The land of Scotland and the common good: report

Section 28 - Tenant Farms

1 Agricultural tenancies in Scotland other than those under crofting law and the small landholdings Acts, are governed by Scotland's agricultural holdings legislation. The current primary legislation is the Agricultural Holdings (Scotland) Act 1991 as amended.

2 The future of agricultural tenancies under the 1991 Act was one of the most contentious issues during the Review Group's inquiry. As with many land reform topics considered in this Report, an appreciation of the historical background is a key part of understanding the current issues. The data below is taken from briefings provided by the Scottish Government.

28.1 Number of Tenant Farms

3 The original legislative framework for agricultural holdings was the Agricultural Holdings (Scotland) Act 1883, introduced over 130 years ago At that time, over 90% of Scotland's land was owned by 1,750 owners with over 405 ha (1,000 acres) each and over 90% of the agricultural holdings or 'farms' in Scotland were tenanted. Since then, there has been a continuing reduction in the number of tenanted holdings.

4 By the 1880s, there had already been a long history of land owners reducing the number of smaller tenant holdings on their land, to create larger units to maintain or improve rents. While this continued, another trend which started in the early 20th century was tenant farmers becoming owner occupiers of their holdings. The most concentrated period of this was in the 1920s when following the impact of the First World War, taxation and economic recession also contributed to the break up of some estates. In lowland areas, with better agricultural land, these sales often resulted in the tenant farms being sold to their occupiers. In the 1920s, while there was little change in the total number of agricultural holdings in Scotland, the proportion that were owner occupied increased from 8% to over 21% ( Fig. 32).

5 This conversion of tenants to owner-occupiers in lowland areas continued to a limited extent during the 1930s and 1940s. By the time the Agricultural Holdings (Scotland) Act 1949 was enacted, 27% of Scotland's agricultural holdings were owner occupied. There were a further significant number of estate farm sales to tenants in the new post war context of the 1950s and by the 1960s, 38% of agricultural holdings and 51% agricultural land was farmed by owners rather than tenants.

6 The continued decline, since the 1950s, in the number of tenant farms and the extent of Scotland's agricultural land that they farm, can be attributed to a range of factors. There continues to be some farm sales by land owners to tenants, but this has been limited. However, a major factor in reducing the number of both owned and rented holdings, has been farm amalgamations. Post war public policy for agriculture was focused on increasing output and promoted the amalgamation of holdings to create larger and more mechanised farms. This essentially remains the case today with an ongoing pressure on many farmers to be able to farm more land, to achieve 'economies of scale' and improve viability.

7 Another likely influence on the falling number of tenanted holdings have been public subsidies to agriculture. Traditionally, when a tenanted farm became vacant, land owners tended to add the land to existing tenancies as part of ongoing amalgamations. However, from the 1970s, the levels of farm grants compared to the rents from tenants encouraged an increasing number of land owners to further develop their own farming operations and to absorb tenanted land which became vacant into their 'in-hand' land. This could mean remaining tenants were increasingly constrained by their limited acreage, which could in turn result in further tenant land becoming vacant and added to the owner's farm.

8 A third key factor in the continuing reduction of the number of tenanted holdings has been the increasing reluctance more generally of land owners to create new farm tenancies. This has been due to the greater security of tenure and other improvements for agricultural tenants in the Agriculture (Scotland) Act 1948 and Agricultural Holdings (Scotland) Act 1949 and continued since by the 1991 Act, as the successor consolidating legislation. The security of tenure significantly reduces the capital value of the land in sales to sitting tenants and in open market sales of land with an existing secure 1991 tenancy. In addition, since 2003, these secure 1991 tenants have also been able to register a pre-emptive right to buy their holding if it is being sold.

9 By the 1980s, the supply of land available to rent as a secure tenancy had virtually dried up and despite various initiatives, this has remained the case. Very few new secure tenancies have been created over the last 30 years. Thus, the number and extent of secure 1991 tenancies continue to reduce ( Fig. 33). By 2005, the number of secure 1991 tenancies was down to around 6,350 and seven years later in 2012, this total had reduced by 15% to around 5,400 ( Fig. 34). During the same period, the total amount of land held by secure 1991 tenants reduced by 18% to 885,000ha ( Fig. 35).

28.2 New Types of 1991 Tenants and Tenancies

10 In the 1990s, a new approach was developed by some land owners in which agricultural tenancies were let to a limited partnership, which avoided the consequence of security of tenure. In these arrangements, the land owner is a limited partner who takes no part in the management of the partnerships' affairs while the farmer is a general partner who has sole responsibility for these. By creating the limited partnership for a fixed period of time, the tenancy also comes to end with- the limited partnership - because the 'tenant' no longer exists.

11 These Partnership arrangements became the predominant way of letting land prior to the Agricultural Holdings (Scotland) Bill 2003. However, as a result of measures introduced during the passage of the Bill, many land owners with Limited Partnerships became concerned about the potential impact of the legislation and as a precaution served notices to end their Limited Partnership tenancies. The ramifications from this culminated in the Scottish Government introducing an Agricultural Holdings (Scotland) Act 2003 Remedial Order, which came into force on 27 March 2004. However, the number of 1991 Limited Partnership tenancies has continued to decline since then, reducing from over 800 in 2005 to around 500 in 2012. ^[50]

12 The 2003 Act, however, also amended the 1991 Act to introduce a new form of limited duration statutory agricultural tenancy. This had been recommended by the Land Reform Policy Group in 1999 to encourage new entrants into farming. ^[51] Two types were created: Short Limited Duration Tenancies ( SLDTs) of up to five years duration and Limited Duration Tenancies ( LDTs) of 15 years or more. The latter was, subsequently reduced to 10 years or more in 2011. ^[52] Both these types of tenancies have increased since, with SLDTs increasing from around 280 in 2005 to around 540 in 2012 and LDTs increasing from around 100 to around 320 during that period. ^[53]

28.3 Secure Tenant's Right of Pre-emption

13 Another measure introduced in the public interest by the 2003 Act was a right for secure 1991 tenants to register a pre-emptive right to buy over their holding, under which they would be able to buy their holding at the point of sale if the land was being sold by their landlord. These registrations are recorded by Registers of Scotland in the Register of Community Interests in Land and need to be renewed every five years to remainvalid.

14 There had been 1,463 registrations by early 2014, of which 906 are still active. ^[54] No information is available on the reasons behind the 557 registrations which have come off the Register. Some registrations would have been removed because they had lapsed, while others may have been rescinded for inaccuracies. In some cases, the right may had been exercised or the tenancy may have ended for other reasons. The Review Group's understanding is that, while no purchases have apparently taken place by a tenant exercising their right under the legislation, the existence of the right has facilitated that outcome in some cases.

15 The Group considers, however, that these 1991 tenants should not have to register their interest and then repeat that process every five years, to be able to benefit from the right of pre-emption. The Group's view is that this requirement should be considered an unwarranted constraint on the public interest intent of giving the right to all tenants with secure 1991 tenancies.

16 The need for registration is clear in the case of the equivalent right of pre-emption which was also introduced in Part 2 of the LR(S) Act 2003 for local community bodies. In that case, registration is necessary to identify the community body and the land over which it wants to register an interest in its local area. With secure 1991 tenancies, the tenant and owner of the land are already in a statutorily defined relationship over a defined area of land. The Scottish Parliament has made the right of pre-emption available to all these tenants. The Review Group considers they this should be sufficient, and that tenants should not be denied the opportunity to use the right, simply because they have not registered an interest or their registration has lapsed. In advocating this, the Group understands that some tenants, and perhaps many tenants, do not register their interest as this might be seen by the landlord as a 'hostile' move. In addition, tenants may only find out about land being sold at a relatively late stage in the process.

17 The Review Group considers that there should be a more straightforward position where, if the owner of land covered by a secure 1991 tenancy decides to sell any of that land, the tenant should have first option under the legislation. Under current legislation, landlords are already required to send tenants various notices and these could be extended to include notification of a sale of land, giving the tenant a chance to say within a set period if they are taking up their right of pre-emption. Where a tenant chooses to do so, the terms of the purchase might be agreed directly with the owner, failing which through the statutorily defined process. The Group understands that removing the requirement for registration should not raise issues under the ECHR, as the change would not alter the nature of the right.

18 The Review Group's view is that the requirement for registration is an unwarranted constraint on the right of pre-emption of secure 1991 tenants under the Agricultural Holdings (Scotland) Act 2003. The Group recommends that the legislation should be amended to remove this requirement and to provide that all these tenants have first option on buying any part of their tenanted holding which their landlord decides to sell.

28.5 Agricultural Holdings Review

19 The long evolution of Scotland's agricultural holdings legislation governing what are now known as secure 1991 Act tenancies, has created a detailed and particularly complex statutory framework for the relationship between landlords and tenants. There have always been issues between landlord and tenant interests over aspects of these arrangements. The current time is no exception with, for example, concerns related to rent reviews and compensation due at the end of tenancies.55 There have also been discussions and initiatives for many years about the wider issues over the lack of agricultural land available for rent and the effect of this on limiting opportunities for new entrants into farming.

20 Legislation in 2011 and 2012 made further refinements to agricultural landlord and tenant relations, including proposals developed by the Tenant Farming Forum at the Scottish Government's invitation. ^[56] The Forum had been established after the 2003 Act, as an industry-led forum to facilitate debate about matters of common interest to landlords and tenants and to improve relations. At the time of the legislation in 2012, the Scottish Government made a commitment to have a full review of the Agricultural Holdings legislation. In June 2013 the Cabinet Secretary gave initial details of this review, which included that a right to buy for agricultural tenants would be considered as part of review process. ^[57] Further details given that September included that the review would be a Ministerial-led review. ^[58]

21 In November 2013, the membership of the Agricultural Holdings Legislation Review Group ( AHLRG) was announced with its aim " to determine what policy and legislative changes may be required to deliver a sustainable Scottish farming sector that is dynamic, gets the best from the land and the people farming it and provides opportunities for new entrants". ^[59] The AHLRG is due to produce an interim report in June 2014 and its final report in December 2014. Following the establishment of the AHLRG, it was also clarified in early 2014 that the scope of the review had been widened to also cover tenancies under the Small Land Holdings legislation.

22 The announcement by the Scottish Government of an Agricultural Holdings Review was a prospect for much of our inquiry. We support the aim of the AHLRG and are pleased that it is Ministerial-led by the Cabinet Secretary, as we consider significant changes are required to deliver the AHLRG's aim and give Scotland a system for renting agricultural land suited to contemporary needs in the 21st century.

23 As many commentators have observed, and as reflected in the Government's review, the evidence is clear that Scotland's current system for renting agricultural land no longer works effectively. The long running debate also reflects that the system has not provided a supply of let land for many years and is in general terms, seen by both landlord and tenant interests as needing reforms over and above just refining the existing arrangements. We also share the general view that there needs to be new, improved arrangements for renting farm land, where it is in the interests of both the land owner and tenant to be in the relationship, so that rented land can be a valuable component of the future of agriculture in Scotland.

28.6 Secure 1991 Tenancies

24 In fulfilling its remit, the AHLRG will be spending around a year examining the agricultural holdings legislation and will have the benefit of detailed new information, including the results of the surveys being carried out by the Government of both tenants and landlords. For our part, within the constraints of our inquiry, we have focused on what we consider to be the central land reform issue in the current debate: the future of tenant farmers with secure 1991 tenancies. These 5,400 or so secure 1991 tenancies at present account for over 75% of farm tenancies under the 1991 Act and currently cover around 70% of the land let under 1991 tenancies ( Fig. 34).

25 There were no statistics available during our inquiry on how many landlords are involved in these tenancies or the numbers of multiple tenancies held by individual landlords from one tenant to seventy or more on some large private estates. The Government's current survey for the AHLRG should clarify this structure of landlord/tenant holdings. The map of the distribution of tenanted land ( Fig. 36) shows the concentrations of tenants in some areas and this can be correlated with the location of large estates. While some parishes have been amalgamated in the map to prevent identity disclosure, it can be anticipated that disaggregating the data would further clarify the correlation between concentrations of tenants and particular large estates.

26 While we will refer in this sub-section to these 'secure 1991 Act tenants' simply as tenants or tenant farmers for ease of reference, it is the security of tenure of the heritable tenancies held by these tenants which defines their position. This is both in terms of the tenant's rights over their tenanted farm and the reasons why land owners do not grant secure 1991 tenancies anymore. It is also worth noting that there are clear financial benefits to land owners when these tenancies end, both in terms of the increased capital value of the land and in its subsequent management. The significant possibility since devolution of land reform measures that might give these tenant farmers a right to buy, has only increased the interest for landlords in bringing secure tenancies on their land to an end.

27 The proposal for tenant farmers to have the option of a right to buy their farms, was prominent at the time of the Land Reform Policy Group in the run up to the establishment of the Scottish Parliament. The demand for this continued and the proposal for a right to buy was a significant issue in debates over the Agricultural Holdings (Scotland) Act 2003, which gave tenant farmers the option of a right of pre-emption over their farm.

28 The issue of a right to buy was less prominent following the 2003 Act, as the Tenant Farming Forum developed the refinements subsequently made by legislation in 2011 and 2012. However, the topic of a right to buy has been a dominant issue in the debate leading up to the Government's agricultural holdings review and is now a core consideration in the work of the AHLRG. The scope of their review as set out by the Government is largely focused on the interests of landlords, tenants and agriculture. ^[60] However, as the AHLRG's remit reflects in part, the factors that should be involved in determining the public interest outcome are now significantly wider than in traditional agricultural holdings discussions of those topics.

Rural Communities

29 The Cabinet Secretary has said of the Agricultural Holdings Review that " Given the current land reform debate in Scotland, we need to consider what is in the best interests of rural communities and the role individual ownership plays in this". ^[61] This is the aspect of the current situation that we have most focused on during our inquiry as the Land Reform Review Group. The Group considers that the position of these tenant farmers as part of Scotland's rural communities is central to the public interest, and, should become a more central consideration in determining the way forward. Two important factors within this consideration are the distribution and composition of these tenant farmers.

30 In terms of distribution, the map of tenanted land in Fig.36 reflects that these farmers tend to be concentrated in areas that might be described as more marginal areas, in terms of both the quality of the land and the nature of the rural communities. Thus, the pattern is concentrated in parts of the Borders and South West, along the Highland Boundary Fault and round the edge of the Eastern Highlands to Inverness. In agricultural terms, they are concentrated in and along the edge of Less Favoured Areas.

31 The Group considers that tenant farmers can have a key role in rural communities because of the inter-generational continuity they represent. The family may not always have had the same farm, but they will often have farmed in the same area. The Group were unable to find much data on this, but it seems likely that many tenant farming families have roots in particular communities that go back several generations, and this can be an important component of local social capital. The Agricultural Holding Review survey of tenant farmers may give some improved information on this continuity.

32 Inter-generational continuity might be considered to be of little or no direct relevance from a purely agricultural perspective and considerations such as farm investment or output. However, the Group considers the apparent high level of continuity is a significant social factor from a wider rural policy perspective. The Group considers that in broad terms, there is some correlation between the extent of a family's inter-generational continuity through successive generations in a rural area and the extent of their kinship ties in that area. The Group also considers that there is a correlation between the density of kinship ties in an area and the level of social capital, which is recognised as a key factor in the resilience of communities, particularly within a rural community development context. While the Group appreciates that tenant farms involve many and varied circumstances, the Group considers that the tenant farming community tends to score high in these social measures in many of Scotland's more marginal rural communities where community development is an important issue.

33 From a rural perspective, the prospects for this tenant farming community with secure 1991 tenancies has not looked good for some time. The number of tenant farmers continues to decline and the average age of those that remain continues to increase. Many are on relatively small farms, with little chance of adding land to their existing tenancy. This decline has been ongoing and the Review Group is concerned that current debates about a right to buy and factors such as the higher value of land with vacant possession rather than with a secure 1991 tenancy, are creating an increasingly harsh situation for some tenant farmers. While the confidential submissions to the Review Group included submissions from land owners who have longstanding and positive relationship with their tenants, there were also confidential submissions from tenants recounting much more negative experiences. Some of these submissions clearly reflected the degree to which the interests of landlord and tenant are now out of alignment. The danger is that, if the right to buy debate continues to develop, technicalities may become increasingly used by land agents as a way of gaining vacant possession.

34 The Review Group recognises that the circumstances of tenant farmers in Scotland vary widely. However, many tenant farmers face a bleak future. The Review Group considers that this ongoing process is weakening some of Scotland's rural communities and is undermining the resilience of these communities. This seems at odds with the aim of the Scottish Government in the Group's remit of making " stronger, more resilient and independent communities".

Owner Occupation

35 The Cabinet Secretary's statement quoted in paragraph 29 above refers both to " the best interests of rural communities" and also to " the role individual ownership plays in this". In considering the second question, the Review Group did not find studies of the economic and social outcomes resulting from tenants on an estate becoming the owners of their own holdings. There are clearly examples of this happening which have occurred at defined times throughout the last 100 years, and in a wide range of locations. It would have been helpful for the Group to have been able to identify and examine the outcomes of this kind of tenure change and been able to contrast these with similar areas which have remained tenanted. While the Group may have missed studies during its investigations, the limited information identified reflects an important gap in our understanding of patterns of land ownership in Scotland and an area which the Scottish Government may want to consider addressing.

36 When tenants become owner occupiers, the financial and other terms by which they became owners will have a major influence on the subsequent outcomes on their land. Money spent by the farmer on the acquisition may, for example, limit the funds available to invest in the land. However, in general terms, ownership provides the tenant with a recognised new incentive to invest in their holding. In addition, ownership may well release latent or frustrated entrepreneurialism given the full opportunity to diversify activities on the farm, without the constraints of an agricultural lease. Many tenanted holdings are concentrated in those marginal rural areas where housing is scare and ownership may well open up the opportunity for inter-generational housing to be developed within the holdings. Over the years, and within an international context the conversion of tenants into owner occupiers has been seen as a positive objective for rural community development.

37 The Review Group recognises that in parts of Scotland where tenant farmers became owner occupiers at some earlier stage in the 20th century, the economic incentives contributed towards a the pattern of ownership becoming concentrated into larger farms. It is however worth noting that the previous development of owner occupation has been mainly in lowland areas with better land where, for example, in 2013, around 75% of farm sales were to other farmers. ^[62] However, if owner occupation became more of the pattern in the marginal upland areas where many tenant farms are concentrated, the Group considers that it might reasonably be anticipated that there would be less agricultural incentive to accumulate more land and a greater development of farms where families retain their land, but rely less on agriculture, by developing other forms of on or off farm incomes. ^[63] These 'pluri-activity holdings' have, like crofting and part time farming in upland areas long been seen in many European countries, as having a positive impact on maintaining and strengthening rural communities.

38 If there was a scheme under which secure tenants had the option to buy their holdings on terms judged fair and reasonable to the land owner and tenant interests, and be in the public interest, some tenants would not want to take up the option and others may not have the capacity to take it up. Others might reach other agreements with their landlords given the context of the tenant's option to buy. However, in this general context, the Review Group considers that a significant shift to owner occupation would overall be a very positive outcome for rural community development in Scotland and support the wider public interest aims within the Group's remit.

39 The Review Group recognises that the line of discussion developed above does not factor in the potential impact that the introduction of a right to buy would or could have on the agricultural industry as a whole, the interests of landlords, and on the prospects for the tenanted sector. The Group understands that this is a matter which the AHLRG will be considering.

Right to Buy

40 The Review Group does not consider the continued loss of tenant farming families in Scotland's rural communities to be in the public interest. These families, with their potentially high levels of inter-generational continuity in their localities, are often an important part of the fabric of some of the more marginal rural communities in Scotland.

41 These secure 1991 tenants have long had security of tenure, including rights of family succession over their holding. They have therefore already been given rights of perpetual possession of their holdings in the public interest. In 2003 the Scottish Parliament passed legislation to give these tenants a right of pre-emption if their landlord is selling the holding, also in the public interest.

42 The security of the 1991 tenants could be strengthened further. Proposals to the AHLRG include giving these tenants greater rights of assignation in determining the successor to their holdings and also designating land under these 1991 tenancies so that it has to remain as '1991 tenanted land' when a tenant farmer leaves a holding. Such measures would bring the tenure of these 1991 tenancies closer to crofting tenure, and would strengthen the position of tenant farmers.

43 The Group considers that the position of 1991 tenants in their relationship with their landlords should be improved as part of the Agricultural Holdings Review. While this includes matters of detail in the current arrangements, more significant changes such as greater assignation and designated 1991 land, do not preclude tenants also having a right to buy. Both changes could be introduced, providing an improved position for those tenants who did not take up the option of a right to buy. These changes could also be introduced together where, for example, the right to buy only applied to the farm house, buildings and a certain amount of land, with the other measures applying to the remainder of the holding.

44 The Review Group recognises that proposals for a right to buy cause profound concern for landlords with secure 1991 tenancies on their land. While such a right is often called an 'absolute' right to buy, the Group considers that to be an unhelpful term. If the term is intended to distinguish a right to buy from the existing pre-emptive right to buy, then it would be better called it an 'actual' right to buy as any such right would be conditional rather than absolute, and be determined on a case by case basis. The basic starting point of that conditionality is that, as already noted, the introduction of any such right would need to be clearly judged in the public interest in order to protect the rights and interests of the land owners involved under the ECHR.

45 Many aspects of the terms of any proposed conditional right to buy would need to be worked out in detail, including the scope of its application to 1991 tenancies. Specific exemptions would be required, for example, on specific types of land where there was a different balance of public interests, such as Common Good Land (See Section 14). Another key aspect to be settled would be valuing the respective interests of the sitting tenant and the landlord. More generally, the overall terms of any conditional right to buy would be central to the level of uptake. The Group considers that if such a right was introduced, the public interest represented by giving the right should be actively promoted, with a clear and accessible process to take up of the right.

46 The Review Group has had limited scope within its inquiry to consider the issue of a right to buy for secure 1991 tenants and in considering it from a land reform and rural development perspective, the Group has had access to a limited evidence base. The Group recognises that the AHLRG will have substantially more resources with which to consider this issue. However the Group considers that wider public policy relating to the future of Scotland's rural communities should be central within any consideration of this issue. The Group's view, in terms of its remit and on the basis of its investigations within that context, is that a public interest case can be made for the some form of conditional right to buy for secure 1991 tenants. This position is entirely in line and consistent with the Group's remit to diversify patterns of ownership and make rural communities stronger, more independent and more resilient.

47 The Review Group considers that the position of secure 1991 tenant farmers and their families as part Scotland's rural communities, should be an important consideration in the Scottish Government's current review of Scotland's agricultural holdings legislation. The Group recommends that the Government should take full account of social and local community factors in determining whether the introduction of a conditional right to buy for tenants with secure tenancies under the Agricultural Holdings (Scotland) Act 1991, would be warranted in the public interest.