Crofting law reform proposals 2024: consultation

1. Entry to Crofting

The market price of a croft tenancy, or of an owner-occupied croft, has risen considerably in recent decades, making it much harder for people of limited means, including many young people from traditional crofting families, to get a croft of their own. This price escalation is driven by a demand for land and lifestyle in remote areas of Scotland. Similar trends have been seen in attractive rural areas in other parts of the UK and internationally.

The Scottish Government and the Crofting Commission are working to reduce this trend. The enforcement of duties by the Commission reminds those who purchase tenanted or owner-occupied crofts that they are not just buying a piece of real estate but are committing to a lifestyle and a community. The Scottish Government has established the Scottish Land Matching Service to help put aspiring crofters (and farmers) in touch with people who can offer an opportunity on their land, and the Commission has launched a Succession Project with similar aims, focussing particularly on areas at particular risk of population decline.

Alongside other proposals such as faster enforcement of duties, we propose a specific legislative change that would help aspiring crofters purchase their first croft tenancy, namely that croft tenancies can be shared between two people. We also invite comments on the scope for using a croft lease as security for a loan.

Croft tenancies for two people

Most crofts have just one crofter. Since 1912 any assignation of a croft tenancy can only be to one person. This means that the only crofts which are shared by more than one person are some 1,500 owner-occupied crofts, and just four joint tenancies that have continued to be in joint hands since before 1912^[1].

We propose that future assignations of croft tenancies could be to two people in a joint tenancy. This would be possible by a single crofter assigning the whole of the tenancy to two new people; by a crofter assigning part of the tenancy to a new crofter who would share with them; or on succession, if a deceased crofter had chosen to bequeath the tenancy to two people, for example, a son and daughter. Our proposal would limit joint tenancies to a maximum of two people.

Allowing two people to share jointly in a tenancy would bring crofting tenancies more in line with the position enjoyed by those taking out other tenancy agreements in other sectors, including standard agricultural tenancies. We also believe that this proposal could make crofts more affordable and would have a number of advantages for entry and succession to crofting:

• Any two people, for example a couple or friends, could pool their resources when buying a croft tenancy, knowing that they would both become joint tenants.
• An older crofter, wishing to pass their tenancy on to a family member or other acquaintance, could do this in two stages: inviting the new person to become a joint tenant; and later assigning or bequeathing the remaining share so that the new tenant became the sole tenant.

There would, however, be risks associated with this proposal, as there are in any joint venture:

• A croft tenancy is a heritable tenancy, designed to continue for generations. While a shared tenancy may work well for as long as the two joint crofters agree about their plans for the croft, once a shared croft passes down to another generation, perhaps siblings or cousins, there is a risk that the two joint tenants would have quite different plans: one wishing to live on and invest in the croft, one wishing to live elsewhere. The one wishing to croft actively could be disincentivised from doing so because the value of their investment of time and money would be shared.
• Over time, joint tenancies could lead to increased fragmentation either of crofts themselves, or at least of control of crofts. Fragmentation has long been seen as detrimental to strong and sustained crofting communities.

To limit these disadvantages, we propose to limit the number of joint tenants to two, rather than have an unlimited number.

Question 1.1

Do you agree that two people should be able to share a joint croft tenancy? [Yes/No/Don’t Know – comment]

Standard Securities

Traditionally, crofters were the tenants of their crofts, paying rent to the landlord. Since the Crofting Reform Act 1976, crofters have been able to purchase their croft for 15 times the annual rent, becoming the landowner whilst the croft still remained subject to crofting tenure. The term ‘owner-occupier crofter’ was first defined in the Crofting Reform Act 2010.

The Scottish Government considers that tenants and owner-occupiers should as crofters have an equivalent balance of rights and responsibilities within the crofting system. In principle, that should include a similar ability to borrow against the value of the land if owned or the value of the lease if rented.

However, the respective rights of an owner-occupier and a tenant which might be used as a security for a loan are very different as a matter of general property law. Although it would be particularly challenging to change the law to enable a standard security over a croft lease, the Scottish Government is working to establish whether there is a possible solution. We therefore seek views on whether, in principle, the power to grant a security over a croft lease would be supported.

In that context, information from sales provides clear evidence that a croft or a croft lease can be a valuable asset. However, those aspiring to buy a croft or enter into a croft lease may find it difficult to raise the necessary funds, partly because they cannot secure a loan against the new asset.

An owner-occupier can grant a standard security for a loan (a mortgage) over an owner-occupied croft. However, a standard security is only attractive to a lender if the secured asset can be realised (sold) on default. Crofting is a highly regulated activity, and there are significant regulatory barriers that could make it too hard for a lender to enforce a security.

A tenant cannot currently grant a standard security over a croft lease. It may be possible to create a mechanism for doing so, but even if that were so then there would be similar regulatory barriers to realising (assigning) the secured asset on default.

Although regulatory barriers would be removed or reduced if the croft could be taken out of crofting tenure (decrofted) by the lender if a borrower defaults on a secured loan, the Scottish Government considers that whole-croft decrofting can have an adverse impact on crofting and crofting communities.

The Scottish Government considers that changes to security law would facilitate access to finance that could be used to acquire a new croft, or develop an existing one. This in turn would make a positive contribution to the development of the crofting sector, which makes a vital contribution to increasing the population of remote rural areas, and to strengthening the rural economy.

Crofts have a capital value in that they can either be sold, or a tenancy can be assigned for value subject to the agreement of the Crofting Commission.

For crofting tenancies, the lease has value as the outgoing crofter is entitled to be compensated for any permanent improvements made to the croft such as houses, farm offices, walls, fences, and so on. This right applies whether the crofter voluntarily departs or is removed. There is also potential value in that crofters are able to apply for planning consent for a house on their croft and, if successful, they would be eligible to apply for Scottish Government grants for a new build or home improvements.

A croft also has a ‘working’ value, in that it can be used to generate income through a number of means, such as farming, subsidy income, bed & breakfast accommodation, woodland creation, and so on.

We are looking to provide a process for granting and discharging a security over a croft or a croft lease, that makes a security attractive to both the crofter and the lender, but without the need to decroft. The law would need to change in that respect, and in particular would need to clearly set out the rights and responsibilities of crofters and creditors where a croft interest is used to secure a loan.

We propose to change the law to better enable banks to undertake secured lending over owner-occupied crofts, and are interested in enabling securities over leased crofts if that is both supported and practicable. The secured loan could be used either by an incoming crofter to obtain a croft tenancy or an owner-occupied croft, or by an existing crofter to make improvements to their croft.

It is not proposed that any such measures will modify the current process that applies where a crofter applies to decroft land in order to build a house on that land. It is expected that this process will continue as it currently does, with the crofter decrofting a small area of land as a house site, in order to grant a standard security over that land to raise the finance they need to build the house.

Granting a security over owned land

A security over an owner-occupied croft would be created by registering a standard security in the Land Register of Scotland. The crofter would need to register the land in that Register if that had not already been done.

Granting a security over leased land

A security over a lease could require an entirely new process.

The current thinking is that a standard security could be granted over a lease provided that both the lease and the security are registered in the Crofting Register.

It is also thought that there would need to be notice on the Land Register given that the existence of the lease and the security are a matter that would be of legitimate interest to, for example, a prospective purchaser.

Enforcing a security

Like any other borrower, it would be expected that crofters will repay the loan, and that the security would then be discharged as is the case for securities over other types of property.

In order for creditors to have the confidence to lend to crofters, it would be necessary to modify some of the statutory rights and responsibilities while the security is in place and until the loan has been discharged.

The Scottish Government considers that it should not be possible for the crofter or landowner to do anything that might significantly affect the value or interests in the security, without first seeking the consent of the creditor. We propose therefore that the creditor should have to consent to specified changes including the enlargement, assignation or division of a croft.

If the crofter defaults on the loan then the creditor would have the option of calling up the security. In this scenario, the creditor would possess the croft for the purposes of realising value from the property. The Scottish Government considers that it would be necessary to suspend specified rights of the defaulting crofter, including the right to purchase, to assign, and to claim compensation. In addition, neither the defaulting crofter nor the lender would be expected to meet the duties to be resident on the croft, or to cultivate the croft, or to put the croft to purposeful use.

For an owner-occupied croft, the creditor could then sell the croft to a new crofter in the same way as at present. The previously suspended duties would then apply in full to the new crofter.

However, for a croft tenancy, a new tenant would need to be approved by the landlord. If the tenant is approved, then the Scottish Government considers that there should then be no need to obtain a second approval from the Crofting Commission. Alternatively, if the landlord objects to the assignation, then the creditor should be able to seek the approval for the proposed assignation from the Commission.

Only if both the landlord and the Commission oppose the proposed tenant will the creditor need to find another person to purchase the tenancy.

Question 1.2

Do you agree with the proposal that regulatory barriers that limit the ability of an owner-occupier to grant a standard security over their croft should be removed or reduced? [Yes/No/Don’t Know]

Question 1.3

Do you agree with the proposal that a tenant crofter should in principle be able to use their croft tenancy as security for a loan?

[Yes/No/Don’t Know]

Question 1.4

Do you agree that there needs to be modifications to rights and responsibilities when a security is in place over a croft?

[Yes/No/Don’t Know]

Question 1.5

Do you agree that if a croft tenancy is repossessed by a lender, the lender should be able to assign (sell) the tenancy on to a new tenant provided that either the landlord or the Crofting Commission agrees?

[Yes/No/Don’t Know]

Question 1.6

Do you wish to add comments in regard to the proposed application of standard securities to crofts? [Free text]