Decision of the Scottish Land Court

Druim Leathann Windfarm Limited (Applicant)
v
Shareholders in North Tolsta & Glen Tolsta and in New Tolsta Common Grazings (Respondents)

Case reference SLC/28/18
before
Lord Minginish, Chairman, and Tom Campbell
14 May 2019

INTRODUCTION

[1] By our order and note of 29 March 2019 we granted consent, in terms of sec 19A of the Crofters (Scotland) Act 1993 (“the 1993 Act”), to the land in question in this application being developed in accordance with the scheme of development lodged by the applicants and said that we would issue a note of our reasons in due course. This is that note.

[2] In the circumstances described in the short note which accompanied our said order, the hearing of the case at Stornoway on 25 and 26 March 2019 went ahead as undefended with the applicants represented by Sir Crispin Agnew of Lochnaw QC.

[3] Evidence was led from three witnesses: Mr Alasdair Gordon Macleod BA, MSc, MRTPI, the applicants’ Director of Renewable Generation, Mr Iain Maclennan Maciver, Factor of the landowners, The Stornoway Trust, and Mr Robert Gordon Stewart, Chartered Surveyor, a partner in Bidwells, Chartered Surveyors, Perth. Although their evidence was not challenged by a contradictor, we have no reason to question the credibility or reliability of any of them.

[4] Since there are no factual conflicts to be resolved, there is no need to set out the evidence each witness gave. Instead, what follows is, first, a factual description of what this scheme of development involves and how it is intended to operate and, secondly, our consideration of the legal issues which arose.

FACTUAL DESCRIPTION

The applicants

[5] The applicants are Druim Leathann Wind Limited (“DLWL” or “the developers”), a wholly owned subsidiary of Forsa Energy Limited (Forsa) created for the purpose of carrying out this development. Forsa are an international company registered in England. DLWL have their registered office at Suite F3, Clyde View, 22 Pottery Street, Greenock.

[6] Forsa Energy have completed the development of three wind farms in the United Kingdom, with a fourth currently under way in Greenock and six others in the pipeline. Their modus operandi is to set up a subsidiary company for each individual development and when each development is up and running sell the company to a financial institution such as an investment fund looking for an income stream in return for a capital payment.

The development

[7] What is proposed is the erection of a wind farm comprising 14 turbines, 13 of the them on the common grazings pertaining to the township of North Tolsta, Isle of Lewis, and one on the neighbouring New Tolsta grazings, with ancillary infrastructure such as access roads, hard-standings for cranes, laydown areas, borrow pits, a substation and an anemometer mast. The development extends over some 248 hectares of land but its actual physical footprint will be very much smaller. The owners of the land are the Stornoway Trust.

[8] Included in the physical footprint of the development is 1.7 ha of woodland on which turbine 13 is to be built. This is part of a larger area of woodland planted on the North Tolsta Common Grazings under the Crofter Forestry Scheme. The 1.7 ha area requires to be felled. Mr Stewart gave evidence that it is of little value in its present condition. It will be returned to blanket bog, in so far as not built upon and the developers will pay for the replanting of a similar area elsewhere on the Common Grazings under the supervision of Scottish Forestry (the former Forestry Commission for Scotland).

[9] At the present time the planning consent which exists is for turbines of a maximum tip height of 126.5 metres with a maximum combined output of 46.2 Megawatts (“MW”) but a planning application is pending for a height increase to 140 metres, which, if granted, is likely to produce 3.5MW of additional capacity. The consent granted will remain extant for a period of 27 years from the date of final commissioning of the scheme. Construction is expected to start in 2021 and final commissioning is expected to take place in 2023 but, at present, the whole scheme is dependent on getting a Contract for Difference (“CfD”) from the UK government and the construction of an interconnector to connect the Western Isles to the mainland.

The structure of the scheme

[10] DLWL will lease the site of the wind farm from the Stornoway Trust (“the landlords”) for a period of 28 years during which they will pay the landlords a rent, calculated in accordance with the lease, 50% of which will be paid by the landlords to the crofters having shares in said grazings. The crofters themselves are not to be parties to the lease or to any of the other contractual documentation.

[11] As is usual in these schemes, the rent provisions are complex but, as explained to us by Mr MacLeod and, more particularly, Mr Stewart, what they come down to is this:

(i) A “Base Rent” of £7,500 per MW of installed capacity, index-linked, per annum, will be payable from the date of entry until the date of commencement of commercial operations and will remain available as part of the “Variable Rent” referred to below at that rate until the 12th anniversary of the date of the development becoming fully operational, when it will increase to £11,000/MW per annum index-linked.

(ii) The landlords then (i.e. before the start of commercial operations) have to opt for the payment of either a “Fixed Rent” or a “Variable Rent” from the date of commencement of commercial operations for the next five years and that election has to be repeated at the start of each subsequent five year period for the duration of the lease.

(iii) The “Fixed Rent”, available, should it be chosen by the landlord, from the date of commencement of commercial operations until the 12th anniversary of that date is £8,500/MW, index-linked, per annum, increasing to £12,000/MW, index-linked, on the 12th anniversary of commencement.

(iv) The “Variable Rent” is the higher of the Base Rent and 3% of the Gross Income of the development. Since the Base Rent on its own will never be higher than the Fixed Rent (see above), the Variable Rent will only be more attractive than the Fixed Rent in the event that 3% of the development’s Gross Income takes it over the level of the Fixed Rent. Mr Stewart did not expect that to happen, saying “the Fixed Rent is now the only likely income”.

[12] The landlords have to pay the shareholders in the two common grazings 50% of the rent received, the sums being paid through the Grazings Committees.

[13] No capital payment will be made to the crofters, it being explained that a capital payment made at the outset of the project in satisfaction of their right to fair recompense would render the development unviable.

[14] In addition to the rent paid to the landlord and shared with the graziers, there is a community benefit of £7,000 per annum per MW of installed capacity (index-linked), increasing to £10,000 (index-linked) in year 13, payable to the community. It is envisaged that most of this will be paid to a local body such as the Tolsta Community Development Trust or the Community Council to administer but some will go to projects elsewhere.

The crofters

[15] There are 82 shares in the North Tolsta Common Grazings and 20 in New Tolsta. Consultations with the shareholders, in the form of public meetings, and with the two Grazings Committee were held by the developers in the course of 2012 and 2013. The developers also paid for them to be advised by separate firms of solicitors. These consultations led to an uplift on the rent originally offered and, consequently, the sum to be shared among the graziers. By letters to the Court dated 16 January 2018 (productions 12 and 12A) the Clerks to the two Grazings Committees confirmed their Committees’ consent to the granting of this application by the Court.

[16] Support for the application has not, however, been unanimous. A total of 13 competent objectors (including himself), some from North Tolsta and some from New Tolsta, were at one time represented by Mr Donald Maciver of 18 North Tolsta, who lodged full written answers on their behalf. Two other individuals wrote in but their status as competent objectors was not established and they did not seek to take any further part in the case. Although, at the end of the day, none of the objectors opposed the application in court, we bear in mind the points made in the written answers lodged by Mr Maciver in what follows. That is because, in a situation where we require to be satisfied on certain matters whether or not they are contested, we think it helpful to have regard to points made by objectors lest they flag up something to which we should be alert in the discharge of our statutory duty.

LEGAL ISSUES

Authorities

Stornoway Wind Farm Limited v Crofters having rights in the Stornoway Wind Farm Site SLC/59/17, decision of 1 March 2019

Viking Energy Wind Farm LLP v Crofters having rights in the Common Grazings of the Townships of Sandwick, Sweening & Laxo & Others SLC/31/16, decision of 5 September 2018

[17] Section 19A(2) of the 1993 Act forbids us from granting consent under subsection (1)(a) unless we are satisfied as to the following matters:

“(a) that the development is for a reasonable purpose;

(b) that to carry it out would not be unfair;

(c) that the scheme provides for there to be fair recompense to each member of the crofting community in the area affected by the development for the effects of the development (including, in relation to the croft land of each such member, recompense at least equivalent to the recompense which the member might be expected to have obtained had that croft land been resumed); and

(d) that, were the development carried out –

(i) that community would be likely to benefit financially; and

(ii) such benefit would be at least commensurate with any financial benefit which the members of that community might obtain on the development proceeding other than by virtue of this section.”

We deal with each of these in turn.

Whether the development is for a reasonable purpose

[18] The definition of “reasonable purpose” for resumption purposes contained in sec 20(3) of the 1993 Act is incorporated into sec 19A by subsec (3)(a) of that section. Section 20(3) includes, at (viia), “the generation of energy” as an example of a reasonable purpose. In the cases of Viking Energy Wind Farm LLP v Crofters having rights in Common Grazings of the Townships of Sandwick, Sweening & Laxo & Others (at para [83]), and Stornoway Wind Farm Limited v Crofters having rights in the Stornoway Wind Farm Site (at paras [70] and [71]), we held that it is not necessary to be satisfied that the purpose will in fact be carried out. Accordingly we hold that this development is for a reasonable purpose.

[19] Before we move on to subsec (2)(b), however, we would comment on something argued under this head in the objectors’ answers, at page 4, where they say “In the event that the Court consent to the scheme but the applicants do not proceed with the development, such an event will not be neutral for the shareholders, as contended for by the Applicants, as the restrictions on the rights of the shareholders contained within the scheme will be binding upon the shareholders in terms of section 19A(11) as a consequence of the registration of the scheme in the Register of Crofts.”

[20] We do not think these fears are justified. From a physical point of view the restrictions on crofters’ rights in the scheme will not become operative until, at the earliest, the start of construction of the scheme. Until then there will be nothing to prevent animals grazing on the intended sites of infrastructure. Nor will the restrictions on tree planting within 500 metres of turbines apply because there will be no turbines. In so far as the concern is that shareholders in the common grazings will not be able to bring a sec 50B application at any point in the future because, they say, the land will be sterilised by the registration of the present scheme, it has to be remembered that the scheme that is binding is the scheme that has been approved by the Court and registered by the Commission and no other. Any credible scheme will explain when it is going to be developed. Accordingly, if nothing happens or work stops, a time will come when it is clear that the scheme is not going to be developed according to its terms.

[21] The present scheme contains the following timescale: “3.6. The construction of the Scheme is planned to commence in 2021 based on current contracted grid connection dates. The wind turbines will be erected in 2022 and the project will be commissioned in 2023. … This programme is dependent on the grid connection date which in turn is dependent on construction of the interconnector between the mainland and the Isle of Lewis, but has yet to be confirmed.” The timetable is, therefore, dependent upon the construction of the interconnector. If that never happens the project will be dead. The same goes for the Contract for Difference. The planning permission currently in place is subject to a three year expiry deadline should the development not be commenced, so, absent an extension, that too could terminate the scheme as a live project. In any of these circumstances it would arguably be the duty of the Crofting Commission under sec 41(2) of the 1993 Act to remove the scheme from the Register of Crofts as part of its duty to “insert new entries in the Register or alter or omit existing entries so far as may be necessary to ensure, so far as practicable, that the Register is consistent with such information as the Commission has obtained under or by virtue of this Act”. Alternatively, if the project is not commenced within the timescale indicated for some other reason (such as simple delay on the part of the developer) a point would be reached when it would be possible to meet any attempt to prevent an alternative development, such as an application under sec 50B, with the argument that the scheme was no longer binding because the timescale during which it was to have been commenced or completed had not been met. Any scheme proceeding after that point in time would not be the scheme to which the Court had consented. Accordingly, whilst it would be better if the legislation included a provision for the removal of schemes from the Register of Crofts, we think, even absent such a provision, the objectors’ concerns are more imagined than real.

Whether to carry it out would be unfair

[22] It is unfair to carry out a sec 19A development only where to do so would have significant adverse consequences for one or more of the members of the crofting community in the area affected by the development and those consequences would be disproportionately greater than the adverse consequences for the other members of that community or there would be no adverse consequences for those other members; sec 19A(3)(b).

[23] We have considered whether any of the matters raised by Mr (Donald) Maciver give rise to that sort of unfairness. These matters include (i) the destruction of an area of woodland, (ii) that the scheme would pre-empt any possibility of a sec 50B scheme being brought forward by the crofters, (iii) that a sec 50B scheme would yield a far higher financial return to the community, (iv) that the scheme will lead to higher prices being asked for tenancy assignations, with consequent adverse effects on new entrants and the continuation of crofting, and (v) that it would lead to the separation of common grazings shares from the crofts to which they presently pertain (because the assigning tenant wanted to keep the income from the wind farm). Other points are made too, including the unavailability of a capital sum payment to crofters at the outset, but that is a matter on which the Court has ruled in the Stornoway case.

[24] Whatever the merits of that list of points in relation to the effects of the scheme, it seems to us that none of them impacts differently on certain members of the crofting community compared with others. For that simple reason they do not come within the definition of unfairness contained in sec 19A(3)9b).

[25] With particular reference to the sec 50B arguments, in so far as not already dealt with, this case is obviously different from the Stornoway Wind Farm case. The significance of the sec 50B applications in that case is that, because four out of the nine townships involved have sec 50B applications which (if the appeals from the Crofting Commission decisions were to be successful) might be prevented from going ahead by the landlords’ sec 19A application, it is possible to argue that the sec 19A scheme has significantly more adverse consequences for some members of the crofting community than others (see paras [76] and [77] of our judgment). In the present case neither of the two townships has or proposes a sec 50B application so no question of unfairness arises.

Whether the scheme provides fair recompense to each member of the crofting community for its effects

[26] “Fair recompense” has to be determined having regard to both the value of the development and to its effect on the individual members of the crofting community affected by it.

[27] The only evidence as to value with which we were presented was the evidence of Mr Stewart who had been instructed to calculate the capitalised value of the landlords’ interest in the lease, which is not the same as the value “of the development”, which is what sec 19A(3)(c) refers to. The purpose of his evidence seemed to be directed at explaining why a landlord (and, by extension, crofters sharing in the rent received by the landlord) would be well advised to opt for a continuing income stream rather than a capital payment at the outset.

[28] Notwithstanding the limitations of his instructions, he refers, at para 12.1.4 of his report (production 21), to having “calculated the value of the Property based on an assessment of the net present value (NPV) of the projected rental and other payments due under the lease” (our emphasis). That is preceded by an explanation that “Whilst there is a growing secondary market for wind farm developments, sale terms are normally confidential and subject to non-disclosure agreements”. It appears therefore that he considered assessing the value of the whole development but found himself unable to do so due to lack of objective evidence. Forsa obviously know the sums for which their previously completed wind farms have been sold, which would be one measure of the value of a development, but they are presumably bound by the non-disclosure agreements referred to.

[29] With those caveats as to its relevance, the evidence given by Mr Stewart orally and in his report was as follows.

[30] As has been said, he used the NPV method to calculate the value of the landlords’’ interest. That involved calculating the total rental and other payments due under the scheme and then discounting that figure to provide the present value.

[31] The assumptions he required to make and the discount he applied, and why he chose that figure, are all explained in his report (production 21) and there is no need to repeat them here. Because he allowed for the possibility that landlords would sometimes elect to take the Variable rather than the Fixed Rent he had to make assumptions about what that might be. He seemed careful to err on the side of caution rather than optimism. It seems the market has been over-optimistic about things such as electricity prices and the efficiency of turbines in the past and he made allowances for that. Having made these allowances he estimated that the average annual rental income of the scheme in the first 12 years would be £440,000 (index-linked) and £620,000 (index-linked) thereafter. He applied a discount rate of 9% (higher, he said, than might be expected and deliberately so to reflect the tenant’s right to terminate the lease on giving six months’ notice). The resultant value was £6,956,000, or, in round figures, £7m.

[32] As we noted in the Stornoway case (at para [60]), there is no mechanism in the Act for relating fair recompense to the value of the development. All that seems to be required is some broad correlation so that the recompense on offer is not seen to be unfair given the scale of the development. It was the evidence of Mr Macleod, Mr (Iain) Maciver and Mr Stewart that the recompense payable here is, if anything, on the generous side, when compared to other windfarms of which they have experience. In his witness statement, Mr Macleod says “In our view the rentals offered represent a fair market value rental bearing in mind the ‘capital’ value of the ‘scheme site’”, although he does not say what he understands that capital value to be. Mr Maciver thought that that the rents agreed here were better than any of the other rentals of which he had been aware when negotiating the deal. He did not suggest that he had become aware of information to the contrary since then. Mr Stewart, at para 5.1 of his report, says “The commercial terms for the lease for the land required for the operation of the wind farm at North Tolsta are consistent with those generally found in wind farm leases that have been agreed in the UK over the past 25 years, where annual payments are received in proportion to the size of the development and/or the performance of the operating turbines.” Standing that body of evidence, untested and uncontradicted though it was, we have to conclude that the recompense on offer is fair in relation to the value of the development.

[33] Turning to the effects of the scheme on members of the crofting community, these are minimal and not exclusively negative. They will lose the right to graze over the physical footprint of the development, that is to say, the site of the turbines and ancillary buildings, the areas of hard-standing, the solum of access roads and of any other infrastructure, but their soumings will not be reduced. They will lose the right to plant trees within 500 metres of the turbines in order to protect the wind flow. They will lose, for a time, the 1.7 ha of crofter forestry referred to above but (a) on the evidence we heard it is of little or no value anyway and (b) an equivalent area is to be planted elsewhere. On the positive side, the access roads will improve access to parts of the grazings not easily accessible at present.

[34] As to recompense, the evidence of Mr Macleod and Mr Stewart was that the rent levels agreed between the developers and Stornoway Trust were at the generous end of the current spectrum. Although the graziers are not parties to the lease, they have, through their Grazings Committees, agreed these levels, the levels having been increased at their behest. The evidence of Messrs Macleod, Maciver and Stewart narrated at para 32 above is relevant here too. Additionally we would say that Mr Stewart gave evidence that the rental payments here are comparable with other sites of which he was aware in Lewis at Barvas, Galson and the Pentland Road, and probably better (from the landlords’ and crofters’ points of view) than anywhere else of which he was aware, including the Viking development in Shetland. Although the “Income Rent” percentage of 3% was 1% or 2% lower than on the mainland, this was explained by higher grid connection charges payable by island sites. Accordingly we are satisfied that the scheme offers fair recompense for its effects.

[35] Subsection (2)(c) of sec 19A includes a reference, in parenthesis, to recompense equivalent to what a member of the crofting community might be expected to obtain had the land been resumed but we held in the Stornoway case (at paras [49] to [54]) that this only applies to inbye croft land affected by a sec 19A scheme, not common grazings.

Whether the crofting community will benefit financially from the development and whether that benefit will be commensurate with what might be obtained if the development proceeded other than by virtue of sec 19A

[36] That there will be financial benefit to the crofting community here is not in doubt. It will take two forms: the crofters’ share in the rent paid by the developer to the landlords and the community benefit of £7,000/MW per annum (increasing in year 13 as aforesaid) paid to the community at large in which members of the crofting community will also share. With regard to the latter, Mr Macleod’s report (production 20) tells us that this level of community benefit exceeds the Scottish Government’s guidance at the time the scheme was first mooted, in 2013, the higher sum having been agreed as a result of representations made by Stornoway Trust.

[37] As regards the former, a comparison is required with other ways in which the scheme could be carried out. That means by an agreement with the landlord which has been approved by the Court in terms of sec 5(3) or by resumption under secs 20 and 21.

[38] It could be carried out by agreement under sec 5(3) of the 1993 Act in as much as the crofters could enter into an agreement whereby they surrendered their rights to the extent required for the development to proceed and the Court could then be asked to approve that agreement. However sec 5(3) contains no provisions as to recompense, so cannot be used as a comparator here.

[39] The scheme could also proceed by way of resumption, in which case both compensation under sec 20(1) and a share in the value of the land under sec 21(1) would be payable. In this case compensation, given the limited nature of the crofters’ loss, would be modest and, without quantifying it, we can safely say that the projected payments in the way of the crofters’ share of rent will quickly and comfortably exceed it. So far as a share in the capital value is concerned, we have already held, in the Stornoway case (at para [59]) that the requirement of equivalence (as a minimum level of recompense) with resumption does not mean that applicants under sec 19A have to offer the payment of a capital sum. But the crofters mustn’t be left worse off than they would be were the land to be resumed.

[40] We have not been supplied with calculations dealing specifically with this matter. In particular we have had no evidence as to the difference between the crofting and market value of the land (what is sometimes called “development value”) and, therefore, what the crofters might expect to get under sec 21 of the 1993 Act on a resumption. But what the present scheme promises (subject to various caveats, certainly) to deliver is known. A fixed rent of £4,250 (crofters’ share) index-linked per MW of installed capacity (46.2 at present) over 12 years, increasing to £6,000 per annum for the remaining 13 years of the lease (we have confined the calculation to the 25 year period for which operational planning permission exists) is a very substantial sum (£5,959,800 without index-linking). That figure would have to be discounted in order to allow for uncertainties such as the possibility of early termination and so as to arrive at a present day value which one could use as a comparator to the share in development value. Even without attempting that calculation and without evidence as to what the share in development value on resumption would be likely to be, it seems to us highly unlikely, to say the least, that resumption would produce a more favourable outcome. It was also Mr Maciver’s opinion, against the background of his knowledge of resumption of Stornoway Trust land, that this was a more favourable level of recompense. Accordingly we are satisfied that the scheme meets the requirements of sec 19A(2)(d) in so far as a comparison with resumption is concerned. However, future applicants should take care to supply the Court with evidence as to what the outcome of resumption would actually be.

[41] As to whether sec 50B schemes are relevant comparators for the purposes of sec 19A(2)(d)(ii), we adhere to what we said in the Stornoway case, where we held (at paras [72] – [75]) that they are not. The comparison has to be with any other way by which the landlord could deliver the development and that confines the comparison, effectively, to resumption, given what we have said above about sec 5(3). In any event, as we have already said, there is no prospect of a sec 50B application in the present case.

DECISION

[42] The result is that we are satisfied as to all of the matters listed in sec 19A(2). We therefore granted consent to the application by our order of 29 March.