THE COURT

(Lord McGhie, D J Houston, J A Smith)

R W MORRISON-LOW v THE EXECUTORS OF THE LATE T H PATERSON

(Application RN SLC 233/08 – Order of 5 April 2012)

AGRICULTURAL HOLDINGS – RENT – AGRICULTURAL HOLDINGS (SCOTLAND) ACT 1991, SEC 13 – RATES PER ACRE – RENTAL OF COTTAGES

Following the appeal to the Court of Session from the order of 2 June 2012, and in the light of guidance issued by the Lord Justice Clerk, the Court fixed the rent at £31,462.

The Note appended to the Court’s order is as follows:

[1] We heard short submissions on 12 March 2012 when we were invited to determine the rent in light of our previous findings and the guidance provided by the Lord Justice Clerk, Lord Gill, in his Opinion in [2012] CSIH XA 82/10. Both parties suggested that could be done although Sir Crispin mentioned certain matters upon which further evidence might be required. For the landlords, Mr Kermack contended that we could determine rent on the basis of the acceptance, at para [144] of the Note appended to our Order of 2 June 2010, of the rates of £65 and £60, respectively for land classed 3(1) and 3(2) in terms of the Land Capability for Agriculture classification by the Macaulay Land Use Research Institute. When a comparable figure – said to be £50 per acre – was applied to class 4 land and agreed levels of rental income for the cottages were added, the total exceeded the claimed figure of £32,000. That sum should accordingly be awarded. He referred to our decision to that effect in Edwards v Robb’s Trustees – SLC 100/11. For the tenant, Sir Crispin contended that our figures per acre had to be assumed to include fixed equipment including the cottages and, therefore, the rental from them should not be added. A calculation had to be made for the class 4 and 5 land. But, he submitted that the evidence did not justify a figure in excess of £30 per acre for that land.

[2] In the result there were three contentious issues to be resolved on the merits: the rate for class 4 land; whether there should be any addition for all or any of the cottages; and if so, whether the open market rental of cottages could be used as a basis of assessment. We also heard submissions in relation to appropriate uplift on solicitors’ fees but parties were agreed that the main issue of liability in expenses should be left over until our determination of rent was known. We shall deal with the question of uplift at that stage.

[3] In the Note, at [9], we described Moonzie as being a farm of 192 hectares or thereby including some 61 hectares of class 3(1) and some 90 hectares of class 3(2). We accept that some 3.9 hectares is occupied by roads, tracks, buildings, ditches and the like. There is also a small area (around 0.9 hectares) of class 5 land. This leaves a balance of some 36.2 hectares of land lying within the class 4. We did not understand the tenant to dispute these figures. Although Mr Kermack said he had carried out his own measurement of the Macaulay map and his calculation showed a higher figure for class 3(2) and lower figure for class 4, we understood him to be content to proceed on the basis of the figures shown below. It can be noted that they are very similar to those set out in the table attached to the Macaulay field audit for the farm. As the rates were expressed per acre we have converted the figures appropriately:

Class Hectares Acres
3(1) 61.0 150.7
3(2) 90.0 222.4
4 36.2 89.5
5 0.9 2.2
Other 3.9 9.6
Total 192.0 474.4

Rate for class 4 land

[4] There was no dispute about a modest figure for the class 5 land. In relation to class 4, Mr Kermack contended that the appropriate figure was £50 per acre based on the proposition that the land so classed at Moonzie was in fact capable of carrying crops and forming part of an arable rotation. We understood it to be suggested that Mr Morrison-Low, who farmed a similar holding nearby, had given evidence to that effect. This contention was disputed by Sir Crispin who suggested that the evidence showed that its value should be assessed simply as pasture. He suggested that Mr Henderson had given evidence that a reasonable figure for permanent pasture would be about £30 per acre.

[5] We have been unable to find in our notes any evidence dealing explicitly with valuation of the class 4 land at Moonzie and the submissions we heard did not attempt to rely on direct evidence about this. However, we carried out a full site inspection on 22 February 2010. At inspection we could see that large areas of the ground shown as class 4 on the Macaulay Institute map were either ploughed in preparation for spring planting or already growing a crop of winter cereals. The remainder was steeper ground which was in permanent pasture. The cultivated class 4 ground would, in our view, be suitable for the growing of cereals and oilseed rape in rotation. It is unlikely that this ground would be suitable for potatoes. In reviewing the comparable farms set out in Appendix II of our Note, we can see that permanent pasture / pasture was assessed by the landlord’s experts as lying between £40.00 and £50.00 per acre. Although Mr Henderson suggested lower figures, we are satisfied that those listed in Appendix II can be accepted as reasonable comparable figures for pasture on the steeper areas of grade 4 land on a holding such as Moonzie. We can note that in the tenant’s pleadings, he gives the “arable” area as 172.43 hectares, which would indicate – on the basis of the figures for the class 3(1) and 3(2) land outlined earlier – that he considers there to be at least 21 hectares (52 acres) of the class 4 land in the arable rotation. Since the majority of the class 4 land is clearly within the cropping rotation, it should be rented at least at the top of the permanent pasture level.

[6] In our view, much of the class 4 cropped land could provide similar yields to the class 3(2) land although higher growing and harvesting costs might be anticipated. On the whole evidence and the views formed after inspection we think it reasonable to take £50 per acre as an average for the class 4 land on this holding. Although it was not disputed that the figure for the small area of class 5 land should be a modest one, it cannot be completely ignored. In Appendix II, there is listed one figure for rough grazing (at Wester Kinleith) at £10 per acre. In the circumstances here, we consider it reasonable to use that rate in our calculations. It should be noted that these figures proceed on the same assumptions, for comparative purposes, as our figures for the class 3 land and we deal further with this issue in relation to the cottages.

[7] As discussed further below we accept these figures as reflecting appropriate provision of landlord’s fixed equipment. On that basis, we assess the rent for the land at Moonzie with such provision as follows:

Class Acres Rate Total
3(1) 150.7 £65 £9,795.50
3(2) 222.4 £60 £13,344.00
4 89.5 £50 £4475.00
5 2.2 £10 £22.00
Other 9.6 - -
Total 474.4 £27,636.50

Whether the agreed rates included the cottages

[8] We discussed the cottages at paras [194] to [201] of our Note. There were three cottages. Two were let to third parties with the consent of the landlord. The largest one was occupied by the tenant’s son. He worked on the farm as did the tenant and two other employees. However the tenant ran a separate contractor’s business and all staff were used in connection with it. Having inspected the holding we are satisfied that it justifies employment of at least one farm worker in addition to the tenant himself. This was in accord with the limited evidence we heard on this topic.

[9] In accepting the figures of £65 and £60 for the class 3 land, we did not intend these to include potential rental income from cottages which were not required for agricultural purposes and which were in fact let to third parties. Our figures were based on our broad acceptance of figures put forward by Mr Addison-Scott. His evidence was subject to some criticism in respect of reliance on his general experience in simply putting forward a figure for Moonzie, based, he said, on a wide range of farms, without any attempt to provide detail of how he had analysed matters. However, he did produce an analysis of several farms considered to be broadly comparable. Details of these are set out in the Appendix II to our earlier Note. He explained that he had looked for holdings which were broadly comparable in size and quality and which had cottages. Such initial explanation might have been thought to provide the basis for the tenant’s contention that the cottages were simply treated as part of the landlord’s provision of fixed equipment. However, we have no doubt that further in his evidence Mr Addison-Scott made clear a distinction between cottages used for employees and cottages available for letting. The former were treated as part of the total fixed equipment required for the proper farming of the land. The latter were shown as separate figures. That approach was clear from the Appendix.

[10] In cross-examination we understood him to say expressly that he treated the cottage occupied by the tenant’s son as part of his general assessment of the farm but that the other two were to be treated as separately sub-let. This was consistent with the landlord’s pleadings. We proceeded on that basis. However, before looking at the two let cottages, it is necessary to deal with Mr Kermack’s contention that rents for all three cottages should now be added.

[11] As we have said, that was not the basis upon which we proceeded and it was not our understanding of the landlord’s expert evidence. Indeed we have noted an objection by Sir Crispin to the leading of evidence about the rental value of the third cottage on the basis of lack of notice. The leading of such evidence was then justified by Mr Kermack on the basis that it was necessary to deal with it for a budget based approach and that the need for this had not been apparent to the landlord until late in the proceedings. In other words, at that time we understood the landlord’s position to be one of acceptance that the large cottage should not be treated as justifying any increase on a comparative basis. It was simply part of the normal provision of fixed equipment for a farm of that size.

[12] We are satisfied that the assessment we are now undertaking should proceed on the assumption that the incoming tenant will farm the holding himself rather than leave it all to contractors. There seemed to be no dispute that such a tenant would need at least one employee. In the circumstances we have no doubt that the three bed-roomed cottage should be viewed simply as part of the fixed equipment necessary for agricultural purposes and treated as falling within the rates we have accepted for the class 3 land. In other words, those rates are for class 3 land on a farm similar to Moonzie and with a similar provision of fixed equipment – including one cottage for an employee. We have assessed the class 4 land on the same basis.

[13] For completeness it may be added that we heard some discussion of the implications of the lease provisions relating to this cottage. The relevant provisions are set out in our Note at [195]. Put shortly, they require the tenant to “use his best endeavours” to keep this cottage “occupied by a farm worker in full time employment on the farm”. An incoming tenant would be bound to have regard to the terms of the contract.

[14] An obligation to “use best endeavours” has been said to be equivalent to an obligation to use “all reasonable endeavours”. We accept the proposition that it cannot be thought to include “unreasonable endeavours”. But what is reasonable always depends on context. It has been held that it is reasonable for a party under such an obligation to have regard to his own economic interests: EDI Central Ltd v NCP Ltd 2011 SLT 75 para [20]. But this will be subject to the specific provisions of any particular contract and an obligation to use “best endeavours” may be more onerous in this respect. In the present case we think that it points to an obligation to take steps to attract and persuade an employee to stay in the cottage rather than going the length of imposing a requirement that the tenant should adopt a disadvantageous system of farming merely to give work for such employee. But we do not consider this provision to be of significance in the present context as we treat the cottage as being used for such an employee in any event.

[15] We now turn to the let cottages. Although Sir Crispin submitted that they should be seen as covered by the rates we accepted for class 3 land, this was not our intention. We have discussed the matter above in relation to this particular case. It is perhaps appropriate to say a little more about the general contention. We have no doubt that to treat surplus cottages as separate from the rest of the fixed equipment when analysing comparables makes good sense in principle. The process of analysis of comparables involves identification of what is truly comparable and the stripping out of what is not. The more transparent the analysis of comparables can be, the more useful it is as a tool. Where there are no special features it may be quite appropriate to proceed by ignoring the detail of the equipment and analysing comparable rents broadly in terms of a rate per acre based on different classes of land. In other words, making an assumption that the fixed equipment is no more and no less than is appropriate for the proper farming of the land in question. However, where there are special features and in particular where there are features not related to or necessary for agricultural purposes, it will usually be more useful to try to strip them out of the comparison if possible.

[16] In the present case two cottages were not required for agricultural purposes and were available for let on the open market. We have no doubt that an additional allowance must be made for this. However, the parties were also in dispute as to the appropriate approach to assessment of such allowance. The landlord contended that this should simply be the figure agreed by the parties which was a one half share of a figure based on open market rentals. For the tenant it was pointed out that this agreement had been reached purely for the purposes of a budget based calculation in respect of which the parties had agreed, for simplicity, that the farm should be treated as if it was to be farmed on a contract basis. It was initially suggested that it did not provided a reliable figure even if we were to accept that a figure derived from the cottage letting market was the correct approach. However, Sir Crispin eventually accepted that the figure of £3825, agreed for the budget, could be accepted as a reasonable reflection of the open market value of such cottages if they were to be treated separately. But, he submitted that the Court had to assess an overall farm rental and that the proper approach was to look at comparable farm rents and seek to derive an appropriate value for such surplus cottages from such comparison. He suggested that if necessary the Court should continue the cause to hear evidence directed at that specific issue.

[17] We have no doubt that our aim is to find the rent of the farm as a whole – subject to any issues arising from sec 13(7A), which we touch on below. It is clear that the most reliable way of doing this would be to find examples of comparable open market rents. If we had evidence of the rental levels of a similar farm without two comparable cottages and also evidence of levels of such a farm with cottages, it would be possible to determine what level should be attributed to the cottages. However, it is not suggested that such evidence was available at the time of the hearing or that it is ever likely to be available. The best that can be done with such comparable evidence as can be found, would be to try to analyse it to see what guidance it provides. In doing this, any endeavour to see what values should be attributed to cottages would inevitably have regard to the passing rents of cottages on the comparable farms. To be properly comparable such cottages would need to be cottages let on the open market and the passing rents would be expected to reflect open market levels.

[18] The guidance which might appear to be provided by Appendix II indicates a range of figures for cottages. In the only case where there was evidence of rental income from two cottages, the figure shown was £5,400. We understood Mr Addison-Scott to say that this was based on a half share of open market value. He was not asked to discuss allowances for voids and management.

[19] If we were testing the comparison by assuming a person offering for a farm it would again be necessary to look at the return available from the cottages. At [192] of our Note we had expressed the view that such a person would not be likely to offer more than they could expect to receive by way of return if the holding was operated efficiently. It was implicit that such expectation would be soundly based on projected budgets. That approach did not make proper allowance for a prospective tenant who might have reasons to offer more than could be expected as profit from the farm itself. But, we do not see any need for doubt that the start point for a prudent prospective tenant would be to seek information as to the likely economic return. It is not easy to figure situations where prospective tenants might expect to be successful offering less than would be justified on a sound economic analysis.

[20] Accordingly, if there was clear evidence of probable returns from letting the cottages on the open market, we see no reason why a prospective tenant should allow for less. Such tenant might not wish to be involved in the factoring of domestic property but would have to face up to the prospect of competing with offers from parties making an economic assessment of matters. The figure proposed for the budgets in this case made a specific allowance for voids and marketing before calculation of the agreed fifty-fifty split. We are satisfied that the figures calculated for the budgets are the appropriate ones to be added as an additional element in our overall assessment of the rent properly payable for Moonzie. Accordingly we have added £3,825 to the figure calculated above. It may be added that Mr Addison-Scott’s analysis of rents agreed in the four comparable farms shows an average rent of £1,900 to be added in respect of cottages. This is broadly in line with the figure agreed in this case.

[21] It may also be added, for completeness, that we heard submission from Mr Kermack on the provisions of section 13(7A) which require the Court to take into account any increase in the rental value resulting from use of the land for a purpose that is not an agricultural purpose. It is not clear what this would add to our assessment of rent “for the holding” in terms of subsec (1) but it may have been added to avoid any thought that our task was restricted to the “agricultural holding”. The provision does not appear to provide assistance in relation to the problem of assessment here.

[22] As set out above, the total for the farm assessed by reference to the quality of the land, assuming a farm adequately provided for by way of fixed equipment, was £27,636.50. To that must be added £3,825 in respect of the share of rent for the two let cottages. Accordingly, we assess the rent for the farm as a whole at £31,462.

For the landlord applicant: Lewis Kermack, Solicitor, Turcan Connell, Edinburgh

For the tenant respondents: Sir Crispin Agnew of Lochnaw Q.C.; Stronachs, Solicitors, Aberdeen