha estate is or isn’t an LHL when it’s the aggregate of <1,000ha titles owned by different but “connected” people and when even a >1,000ha estate all owned by the same person is not an LHL.   

The new community interest procedures: prohibition on sale
If you’re not interested in the detail of the new procedures you can skip to the paragraph below headed “Comment”. But if you are interested, let’s assume we’re dealing with a >1,000ha LHL, whether owned by a single person or in parts by connected persons.

The starting point is s.46B (page 10 of the bill): the owner (or any one of the connected owners) is prohibited from selling it or any part of it (for lawyers reading this, that’s due to the words “or forms part of” in s.46K(1)) without permission from the Scottish Ministers (SMs). So the new procedures would apply to the sale of something as small as a house plot out of a 10,000ha estate.

Exceptions to the prohibition
The prohibition applies even when there is no community interest in it already registered and no matter how small a part of the LHL the owner wants to sell. But there are some exceptions, in other words transactions with the LHL (or part of it) which are not prohibited. These are referenced in s.46H(2) which cross refers to
s.40(4) of LRA03 which is the list of transactions permitted when there is a community interest registration without triggering the right to buy I mentioned earlier. The most significant of these are:

1. transfers “otherwise than for value”, gifts in other words. But a transaction where no money changes hands may still be prohibited: for example, exchanges of land (‘excambions’ in Scottish legal parlance) or transfers to a company in exchange for shares. That’s because the land received in exchange or the shares are both “value”.

2. Sales to companies in the same group. These are defined (s.41(1) of LRA03) by reference to s.170 of the Taxation of Chargeable Gains Act 1992. I think that includes companies where one is a subsidiary of the other and also companies who are both are subsidiaries of a third but I’d need to speak to a corporate tax lawyer to be sure of that: meanwhile people owning an LHL through the medium of a UK company should be on the alert.  

3. Transfers consequent upon changes in partnership or trusteeship.

4. Sales to statutory undertakers and sales by agreement which could have been achieved by compulsory purchase (sales of land for road works and public utilities etc.).

There are other exemptions of less importance and note that gifts, sales to group companies and partnership/trusteeship changes can’t be used as part of a scheme to avoid the new rules: see the anti-avoidance provision in s.46J(b). So you couldn’t sidestep the prohibition by gifting the land to the ‘purchaser’ and selling him a pencil for £5 million.

(Anyone following the bill really closely might have noted s.46H(2)(a) saying, in effect, that a sale that is not in one of the above exempt categories but is of part of an LHL which is “excluded land” within the meaning of s.33(1) of LRA03 is not affected by the prohibition. I’m not sure I fully understand this exception but am pretty certain it’s of such little practical significance that we can safely pass over it here. If anyone thinks differently, do leave a comment.)  

Lifting the prohibition
Let’s imagine the owner of a “large holding of land” (LHL) wants to sell it, or a part of it (however small), in a transaction that is not exempt.

Before he even “takes any action with a view to its transfer” (defined in s.46H(3) which cross refers to s.40(5) of LRA03: includes advertising it or entering private negotiations with a potential purchaser) he must request the SMs under s.46C to lift the prohibition. Upon receipt of such request, the SMs must (s.46D) publicise on a website the intended sale of the land and how a CB can register an interest to pre-empt it and also send the same information to everyone who has previously asked to be informed about possible sales (note the SMs’ new duty in s.46A in that regard) and to the community council, the local authority and (if applicable) any National Park Authority the land is in.

If, within 30 days of having done that, nobody has submitted to the SMs a “note of intention to register” a community interest in the land (and I’ll come back to what happens if somebody does presently), then the SMs must (no discretion) lift the prohibition (s.46E). The lifting of the prohibition lasts only two years (s.46B(2)(b)): that is the owner’s window within which to complete the contemplated sale failing which the prohibition will drop back into place at the end of the two years and he will have to make a new request to lift it.

“Note of intention to register” (NIR)
If a CB (or someone on behalf of an as yet unincorporated CB: s.46F(3)(b) & (4)(a)) does lodge an NIR within the 30 days, and the SMs are satisfied that it’s likely very shortly to be followed up by an actual application to register a community interest with a reasonable prospect of being approved by them (s.46F(3)(d)) – that it’s credible, in other words – then, under ss.46E & 46F, the SMs must do three things:-

1. lift the prohibition (s.46E(2)), but;

2. immediately impose a new prohibition of 40 days (s.46F(1) & (2)). (The drafting of ss.46E & 46F is exceptionally convoluted and doesn’t make sense until you realise that the general prohibition on sale under s.46B and the 40 day prohibition under s.46F(1) following recipt of an NIR are two different beasts and the latter is not a sort of extension of the former); and

3. invite the CB who lodged the NIR to to make an application to register its interest in the land (s.46G).

If the CB does make an application within the 40 day prohibition, it will be dealt with under new s.39ZA. That is, in effect, the existing expedited procedure for late applications (see above) minus the Community Empowerment Act amendments requiring there to have been some preparatory work towards an application and no previous offer to the CB. Making such an application to register again prohibits the owner from proceding with his proposed sale until it is decided upon by the SMs (that’s not a new type of prohibition introduced under the bill, it already exists under s.37(5)(e) of LRA03). If the application to register the CB’s interest is approved, that immediately triggers their right to buy at valuation (s.39(4)(a) of LRA03 cross referring to s.48(1) which invokes s.47(1)).

If the CB doesn’t apply to register an interest in the land within the 40 days, then the s.46F 40 day prohibition flies off (s.46F(2)(b)) and the owner is back to where he was was with the ‘general’ s.46B prohibition having been lifted by the SMs for two years and so he is free to proceed with his contemplated sale. It’s crucial to note, however, that this doesn’t prevent the CB subsequently interrupting the sale by making a late application to register under the existing procedure in s.39 of LRA03 (which has been a threat to landowners since 2004) but that’s now a race against time for the CB: if the sale has completed before they can pull an application together, they’ll have missed the boat.

Heritable creditors
Note that these procedures apply equally to sales of LHLs (or parts of them) by heritable creditors (mortgagees) as they do to the owners (note the reference to creditors in s.46B(1)). This is a point tending to the marketability of LHLs which will have to be reported to lenders effective today.

Hardship exception
This is unlikely to be of any practical significance, I think, so you can safely skip this paragraph but for completeness, if the owner of the land (but not a heritable creditor) can satisfy the SMs that the proposed sale is to alleviate financial hardship and having to wait for the procedures to play out before proceeding with it would aggravate the hardship, the SMs have power under s.46I to lift the general s.46B prohibition (30 days) or the extra s.46F prohibition (40 days) when a CB submits an NIR within the initial 30 days. Again, however, acceeding to such a request doesn’t prevent the CB making a late application under the existing procedures (although in that circumstance the owner may be entitled to compensation from the SMs under existing
s.63 of LRA03).

Comment
The bill’s “prohibitions” on sales of large (>1,000ha) estates, or parts of them, are temporary: they’re pauses, in other words. 

The principal significance of these new procedures is that communities are informed of private sales of (or from) big estates and they are paused to allow them to invoke the community right to buy: no longer will it be possible to slip a private sale under the community’s radar.

But the 30 or possibly 70 day pause doesn’t seem a very long time for a community to react from a standing start. As I’ve said, missing these deadlines doesn’t preclude a community body from subsequently submitting a “late application” to register their interest under the existing procedures if they can manage that in time before the owner’s sale has concluded. But even so, I should have thought that a longer intial pause of, say, three months coupled with an extension of 40 days if they’re nearly there would be more realistic. I expect to see the 30/40 day periods extended as the bill goes through Parliament.

I’ve seen (here) these new procedures described as a “presumptive” community right to buy but I wouldn’t call them that, with respect – they're perhaps a presumptive leading of community horses to water but there’s nothing in the bill that makes them drink.

The new procedures don’t just apply to private sales, of course, they also apply to sales following a public marketing campaign. As regards these, I would regard the new procedures more as a prompt of something which, if it’s going to happen at all, was probably going to happen anyway. And where there’s no latent community interest, a 30 day delay is no great hardship to sellers.

picture credit Histography