The provisions of the much publicised Land Reform (Scotland) Act 2016 have started coming into force and will continue to do so in a piecemeal fashion. Whilst some of the changes enacted by the legislation will be more radical in effect than others, the reforms contained within Part 10 of the 2016 Act relative to agricultural holdings will have a far reaching impact upon landlords and tenants alike.

Background

One of the topics which gained much publicity at the time of consultation on the Agricultural Holdings legislation was the agricultural tenant's pre-emptive right to buy. The Agricultural Holdings (Scotland) Act 2003 provided a secure tenant with the ability to register a right to buy their tenanted holding if the landlord wished to sell it. Some felt this right did not go far enough, arguing that the tenant's right should apply regardless of whether the landlord wished to sell - i.e. the right to buy would be "absolute" rather than "pre-emptive". That was rejected.

However, the Scottish Government's Agricultural Holdings Review Group recommended that the requirement for a tenant to register their pre-emptive right to buy should be removed and, therefore, all secure tenants would have a pre-emptive right to buy, regardless of whether or not it was something which they would wished to pursue in practice. Coupled with that reform, the Review Group suggested that the current triggers within the legislation as to when the pre-emptive right to buy is triggered were unhelpfully vague and should be clarified.

The position under the Agricultural Holdings (Scotland) Act 2003

A registered pre-emptive right to buy could be triggered where a landlord takes any action with a view to transferring the land (or part of the land) subject to the secure tenancy. "Action with a view to a transfer of land" includes when the land is advertised or 'exposed for sale' but is also circularly defined as including when the owner "enters into negotiations with a view to transferring the land". This is inherently unhelpful and it can often be unclear, at which point this trigger arises. Accordingly, the Review Group suggested that the conclusion of missives for a private sale or marketing the land for a public sale would be the appropriate triggers.

Once the right to buy has been triggered, a process is commenced by which the tenant can ultimately purchase the land at a calculated value. It is therefore of the utmost importance that the 'point of no return' is clearly identifiable. Providing all secure tenants with a pre-emptive right to buy and removing the requirement of registration, reinforces this.

The implementation of the 2016 Act

Under the 2016 Act, the Scottish Government has opted to follow the first recommendation of the Review Group - namely that the requirement for registration should be removed and all secure tenants have the benefit of a pre-emptive right to buy. However, the Government has not implemented the second recommendation to clarify the triggers and the point of no return. This poses significant issues in practice.

Going forward, all secure tenants will have a pre-emptive right to buy the land subject to their tenancy whether they wish it or not. That right will be triggered whenever the landlord takes any action with a view to selling the land.

Landlords will therefore have to be very careful not to enter into discussions with third parties regarding a sale as this could unintentionally trigger the right to buy, even where they are unilaterally approached by such third parties.

Furthermore, as the onus was previously on the tenants to register the right to buy, they in effect had to prove their tenure to the Registers in doing so and landlords were permitted to make representations. For example, there could be discussions regarding the extent of the land comprised in the tenancy, particularly for older unwritten tenancies, and previously the tenant had to provide a plan when registering a pre-emptive interest. However, following the 2016 Act it will be for landlords to take initial steps to establish the nature of any existing tenancy that may affect the land and its extent before considering a sale. A landlord might also innocently assume that they are selling an area outside of the lease only to be challenged by the tenant.

In implementing the details of legislation, the 2016 Act strikes through the provisions in the Agricultural Holdings (Scotland) Act 2003 requiring registration. The intended mechanism is that if a landlord wishes to sell the land then they must first give notice to the tenant. But of course the right will nonetheless be triggered where no such notice is given, but the landlord (perhaps unwittingly) takes any action with a view to selling.

Further transactional issues

The 2003 Act previously contained an exemption where missives for the sale and purchase of land or an option to acquire land were completed prior to a right to buy being registered by a tenant. In that instance the purchaser under the missives or option could proceed to acquire the land and the tenant's pre-emptive right would not be triggered (although the tenant's right to buy could be triggered in any future proposed sale by the purchaser). That provision has been removed by the 2016 Act. This has a number of implications.

Firstly, any existing concluded missives or options for purchase will be retrospectively affected. Once the relevant provisions of the 2016 Act are brought into force, any action taken under those missives and options with a view to selling the land could trigger the tenant's right to buy. This will apply both where the tenant did not previously have a registered right to buy, and also where the tenant previously registered a right after the conclusion of the missives or completion of the option, and which would not otherwise have been triggered under the existing legislation. Any landlords and prospective purchasers in this position with concluded contracts or options may wish to consider whether matters should be accelerated for the purchase to be completed prior to the legislation coming to force. Furthermore, as this legislation has retrospective effect in prejudicing contracts previously concluded on the basis of the existing legislation, it seems there may be some scope to challenge the reforms.

Secondly, in the run up to the effective date, negotiations for any sales or options should be considered carefully as, once the relevant provisions of the 2016 Act come into force, any continuation of those negotiations could trigger the right to buy. This may be particularly pertinent where there is a tenant who did not previously register a right to buy and there would have been no issue under the existing legislation.

Conclusion

Landlords will be well advised to review their existing tenancies to clarify the extent of the land affected and the nature of the tenancies. A conservative approach will be required in considering any sale of the land to ensure that the right to buy is not triggered inadvertently. Existing contracts and negotiations should also be reviewed and, if possible, accelerated to avoid any issues after the legislation is brought into force.