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Agricultural Holdings rent review case decided


Thorntons News

Posted on Jul 14, 2014

The Land Court has issued an important agricultural rent review decision using the principles laid down in the Moonzie case.
Capital Investment Corporation of Montreal Limited v Elliot
Scottish Land Court Application RN 94/09—Order of 11 June 2014

This Roxburghe Estates case is the first significant decision on rent reviews to be given by the Land Court since the Moonzie case. It concerns the determination of rent under s 13 of the 1991 Act as at Whitsunday 2009 and involved consideration of the rent based on open market evidence of a Limited Duration Tenancy suitably adjusted on a different estate. The criteria laid down in the Moonzie decision were considered. Evidence was heard over 15 days, followed by written submissions and a hearing. In addition, the Court inspected the holding and most of the comparables.

Facts:

The landlords applied for the determination as to the rent payable for Roxburgh Mains, Kelso in terms of s 13 of the 1991 Act as from Whitsunday 2009.
At proof the landlords argued for a rent of £67,876 pa (£106.96 per acre) against the tenant arguing for a rent of £30,593 pa (£48.21 per acre). The passing rent was £27,500 pa (£43.34 per acre) and this had been reviewed in 1999.
The farm was let on a full 1991 Act tenancy, varied by a post-lease agreement and a subsequent agreement.
The landlords led evidence of the open market letting of a comparable farm on a neighbouring estate on a LDT as at Martinmas 2009 which had attracted 27 offers ranging from £23,760 pa (£55 per acre) to £55,000 pa (£127.31 per acre). The landlords had decided to accept a new entrant tenant at £34,478 pa (£79.81 per acre).
The landlords argued that there was a distinction between distortion due to scarcity and normal, healthy competition in the market place and that only the highest offer for the comparable was distorted by scarcity. They also argued that, as well as the adjustments which required to be made in respect of physical differences between the farms, an uplift should be applied to reflect the advantages of a 1991 Act tenancy, that uplift to be calculated on the basis of a tenant's alleged capital interest under such a tenancy.
The tenant argued that no such uplift was appropriate, the rent of land under a 1991 Act tenancy being unrelated to its capital value.
The landlord led evidence of four 1991 Act sitting-tenant negotiated rents on their estate and the tenant led evidence of a negotiated 1991 Act settlement on a neighbouring estate. The landlords argued that an upward adjustment of these rents was required to reflect that landlords had been excluding SFP from consideration in the review process due to uncertainty in the law at the time.
Other proposed adjustments considered by the Land Court were differences in altitude, building provision (including cottages), repair and maintenance obligations, soil conditions, suitability for potatoes, yield differences and the provision of a private water supply to part of the farm.
The Land Court issued a very lengthy judgement and held:

1.The open market evidence available was the starting point and had to be given pre-eminence (applying the Moonzie decision).
2. In considering open market value, the Court was not bound to accept the rent paid by the successful bidder on the comparable farm, since a landlord's choice may be informed by particular preferences not necessarily shared in the market place, but the court was instead obliged to give consideration to the whole range of offers received.
3. In a situation in which scarcity of lets was admitted and there was evidence of intense competition it was a necessary inference that scarcity was, to some extent, driving up the level of bidding and producing distortion.
4. There was, as yet, no formula to measure such distortion and the Court had to continue to hypothesise "a reasonably balanced market" thus following the Moonzie case and the Aberdeen Endowments case. It was not sufficient to exclude only unsustainably high offers.
5. There was a distinction to be made between distortion due to scarcity and a premium paid for special amenity and, therefore, even in a reasonably balanced market the comparable holding would have attracted considerable competition, as would Roxburgh Mains.
6. Even in a reasonably balanced market the hypothetical willing tenant would have paid a rent of at least £40,000 pa for the comparable farm.
7. On the evidence, a discount for marriage value was not appropriate.
8. There was no room for an upward adjustment of rent for a 1991 Act tenancy in this case, although expected in principle (to follow the Moonzie judgement).
9. On the basis of the open market evidence, as adjusted for repairing obligations, cattle-handling facilities provided by the tenant, soil characteristics and stone clearing issues, a rent of £48,492 pa (£77.19 per acre) was appropriate.
10. So far as comparables were concerned, the negotiated rents required to be adjusted upwards to reflect the fact that an allowance for SFP had not been made (where appropriate).
11. When so adjusted these rents approximated very closely to the rent of £48,492 in 9 above, thus requiring no modification of that figure.
12. No adjustment to that figure was required either for current economic conditions or for any other s 13 regards or disregards.
13. Notwithstanding that it could not be supported by the budgetary evidence in the case, the rent was realistic given what people were prepared to pay in the open market, suitable adjustment being made for the effects of scarcity.
14. The rent properly payable at Whitsunday 2009 was £48,492 pa.

OBITER by the Court (not part of the judgement but observations made by the Court):

The Court shares the anxiety of the industry for a quicker, simpler and cheaper resolution of rent cases in the future. However, it noted that this was only the second case since (a) the changes to s 13 introduced by s 63 of the 2003 Act and (b) Lord Gill's clarification of the law in the Moonzie case. It noted that this was a high value case and the parties would wish "to leave no stone unturned in the presentation of their cases".
The Court commented that, despite the availability of much useful and well presented evidence on comparable rents and notwithstanding that the Moonzie case had held that the budgetary approach was " a method of last resort", the considerable evidence led on hypothetical budgets added significantly to the length and cost of the case without proportionate benefit.
The Court suggested speed, simplicity and economy could be achieved if close attention is paid to the guidance which now exists as to what evidence is relevant and what is not. It also questioned whether a "lighter touch with a broader brush" might serve equally as well as a detailed exploration of the matters in dispute.
Some comments on the judgement:

This was an important case for the Land Court to apply the criteria carefully set out by Lord Gill in Moonzie, but it is possible to sense the Land Court's frustration as to the length of the case, the amount of evidence led, the time involved and the costs which will have been incurred. In particular, the Court appears to criticise the use of hypothetical budgetary evidence in this case when much comparable evidence was led. Indeed, the Court said
"Given that sort of divergence [between the hypothetical budget and level of rent paid for the comparable farm], we have felt unable to place any reliance whatsoever on budgets, even as a cross-check on how realistic our rent is."
The decision will likely be scrutinised by the Agricultural Holdings Review Group in their deliberations as to whether any changes are required to s 13 of the 1991 Act (as amended) despite the recommendations of the Rent Review Working Group, which reported only 18 months ago, that there should be no major changes made.
The main comparable used for this rent review case of a 1991 Act secure tenancy was a Limited Duration Tenancy ("LDT") which had come to the market around the same time as this rent review was to take place. The considerable number of bids received for that LDT was scrutinised, with issues such as sustainability of rent payments being considered. This led to a discussion of what exactly is "scarcity value" as opposed to healthy open market competition.
On the evidence led, the Court could not agree to a discount for marriage value.
On the evidence led, the Court could not agree to an uplift to reflect the fact that the holding in question was a 1991 Act secure tenancy while the comparable was a LDT, although it stressed that an adjustment would, in principle be expected (thus following Moonzie).
Having arrived at an open market rent for the holding based on the LDT comparable, suitably adjusted, the Court then tested this with the other comparables and concluded that SFP must be considered as part of the rent review process.
Contact a member of the Land & Rural Business Team for more information.

Categories: Land and Rural Business

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