The secure agricultural tenancy is now recognised as having a measurable value. Unlike a number of other lease types in Scotland, secure tenant farmers with a tenancy under the Agricultural Holdings (Scotland) Act 1991 (“the 1991 Act”) possess a valuable asset due to their security of tenure.
Agricultural leases can be passed down through generations of farming families and for many, their livelihoods are dependent on succession or lifetime transfers of the tenancy.
In some circumstances however, there are those who no longer wish to continue to farm and do not have a successor. Consequently, they would be prepared to surrender their tenancy. The Land Reform (Scotland) Act 2016 (“the 2016 Act”) introduced the right for tenants to relinquish and assign their agricultural tenancies and sets out the steps required to do so.
Process of Relinquishment
Provided a tenant has not already been served a Notice to Quit from the landlord or has failed to comply with some or all of the provisions of the lease, they may relinquish the tenancy in return for a compensatory payment from the landlord.
To proceed with a relinquishment, the tenant, upon serving a Notice to Relinquish on the landlord, should serve the same upon the Tenant Farming Commissioner (“TFC”), who will then appoint an independent valuer to assess the value of the tenancy within eight weeks of their appointment. Both the landlord and the tenant can object to the valuer chosen, though it is worth noting that the cost of the valuation is the responsibility of the tenant.
Valuing Agricultural Tenancies
How the tenancy is valued is set out fully in the 2016 Act. However, in short involves an assessment of the value of the holding if it were sold with vacant possession, as well as the value of the holding with the tenant still in occupation.
The valuer will also consider the date on which the landlord would be likely to recover vacant possession of the land, as the closer that date is to the date of the Relinquishment Notice, the smaller the difference between these two values will be.
The value payable to the tenant is half of the difference between those two values, with tenant’s improvements or dilapidations being calculated separately and added to or deducted from the compensation payment.
If the valuation is accepted by both the landlord and the tenant without any further representations or appeal, the landlord will issue a Notice of Acceptance to the tenant and the TFC in the statutory form set out in the 2016 Act, with the compensation payment being made within six months of receipt of the valuation.
Process of Assignation
Should the landlord reject the valuation or withdraw their acceptance, the tenant can instead assign the lease to a “new entrant” or “progressing farmer” for value.
A new entrant is defined in the 2016 Act as being an individual who does not hold or have a “relevant interest” in an existing agricultural tenancy and has not done so within the five years immediately preceding the assignation. A progressing farmer is defined as an individual who does not hold two or more “relevant interests” in agricultural tenancies.
For this purpose, a “relevant interest” comprises the following:
A landowner of a small holding of more than three hectares;
A crofter;
An owner of more than three hectares of agricultural land in aggregate, wherever the land is located.
The tenancy must be assigned within twelve months of the initial valuation following the Relinquishment Notice.
The value at which the tenancy can be sold to a new entrant or progressing farmer is not specified in legislation, so in theory, this could be substantial given the sought-after nature of secure agricultural tenancies, though it is a matter for negotiation between the incoming and outgoing tenants.
Why relinquish or assign?
The right to relinquish and assign the tenancy can be seen as an opportunity for retirement. Farmers with secure tenancies may feel that they want to retire, but need the income from farming to afford to do so.. The compensatory payment or proceeds of the sale of the tenancy to an assignee can be the pension pot required to provide a route to retirement.
Relinquishment and assignation can also pave the way for younger entrants to the farming industry. With the scope of the assignation restricted for those who already own land, the legislation is aimed at encouraging those who are newer to farming but may not necessarily be in a position to purchase land outright. However, the landlord does have the right to object to the tenant’s chosen assignee, including for reasons of lack of the requisite skills to manage the land and to pay the rent, so new entrants should consider carefully whether they are suitable for such a role.
If you are considering a relinquishment or assignation of tenancy or have any questions about agricultural tenancies in general, please contact one of our industry-leading experts, who are always happy to help.
Co-authored by Trainee Madeleine Gill.