We explore the comments made by the Scottish Land Court in Richard Fyffe (Applicant) v John Esslemont (Respondent) SLC 67/15.
We recently blogged on the case of Richard Fyffe (Applicant) v John Esslemont (Respondent) to highlight what can happen where an agricultural tenant goes beyond the primary use of “agriculture”. In this case, the tenant used the farm as a base for a home improvement, double glazing and conservatory business.
In addition to considering what constitutes abandonment of use for agricultural purposes, the case looks at the use of contract farming agreements and grazing lets in the context of secure tenancies.
Firstly, the tenant had argued that he had continued to farm the land via a contract farming arrangement.
Whilst the Court reserved judgement on whether an agricultural tenant can perform his obligations under the lease through a contract farming arrangement, it commented that the doctrine of delectus personae applies to agricultural leases. The doctrine assumes that a landlord has deliberately chosen his/her tenant for their personal qualities and skills. The decision therefore suggests that a tenant should proceed with some caution when putting in place a contract farming arrangement.
The Court’s judgement also has wider relevance for anyone putting in place a contract farming agreement. The Court was only able to reserve judgement on the legal point because, based on the facts, it found the agreement was a sham:
it was an entirely artificial ex post facto paper exercise that had as its principal object making it look as if the Respondent was using the farmland for agriculture for the purposes of a trade or business, when in reality such use was that of the contractor, a stranger to the lease, in relation to which use the Respondent himself played no meaningful party, whether by management control or otherwise.
The Court provides a useful summary of the key features of a contract farming agreement and puts the emphasis on the farmer assuming risk with regard to his income. If the farmer does not assume any risk, he/she is at risk of creating a sub-tenancy. The Court considered the arrangement was “a zero sum game” in which no money changed hands (other than the VAT element) and that it was
merely a paper exercise to disguise the fact that the contractor was in fact a sub-tenant.
Secondly, the tenant also argued that he had granted various seasonal grazing lets to third parties.
The Court briefly considered whether seasonal grazings breach a prohibition on sub-letting in the agricultural lease. However, again, the facts of the case allowed the Court to reserve judgement on the legal point.
The Court did however highlight that there may be a distinction between an agricultural tenant who occasionally sells surplus grass and an agricultural tenant who puts in place seasonal grazing as the principal or only agricultural activity on the holding.
In summary, whilst the case provided an opportunity for the Land Court to touch on some important issues, ultimately the facts of the case meant the Court parked the issues and did not rule definitively on the use of contract farming agreements and grazing lets in agricultural tenancies. The Court appeared to be highly sceptical of “zero sum” contract farming agreements and where there is no proper contract regulating the rights and responsibilities of the parties. The case sheds light on the Court’s view and it would seem that there is now some legal doubt on the validity of these arrangements and consequently any tax or subsidy positions flowing from it. It may be prudent for parties to revisit any such contracts to address and renegotiate any weaknesses if required.