Wednesday, 28 August 2013

Crofting Commission Policy Plan - Fit for purpose?

Crofting is a subject that fascinates me and I'll be coming back to regularly, I expect, but the aspect that's taken my interest today is the Crofting Commission's recently approved statutory Policy Plan (copy downloadable from here.)

Mandated by the recent Crofting Reform (Scotland) Act 2010 (s.2(2) inserting new s.2C into the Crofting Act 1993), the purpose of the plan is to explain the CC's policy on how they will, in practice, exercise their various regulatory powers. Such plans are, in principle, a very good idea as bridging the gap between the bald statutory powers ("the Commission shall have power to grant consent ..." etc.) and how Joe Public can actually expect the law to be applied in their particular case. So let's have a look and see whether the plan lives up to expectation in that most controversial aspect of crofting of all - decrofting (removing land from the crofting law regime so that it can be developed for non-crofting use).

By way of (very simplified) background, there are four types of decrofting only two of which are of practical significance:

(1) "statutory house site" decrofting: you have the absolute right to decroft one already existing house on a croft, no questions asked. The only scope for CC discretion is the size of garden that will be allowed with the house. (In fact, most croft houses have already been decrofted by now);

(2) "reasonable purpose" decrofting: something for which you've got planning permission and the CC is persuaded there's no compelling reason to gainsay the planners and keep the site in crofting. The typical example is a housing development targetted at people not involved in crofting or agriculture.

In the mid 2000s, there was concern too many "reasonable purpose" decroftings were being granted with too much land being lost to crofting as a consequence. This was all tied up with issues about affordability of housing in rural areas, second homes etc. and indeed the whole property bubble that burst in 2008. It's called "speculation" (including in the CC plan) in a sort of vaguely pejorative way but without being anywhere legally defined. Anyway, long/short was the 2010 Crofting Act (s.43) added to the CC's powers to refuse reasonable purpose decroftings by reference to new politically correct sounding - but legally rather elusive - criteria such as the "sustainability" of the local environment and landscape (can a landscape be "sustainable"?) and the "social and cultural benefits of crofting". Having only come into force on 1 October 2011, none of this new stuff has been tested in the Land Court yet (as the pre-2010 law had) so this is precisely the sort of thing the CC's plan should be there for to explain what it means in practice.

This was thrown into sharp relief by a recent case drawn to my attention by Inkster's crofting law blog. A Mr and Mrs MacGillivray obtained planning permission for ten houses on a site they owned just north of Ballachulish Bridge. As the site was croft land, the MacGillivrays' next move was to apply to the Crofting Commission for a "reasonable purpose" decrofting direction. In fact, the CC threw out the application on a technicality. That doesn't preclude them from submitting another one but, crucially, any new application will have to be considered under the post-2010 Act decrofting provisions with all their new talk of sustainability of the environment and landscape and social and cultural benefits etc. Now, we would expect the CC's policy plan to give us a steer how in practice all that will play out with the MacGillivrays' planning permission at Ballachulish so let's see if it does.

The MacGillivrays' site as seen on Google Streetview

The relevant paragraphs of the plan for reasonable purpose decroftings are 56-59 (page 15). And the core of that is paragraph 58:-

58          Policy:  The Commission aims to protect land from being lost to crofting.  When considering applications to decroft land for a reasonable purpose, the Commission will normally refuse applications where it is established that the  general interests of the crofting community would be adversely affected.  In applying this policy, the Commission will take into account the demand (for a croft tenancy) for the land subject to the decrofting application.  Unless there is evidence to the contrary the Commission takes the view that there will generally be a demand for an available croft or part croft.

Apart from appearing in the last sentence to erect a presumption of demand (meaning the applicant for decrofting has to prove there's no demand for the land from neighbouring crofters, hence no reason to retain it in crofting) which I'm not sure is legally justified (comments on that from more experienced crofting lawyers, please), that's just a statement of the law as it existed before the 2010 Act changes.

But read on to paragraphs 60-62. Headed "Croft House Site and Garden Grounds", you'd expect these to be covering statutory house site (SHS) decrofting (unchanged by the 2010 Act: absolute right to decroft one house on a croft with no questions asked) with a sentence or two about the CC's policy on the extent of garden ground that will be allowed (as I recall, the rule of thumb used to be 0.1 hectare). But they're not. They're an awkward muddle of SHS decrofting without anything about garden size (para. 61) mixed in with a description of the commonly occurring syndrome of where the original croft house has been decrofted (SHS) and sold off while the croft land passes into new ownership (or tenancy) to someone who now doesn't have a house on it. For the new owner/tenant to get a new house-site decrofted (important because it's difficult to get mortgage finance otherwise), that will have to be a reasonable purpose decrofting meaning that the CC has the discretion to refuse. Para. 62 looks as if it aims to set out the CC's policy on these cases but then it seems to drift off into talking about larger housing developments, referring as it does to housing for "community purposes". I suspect the plan was written (or revised) by someone who doesn't properly understand decrofting but finally, in the last sentence, we seem get to the nub of the CC's attitude to reasonable purpose decrofting:-

"In all cases, the Commission will consider whether decrofting is an attempt to create building plots, or other speculative development which may lead to an application being rejected if it is considered to be potentially detrimental to crofting, the crofting community, the landscape or the environment, or the social and cultural benefits associated with crofting."

There's that s word: "speculative". It's not defined in the plan but according to my dictionary it's "characterised by speculation, esp. financial speculation" and the latter word is "investment involving high risk but also the possibility of high profits". My dictionary also has for speculate "to buy or sell securities, property, etc., in the hope of deriving capital gains" which tones down the risk element so just about every non-social housing development is "speculative". But note that the plan does not say it's the CC's policy to reject a decrofting application if it's speculative. (Nor does the 2010 Act despite what it says in para. 6 of the plan.) What the plan says is that, if the development is speculative, it may refuse decrofting if it would be "potentially detrimental to crofting, the crofting community, the landscape or the environment, or the social and cultural benefits associated with crofting". Which seems to imply that if a development is not "speculative", then the CC will not take account of the new criteria introduced by the 2010 Act and the old law will continue to apply to it.

The MacGillivrays' site on the OS Six Inch map of 1903
Maybe it's unfair to apply the scalpel of statutory interpretation to a policy plan. The point here is that, if we allow that the MacGillivrays' plans at Ballachulish are "speculative", does the plan give any guidance as to how the Crofters Commission will act in response to considerations such as the environment and landscape? Will it, for example, call for some sort of impact assessment from Scottish Natural Heritage, for example? But the plan contains no such guidance making it for all practical purposes absolutely useless as simply repeating the words of the statute it is supposed to explicate!

I shall be very interested to see how the CC responds to the MacGillivrays' next decrofting application. And even more interested to see how the Land Court responds to the post-2010 decrofting law and the CC's policy plan (which the LC "may" take into account, but doesn't have to) if or, almost inevitably, when the MacGillivrays' or another similar case gets there on appeal.

Sunday, 25 August 2013

Tenants' improvements - Part 2: rent review

Picture credit James Allan

“You get rented on your own improvements” is something you often hear from unhappy agricultural tenants.

At its crudest, the claim is that the tenant carries out an improvement to the farm at his expense and then, at the next rent review, the landlord turns round and says “my farm is now more valuable as a result of what you’ve done so I am entitled to more rent.”

Legally speaking, that is simply not true.

If a tenant doesn’t agree to his landlord’s demand for an increased rent, he has the right to go to arbitration (by the Land Court since 2003). Ever since statutory rent reviews were introduced in 1948 (as the counterpart of leases being prolonged by statutory security of tenure), the legislation has directed that the arbiter (LC post-03):-

“… shall not take into account any increase in the rental value of the holding which is due to improvements which have been executed thereon in so far as they were executed wholly or partly at the expense of the tenant …”

The Land Court has since decided that the fact a tenant’s improvement wouldn’t be eligible for compensation at termination of the lease (e.g. because was carried out before 1883 or was post-1883 but no prior notice or there’s an expired WDA: see previous blog for what I mean by that) does not mean it can be rented.

So the intention of the law seems pretty clear: a tenant is not to be rented on his improvements. But are there loop-holes a landlord can exploit to get round the default position?

The only one I can think of is where a tenant carries out improvements and then later takes a new lease of the same farm. That sometimes happens when a lease gets so old and out of date and/or has been amended so often that the parties decide to start with a clean slate. (It also happened, as I recall, when 100% agricultural property relief from Inheritance Tax was extended to land let under a lease granted after 1995 and the Inland Revenue appeared to accept that a new (post-95) lease granted to an existing (pre-95) tenant counted.) Section 35(5) of the Agricultural Holdings (Scotland) Act 1991  specifically protects the right of a tenant under a new lease to compensation for improvements he carried out under a previous lease but crucially only when the tenant under the old and new leases is exactly the same person. It often happens when a new lease is being arranged that the opportunity is taken to update the identity of the tenant, typically by substituting a younger generation of a family for an older. In that case, s.35(5) doesn't apply so the new lease must specifically record that some improvements belong to the (new) tenant. But that's a subtlety of agricultural law that sometimes gets overlooked if the tenant’s advisors aren't sufficiently clued up and, if it is, the new tenant will not be eligible for compensation for improvements carried out during the previous lease and will also be liable to be rented on them at the first statutory rent review. The fact the previous tenant hadn’t in fact been compensated for his improvements under the previous lease and the starting rent under the new lease reflects that doesn’t alter the fact.

 No doubt there must be some tenants who’ve been caught in the new lease trap but I don’t believe it’s a common enough syndrome to render the general proposition that you can’t legally be rented on your own improvements untrue. But, of course, these general propositions assume that people don’t take liberties and in that regard I was very struck by one of the submissions to the Land Reform Review Group from an anonymous tenant farmer. He (or she) reported:-

“I decided to improve a boggy part of the farm, about 30 acres of unusable ground … . Arterial ditches were opened up and drainage pipes with gravel were laid across the whole area. It was ploughed, limed fertilised and re-seeded. This is now good grazing pasture … [H]owever at the next rent review the factor insisted that my rent should go up to reflect the bit of ground that is no longer a useless bog but now good fields. I said “But I did all the work, and paid for all the materials. I did all the improvements in it’s entirety” The factors response was that I had “merely unlocked the potential of the ground” So, my rent increase was greater than expected, I really wish I hadn’t bothered, I won’t be improving any more land unless I could own it.”

The argument that the tenant’s work had merely “unlocked the potential of the ground” is an example of what lawyers encapsulate in that venerable legal maximum habens ridetis. The tenant should never have agreed to that rent increase. The Land Court would have dismissed it out of hand but no doubt the tenant felt he/she couldn’t afford the risk of the fees and general grief associated with a LC case and acceded to the landlord’s demand.

This syndrome draws us into the area (not by any means unique to agricultural tenants) known as “access to justice”. It used to be summarised by the (rather dated) adage: “the law courts are open to anyone, rich or poor. Just like the Ritz Hotel.” I’m digressing here but it’s a dreadful irony that, in other areas of the law, the great panacea is arbitration to keep things out of the courts: in agricultural law, arbitration had been compulsory for decades until, due to the mounting costs involved, disputes were in moved in 2003 to the courts! Giving the Land Court jurisdiction has not solved the problem. I know that the Scottish Agricultural Arbiters and Valuers Association (SAAVA) and Tenant Farming Forum have been involved in trying to address this problem. I have to admit I’ve not engaged with any of these moves but as I type it occurs to me the way I would deal with rent demands with no legal basis would be that a rent review could only be initiated by service of a statutory form in which the landlord (or tenant) was required to justify a proposed new rent according to the criteria and methodology laid down by the agricultural holdings legislation. Crucially, the form would require to be certified by a lawyer (probably not the landlord’s usual lawyer) that the proposals were reasonable in law. It would be a bit like auditors signing off company accounts – they’re not guaranteeing they’re right or wrong, just that they’re in the ball-park and nobody’s assumensque michaelem.

Saturday, 17 August 2013

Tenants' improvements - Part 1A

In the last post, I said I wasn’t going to say anymore about compensation for improvements when a lease comes to an end. That's because I believed the more common syndrome of alleged "improvement theft" nowadays was tenants being rented on their improvements at rent reviews in the context of an ongoing lease. However, I read in the Glasgow Herald today that the Scottish Tenant Farmers Association (STFA) are meeting with the Scottish Government to discuss, amongst other things, problems with compensation for improvements at way-go (termination of a lease). It therefore seems to be more of a live issue than I’d assumed in retirement and it prompts me briefly to revisit this situation. (As I type, I can imagine an affected tenant saying “Briefly revisit? I’ll “briefly revisit” you, sonny …”)

Picture credit - Steven Brown

The main point is that, to be eligible for compensation at way-go, a crucial pre-condition is that the tenant gave written notice of the improvement to the landlord before he (tenant) carried it out - no notice, no compo. It’s amazing how many tenants don’t seem to be aware enough of their rights to comply with this relatively simple requirement. Something for the STFA to promote to its members perhaps. Note also that the tenant doesn’t require the landlord’s permission to carry out an improvement, he just has to inform him. If the landlord objects, it’s the Land Court which decides.

It used to be common for landlords and tenants to enter into “writing down agreements” (WDA) in relation to improvements. Under a WDA, the L and T would agree that the cost of providing an improvement would be written down on a straight line basis over an agreed number of years, usually 20 if I recall. Thus, suppose T put up a building at a cost of £10k. In a straight line 20 year WDA, if the lease ended 10 years later, the compensation would be £5k, if it ended 15 years after it would be £2.5k and so on. It’s important to note that tenants were not obliged to enter WDAs and, I must say, I was never quite sure why they did. New WDAs were abolished by the Agricultural Holdings (Scotland) Act 2003. There's some doubt about whether existing (pre-2003) WDAs with a remaining term to still to run were abolished. (If anyone wants to comment on that particular aspect, I’d be interested to hear.)

I don’t know what the particular problems with compensation at way-go the STFA wants to discuss with the SG are. But an obvious area of tension is when the tenant didn’t give prior notice of the improvement so the landlord is not obliged to pay compensation for it. In that context, it’s interesting to note the tenant has the right (subject to conditions, inevitably) to remove from the farm any improvements he is not entitled to compensation for - including, apparently, by demolishing a building put up by the tenant. That rather extreme solution wouldn’t compensate the tenant financially, of course, but the threat of it could bring the landlord to the negotiating table. 

Do leave a comment - especially if you disagree with the gloss I'm putting on very complicated legislation to make it understandable. Or for any other reason.

Picture credit - Dave Fergusson

Wednesday, 14 August 2013

Tenants' improvements - Part 1

In the debate about whether agricultural tenants should have an absolute right to buy (ARTB) their farms even when the landlords don’t want to sell, one occasionally hears from the tenants’ side about the syndrome of “stolen improvements”.

These are improvements carried out on the farm by the tenant which the landlord is alleged to “steal” by either (a) not paying compensation for it at the end of the lease (assuming the improvement still has some residual ongoing value at that time); or (b) charging extra rent for it at the next rent review. Type (a) theft was (allegedly) more common historically before security of tenure in 1948 when leases regularly terminated but rent reviews were uncommon whereas type (b) is (allegedly) more common now when rent reviews happen more often than leases come to an end.  

The purpose of this post is to look beneath the claims and counter-claims at the law which governs the whole subject of tenants’ improvements and ask if that law is working effectively.

Historical – type (a) “theft” by no compensation at termination of lease

At common law (i.e. the law before it is innovated upon by an Act of Parliament), a tenant was not (unless his lease contained alternative provision) entitled to compensation from his landlord at the termination of the lease for improvements he had carried out: tenants were assumed only to make such investments as they could recoup during the remaining terms of their leases. Whether that was a reasonable position for the common law to take as its default option depended on the length of the lease and the respective bargaining strengths of the landlord and tenant.

Around the turn of the 18th/19th centuries – when commercial farming as we know it today developed out of subsistence agriculture – the standard agricultural lease the law assumed as its paradigm was 19 years (a much longer chunk of anyone’s life then than now). Nobody was obliged to take an “improving lease” (as these were known). The tenants were hard headed businessmen at the cutting edge of the Industrial Revolution able to take on landowners on equal terms. If they were content to recoup their investments over 19 years, then, if anything, I’d have been worried about whether the landlord might have been had over!

At the other end of the spectrum in the same period, was the Highland crofter. He had no bargaining strength at all. Booted off his traditional subsistence holding, there was no way he could recoup the effort off converting his allotted patch of barren moor to tillage in the single year a crofting let implied. As such, the crofter was at risk of a ruthless double whammy of the blackmail of paying an increased rent for his improvements if he stayed or no compensation if he went. The crofters’ position was remedied by the Crofting Act of 1886 which conceded compensation for improvements and reduction of rents where they had been subjected to improvement theft. But I’m not going to say any more about the specialist position of crofters here. Instead, I’m going to concentrate on “ordinary” farmers in the rest of Scotland with their 19 year improving leases. Their situation was changed by an Act in 1883 which changed the common law default position so that compensation became due for improvements carried out thereafter.

But, if there is anyone today who is a tenant under a lease which began before 1883 and whose ancestor in the tenancy carried out  an improvement before 1883 which still has a residual ongoing value today, then that improvement will not be legally eligible for compensation when the tenancy ends. That will therefore indeed a stolen improvement. But I suspect the number of tenants in that situation must be small to non-existent. But don’t let me pre-judge – if you think you may be in that situation, then leave a comment (anonymously). I would be very interested to learn if my pre-conceptions on this may be wrong.

But for the vast majority of agricultural tenants - those with leases which began after 1883 - they are legally entitled to compensation for improvements they have carried out (assuming they still have residual ongoing value and are not past their useful life at the end of the lease). That is subject to some conditions and exceptions but I’m not going to go into these here (unless anyone wants me to in which case I'll be happy to do so) because, with the advent of security of tenure in 1948 and concomitant statutory rent reviews, the far more common allegation of improvement theft nowadays is when the landlord seeks to charge rent under an ongoing lease for an improvement the tenant has carried out.

I’ll come to that in the next post but in the meantime, if anyone wants to challenge me on anything I’ve said here, I’d be very interested to hear it. I’m writing from the perspective of what the law says things should be but if things are operating differently in practice, then the law may need to be reviewed so that its intentions are in fact carried out. So do make your views known.