Two cases help to clarify the 2003 Act provisions on diversification by the tenant

Among the provisions of the Agricultural Holdings (Scotland) Act 2003 most requiring interpretation by the Scottish Land Court are those contained in Part 3, permitting the tenant to diversify into non-agricultural activities. The grounds on which a landlord may object to proposed diversification by the tenant (s 40(9)) are particularly vague and will, I’m sure, be the subject of litigation, in due course.

We do, however, now have guidance on two points on this topic.

Reconciling resumption

Cawdor Trustees v Mackay RN SLC/183/04. The lease contained power to resume any part or parts of the farm at any time, plus an explicit power to resume any dwellinghouse not occupied by a farm worker for over three months. The landlord sought to resume a cottage. The tenant not only opposed the resumption itself but served notice of diversification under s 40, to the effect that he intended to use the cottage for a non-agricultural purpose, namely that of subletting it as a dwelling. The tenant relied also on s 39(3), which provides that a tenant may, despite a prohibition in the lease, sublet where the sublease is ancillary to the tenant’s use of the land for the non-agricultural purpose. The court held that, because subletting was not itself a use of land, the proposed subletting could not be said to be “ancillary to the use of the land for non-agricultural purposes”. Part 3 of the Act did not, therefore, apply.

The court went on to consider how a contractual right of resumption could be reconciled with the statutory right to diversify – in particular where the tenant had either conceived or implemented the non-agricultural use and the landlord tried to take advantage of a resumption clause to put the land to that use himself. As there is no express provision covering the situation, the court reached no conclusion but thought that resumption in such circumstances could be controlled by testing the materiality of the resumption and its impact both on the agricultural use contemplated by the lease and the diversified use now permitted by statute.

No duty to co-operate

Grant v Trustees of the Glengarry Estate Trust SLC/92/08. Much more recently (7 July 2008), the court issued a decision of great importance to both landlords and tenants. The tenant served notice of diversification in the form of a proposed micro-hydro scheme. The landlords initially objected under s 40(9) but later withdrew. They did not seek to exercise their powers (under s 40(10)) to impose conditions on the proposed use. The tenant requested the landlords to sign a wayleave agreement with Scottish Power for cables to connect the hydro scheme to the grid. The tenant could have installed the cables without the wayleave, but at much greater cost and with future liability for maintenance. The landlords did not agree to grant the wayleave. The tenant applied to the court for an order requiring the landlords to do so. He argued that the fact that the landlords had neither objected nor imposed conditions was tantamount to them granting the tenant the right to diversify and that, accordingly, the landlords’ refusal to co-operate with the tenant was a derogation from their own grant; andthere was an implied obligation on the landlords to grant the tenant whatever additional rights he required in order to implement his scheme.

The court emphatically rejected the tenant’s arguments and held that it could not look beyond the statutory provisions (which neither contained nor implied any requirement for landlords to co-operate with tenants). It drew no inference, such as that suggested by the tenant, from the landlords’ decision not to object or to impose conditions.

Workable rule?

The implications for landlords are obvious. From the point of view of tenants, the court’s decision may mean that some diversification schemes cannot go ahead or be carried out economically, without the landlord’s co-operation. The court recognised this, although it did not consider it made the legislation unworkable. It took the view that to compel co-operation by a landlord in matters affecting his own property rights was a step too far. Accordingly, tenants will, in future, have either to establish that their proposed schemes, and everything required to make them workable, are under their control, or to obtain the landlord’s co-operation, by agreement, and possibly at a price. In addition the tenant may require the consent of third parties, such as the owner of a private road or a lender, which are unlikely to be within the landlord’s control, irrespective of the landlord’s own position.

I will provide updates on diversification as and when the litigation which I anticipated at the beginning of this article unfolds.

Alasdair G Fox WS, Anderson Strathern LLPr

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