The Moonzie Rent Case - Bad for Landlords?

If one reads only the Court’s Order and the rent awarded in the Scottish Land Court’s Decision in the Rent Review Case, Morrison-Low v Paterson’s Executors, regarding Moonzie Farm, one could be forgiven for thinking that it represents a substantial victory for tenant farmers. Certainly the Executors of Mr Paterson should be pleased that the rent awarded is substantially less than that demanded by the Landlord (and less than they were paying previously), and this may have a beneficial knock-on effect for arable farmers, but a full study of the remaining 75 or 76 pages of the decision throws a different light on things.

An Honourable Draw

To use a current analogy, in one view, the result could be viewed as a 1-1 draw (the Landlord scoring on the value of 2003 Act tenancies as comparable evidence with the Tenants coming in with a late equaliser on Single Farm Payment). Furthermore, the rent awarded lies almost exactly halfway between the Landlord’s and Tenant’s figures.

Landlords go through on penalties

We would suggest, however, that there is a great deal in the decision which should give comfort to Landlords (who could be said to have won on penalties). For example:-

• that LDT and SLDT may be used as comparable evidence if properly adjusted to rule out such factors as scarcity and marriage value
• that a farm can be operated using contract labour and machinery to some extent
• that even though the Lease prohibits sub-letting, it can be assumed that the hypothetical Tenant can derive third party income from potato growing by making another, permitted, business arrangement, discounted by costs
• that income deriving from Agri-Environmental Schemes can be taken into account
• that cottages not required for farm workers can be assumed to have a rental value
• that a hypothetical Tenant would be assumed to have sufficient capital for the provision of equipment, with borrowing power to cover annual outlays (the costs of borrowing being taken into account in earnings)
• that where rents of farms put forward as comparables were fixed by agreement they are not distorted by scarcity
• that a willing Tenant need not be a newcomer, would have a full knowledge and understanding of the farm and how it is operated and might work the farm on the system which the sitting tenant has adopted
• that commodity prices can be adjusted to allow for “spikes” at the time of review (although also averaged to allow for fluctuations)
• AND ABOVE ALL that it is to be assumed that the Tenant will allocate 80% of assumed net profit to rent and 20% only to himself

Quite an impressive list!

Single Farm Payment ("SFP")

The Ruling by the Court that (apart from the inclusion in a Budget of a figure to show a value for use of the land to realise income from SFP, based on leasing naked acres), Single Farm Payment does not figure in the review of rent (on which we accept that there are and may remain differing views) has grabbed the headlines as the “Tenant’s SFP Victory”. That, however, may not prove to be entirely the case in the long run. While, no doubt, having a downwards effect on rental values for arable farms it should, conversely, considerably increase the rental value of marginal and upland farms, particularly those enjoying environmental grants and those in less favoured areas. Also, naked acres are currently trading at more like £10 per acre than the £6.50 per acre adopted in Moonzie. We would speculate, also, that the market in naked acres will be much less active if and when SFP moves to an area basis.

Furthermore, the logical conclusion of the Court’s rejection of the Landlords’ comparables on the ground that they were agreed taking SFP into account, is that, if it can be shown that there was no such agreement, then agreed comparables will be acceptable. Equally, a higher rental figure may be demonstrable by adjusting comparable rents downwards, to factor out SFP.

Actually, the surprising thing is that the Court found it necessary to make any provision for SFP. Surely SFP is either relevant (as the Court decided and with which we agree) or not.

Other Useful Lessons

The Court is, in our view, to be congratulated on its long and detailed judgement, in a case decided on the individual circumstances of this particular farm, the manner in which the evidence was presented, and for the useful guidance it has given on a number of the matters to be considered by the parties in 1991 Act rent reviews. This includes:-

• the manner in which expert evidence in relation to comparables should be presented, on the one hand, with a full analysis and on the other with no discounts being assumed where no discounts occurred in reaching the comparable rents
• its opinion that weighting between comparable evidence and that of Current Economic Conditions in the relevant sector of agriculture falls to be decided on a case by case basis, with neither factor having priority
• that Current Economic Circumstances should reflect trends and not simply the position as it was on the review date (what it referred to as a “snapshot” time) and that a budget was to be used only for guidance purposes in that context – albeit the Court appears to have contradicted itself, to some extent, by then basing its rent award entirely on a putative budget, albeit some of the figures included were based on a three year average.

Perhaps the most important lessons to be learned from the Case are:
 
(a) that the law itself needs to be simplified;

(b) to go out of one’s way to fix rent by agreement;

(c) (as the Court rightly pointed out itself) to consider an alternative, cheaper, form of dispute resolution, such as arbitration, reference to an expert, to which we would add Mediation (why not try it?) and

(d) if one does end up in the Land Court to present the case in a manner in which the Court will express its indebtedness to you.

Further Information   

For further information please contact Jim Drysdale, John Mitchell or usual contact within the Land Resources team.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.