Decision of the Scottish Land Court

John Esslemont (Applicant) v Richard Fyffe (Respondent)

Case reference SLC 85/16
before
Iain F Maclean, Deputy Chairman, and John A Smith
7 December 2016

[1] The Applicant and the Respondent are respectively the Tenant and the Landlord of the Farm of Muirton of Corsindae (“the Farm”) in terms of a Minute of Lease between the Rt Rev Rollestone Sterritt Fyffe and Another, Proprietors in Trust of the Estate of Corsindae, and John French Esslemont dated 14 and 21 January 1944 (“the Lease”). In this Application, which was received by the Land Court on 17 June 2016, the Tenant craves an Order in terms of section 41(1)(a) of the Agricultural Holdings (Scotland) Act 2003 (“the 2003 Act”) that the Landlord’s objection to a Notice of Diversification given by the Tenant on 15 October 2015 is unreasonable. Were we to grant an Order in the terms the Tenant seeks, the effect would be to permit the use by the Tenant of parts of the Farm for the non-agricultural purpose specified in his Notice of Diversification, namely “the storage of building materials in connection with conducting building activities and the administration of the business” of Monarch Conservatories Scotland Ltd (“Monarch”), a limited company of which the Tenant and his son are the directors and the Tenant the sole shareholder. The date on which the Tenant proposes to commence using the land for that purpose was specified in his Notice of Diversification, as required by section 40(2)(d) of the 2003 Act, as 26 December 2015, but the Tenant acknowledges in his Notice of Diversification that he has “informally been using” parts of the Farm for that purpose since 1996.

[2] The Landlord having lodged Answers to the Application, in which he contended, inter alia, that the Tenant’s Notice of Diversification is ineffective and incompetent, and the Tenant having adjusted his pleadings in response to the Landlord’s Answers, the Land Court, of consent of the parties, on 8 September 2016 appointed parties to be heard at a diet of debate on 14 November 2016. It is a matter of admission by the Tenant in paragraph 4 of the Statement of Facts in the Application that “[he] and Monarch have used the land referred to in said notice for non-agricultural purposes, under explanation that the Applicant started a small business selling double glazing units and conservatories in or about 1996, and that in or about March 2003 he incorporated this business as the company.” At the diet of debate, the Landlord was represented by Gavin McColl, Advocate, appearing on the instructions of Morton Fraser, Solicitors, Edinburgh. He invited us to uphold the Landlord’s second and third pleas-in-law, which were in the terms:

“2. The Notice not having been given not less than 70 days before the date on which the applicant began to permit the use of the land for the non-agricultural purposes set out in the second paragraph of the Notice, it has not been served in accordance with the provisions of section 40 (2) of the Agricultural Holdings (Scotland) Act 2003 (“the 2003 Act”) and is, therefore, ineffective and incompetent, and the application should be refused.

3. The Notice not indicating that the applicant intends to make use of the land for the specified purposes, there is no entitlement to serve a Notice of Diversification under section 40 (1) of the 2003 Act and the application should be refused as incompetent and irrelevant”,

to hold the Tenant’s Notice of Diversification to be ineffective and incompetent and to refuse the Application. Hamish Lean, Solicitor, of Stronachs, appeared for the Tenant to argue that we should repel the Landlord’s preliminary pleas and fix an evidential hearing on the merits of the Landlord’s objections to the Tenant’s Notice of Diversification.

The legislation

[3] The diversification provisions introduced by the 2003 Act are contained in Part 3 (sections 39 – 42) of the 2003 Act. Section 39(1) of the 2003 Act provides that a (a) 1991 Act tenancy; or (b) tenancy under a lease constituting a limited duration tenancy (“LDT”), does not cease to be such a tenancy by reason only that the land is used for a non-agricultural purpose. Section 39(2) of the 2003 Act provides that any term of the lease which prohibits the use of the land for a non-agricultural purpose is of no effect, and section 39(3) of the 2003 Act provides that where—(a) subletting the land is prohibited (by the lease or otherwise); and (b) that prohibition impedes the use of the land for a non-agricultural purpose, the tenant may, despite the prohibition, sublet the land provided that the purpose for which it is sublet is ancillary to the tenant’s use of the land for the non-agricultural purpose. However, section 39(4) of the 2003 Act stipulates that subsections (1) to (3) of the 2003 Act do not apply if the use of the land for a non-agricultural purpose is otherwise than has been permitted under section 40 or 41 of the 2003 Act. In sections 39 - 41 of the 2003 Act, any reference to the land is a reference to the whole of the land comprised in the lease constituting the tenancy or any part of it: section 39(5) of the 2003 Act.

[4] Section 40 (Notice of and objection to diversification) of the 2003 Act provides that:

(1) A tenant under a tenancy mentioned in section 39(1) who intends to use the land for a non-agricultural purpose must send a notice (in this section and section 41 referred to as a “notice of diversification”) to the landlord.

(2) The notice of diversification must be given in writing not less than 70 days before the date on which the tenant proposes to commence using the land for that purpose and must specify—

(a) what the non-agricultural purpose is;

(b) the land that would be used for that purpose;

(c) any changes to the land the tenant proposes to effect for that purpose; and

(d) the date on which the tenant proposes to commence using the land for that purpose,

and must address such matters as may constitute any ground of objection mentioned in subsection (9)(a)(i) to (iii).

(3) Where—

(a) the tenant proposes to effect changes to the land for the non-agricultural purpose; or

(b) the tenant’s intended use of the land for that purpose is in furtherance of a business,

the notice must also specify how the changes are, or, as the case may be, the business is (so far as relating to the land), to be financed and managed.

(4) Where a notice of diversification is given in accordance with subsections (2) and (3), and the landlord does not object to the notice, the land may be used—

(a) for the purpose specified under paragraph (a), and as specified under paragraphs (b) and (c), of subsection (2); and

(b) from the appointed date,

subject to any conditions imposed under subsection (10).

(5) For the purposes of subsection (4)(b), the appointed date is—

(a) the date specified under subsection (2)(d);

(b) where the landlord has made—

(i) a request for information under subsection (6), the date falling 70 days from the making of the request; or

(ii) more than one such request, the date falling 70 days from making of the later or, as the case may be, latest request,

if later than the date so specified; or

(c) such earlier date as the landlord and tenant may agree to.

(6) The landlord may—

(a) within 30 days of the giving of the notice of diversification, request the tenant to provide the landlord with relevant information; and

(b) within 30 days of the providing by the tenant of any relevant information, request the tenant to provide the landlord with further relevant information.

(7) For the purposes of subsection (6), information is relevant if it—

(a) relates to—

(i) the intended use of the land for the non-agricultural purpose (including any proposed changes to the land); and

(ii) where the intended use of the land is in furtherance of a business, the finance or management of the business; and

(b) is necessary for the landlord’s consideration of whether or not there are grounds under subsection (9)(a)(i) to (iii) or (b) for objection to the notice of diversification.

(8) The tenant is to provide any information reasonably requested under subsection (6) within 30 days of the date on which it was requested.

(9) The landlord may object to the notice of diversification if (and only if)—

(a) the landlord reasonably considers that the intended use of the land for the non-agricultural purpose (including any proposed changes to the land) would—

(i) lessen significantly the amenity of the land or the surrounding area;

(ii) substantially prejudice the use of the land for agricultural purposes in the future;

(iii) be detrimental to the sound management of the estate of which the land consists or forms part; or

(iv) cause the landlord to suffer undue hardship;

(b) where the notice specifies a matter mentioned in subsection (3), the landlord reasonably considers that it fails to demonstrate that the proposed changes are, or, as the case may be, the business (so far as relating to the land) is, viable; or

(c) the tenant has failed to comply with subsection (8).

(10) Where the landlord does not object to the notice of diversification, the landlord may impose on the tenant any reasonable conditions in relation to the use of the land for the non-agricultural purpose (including in relation to any proposed changes to the land).

(11) The landlord is, within the period mentioned in subsection (12), to notify the tenant in writing—

(a) of any objection to the notice of diversification (and the grounds for the objection) or, as the case may be, of the fact that the landlord does not object to the notice; and

(b) where the landlord does not object to the notice, of any conditions imposed under subsection (10) (and the reasons for imposing them).

(12) The period is—

(a) where the landlord has made—

(i) a request for information under subsection (6), 60 days from the making of the request; or

(ii) more than one such request, 60 days from the making of the later or, as the case may be, latest request; or

(b) where the landlord has made no such request, 60 days from the giving of the notice of diversification.

(13) If no notification is given in accordance with subsections (11) and (12), the landlord is, except where the non-agricultural purpose is the planting and cropping of trees, deemed not to have objected to the notice of diversification nor to have imposed any conditions in relation to use of, or changes to, the land.

[5] Section 41(1) of the 2003 Act provides that where the Land Court determines that an objection by the landlord to a notice of diversification is unreasonable - (a) the objection is of no effect; and (b) the land may be used (i) as mentioned in section 40(4)(a) of the 2003 Act; and (ii) from such date as the Court may fix, subject to such reasonable conditions in relation to the use of the land as the Court considers appropriate and imposes in terms of section 41 (2) of the 2003 Act.

The Landlord’s argument

[6] Mr McColl submitted that there was here no dispute between the parties as to the material facts, and that on the basis of those facts it was self-evident that the Tenant’s Notice of Diversification failed in two important respects to comply with the mandatory requirements of the legislation. In the first place, it was fundamental to the legislative scheme that a notice of diversification in terms of section 40(2) of the 2003 Act must be given before the date on which the tenant “proposes to commence” using the land for the diversified non-agricultural purpose. Where the landlord does not object to the notice of diversification or, having objected, the Land Court determines that his objection is unreasonable, the effect is to vary the terms of the parties’ lease so as to permit the land comprised in the lease, or any part of it, to be used for what otherwise would be a prohibited purpose. It is only where the use of the land for a non-agricultural purpose has been permitted under section 40 or 41 of the 2003 Act that such use does not constitute a breach of the lease terms, giving rise to a variety of remedies at the hand of the landlord at common law. There was no ambiguity in the words used in section 40(2) of the 1993 and giving those words their ordinary and natural meaning, it was, in Mr McColl’s submission, “crystal clear” that the procedure laid down in Part 3 of the 2003 Act was entirely prospective, and did not provide a means whereby a tenant who is already making use of the land comprised in the lease for a purpose contrary to that for which the land was let can seek what he characterised as “retrospective authorisation for that use”.

[7] In the second place, the use of the land for a non-agricultural purpose specified in the notice of diversification had to be use by the tenant. In terms of section 40(1) of the 2003 Act, it is a tenant under a tenancy mentioned in section 39(1) of the 2003 Act who intends to use the land for a non-agricultural purpose who must send a notice of diversification to the landlord, and section 40(2) of the 2003 Act provides that the notice of diversification must be given in writing not less than 70 days before the date on which “the tenant proposes to commence using the land for that purpose …” Here, Mr Esslemont was the Tenant, but it was apparent ex facie his Notice of Diversification that the use of the land for the specified non-agricultural purpose was, or would be, by Monarch, a corporate body with which the Landlord had no contractual nexus. Only the Tenant had any entitlement to be on the land comprised in the Lease, and were the Tenant’s Notice of Diversification to receive effect, a third party who was a stranger to the Lease would be introduced on to part of the land comprised in the Lease. What rights, if any, Mr McColl asked, would the Landlord have against Monarch in such circumstances? A notice of diversification in which the proposed use of the land for a non-agricultural purpose was by a legal person other than the Tenant was ineffective and incompetent.

The Tenant’s response

[8] For the Tenant, Mr Lean submitted that section 40 of the 2003 Act was cast in terms sufficiently wide to permit of a tenant who had a pre-existing non-agricultural use of the land to take advantage of the new statutory procedure for obtaining permission to diversify. More particularly, the words “intends to use” where they appear in section 40(1) of the 2003 Act could be read as including “intends to continue using.” A landlord, he argued, would not be prejudiced were such a construction of section 40 of the 2003 Act to be adopted because if the tenant could not overcome a reasonable objection on the part of the landlord in terms of section 40(9) of the 2003 Act, the landlord would be able to bring the non-agricultural use to an end, although under questioning from the Court, Mr Lean had to acknowledge that in such circumstances, the landlord’s remedy would have to be derived from common law, because there was nothing in Part 3 of the 2003 Act to address that situation. Mr Lean did not accept that the absence of provision in Part 3 of the 2003 Act of any statutory mechanism to enable the landlord to terminate a pre-existing non-agricultural use which was the subject of a successful objection by the landlord to a tenant’s ex post facto notice of diversification militated against the construction of section 40 of the 2003 Act for which he contended. It would be unduly cumbersome and contrary to the Scottish Parliament’s intention of facilitating diversification if, in the case of a pre-existing non-agricultural use, the tenant, in order to avail himself of the protections afforded by the statutory procedure, had to cease using the land for that non-agricultural purpose before giving notice of diversification.

[9] Mr Lean submitted that the argument advanced for the Landlord that the use of the land for a non-agricultural purpose specified in a notice of diversification must be use by the tenant was too narrow a reading of section 40(1) of the 1993 Act. Here, Monarch was a private limited company wholly owned and controlled by the Tenant. The terms of section 40(3)(b) of the 2003 Act, which provides that where the tenant’s intended use of the land for the non-agricultural purpose is in furtherance of a business, the notice of diversification must also specify how the business is (so far as relating to the land) to be financed and managed, expressly recognised that the business in the furtherance of which the land was to be used for a non-agricultural purpose may be financed and managed separately from the tenant’s farming activities, and there was no reason why a limited company should not be the vehicle for the conduct of that business provided that it was, as here, wholly owned and controlled by the tenant.

[10] When asked by the Court what the position would be were the Tenant to sell or otherwise transfer his shares in Monarch, Mr Lean accepted that in the event of the Tenant ceasing to have a controlling interest in Monarch, any protection afforded by his having gone through the statutory diversification procedure would be lost, presumably on the view that the use of the land for the non-agricultural purpose which had been permitted under section 40 or 41 of the 2003 Act in that circumstance could no longer be said to be that of the Tenant himself. The Tenant’s argument thus requires the corporate veil to be pierced to the extent of establishing that the limited company in question is indeed controlled by the tenant. Mr Lean did not consider that to have what was in law a separate legal person conducting a non-agricultural business on part of the land comprised in the lease constituting the tenancy presented any either theoretical or practical difficulty; it was not, in his experience, unusual for a farming business to be conducted by a legal person different from the legal person holding the tenancy.

Discussion

[11] Although the case of Trustees of the Cawdor Scottish Discretionary Trust v Mackay (2005 SLCR 76) was cited in the List of Authorities intimated on behalf of the Tenant in advance of the hearing, both parties’ legal representatives were in agreement that there were no dicta in that (or indeed in any other) previous decision of this Court which bore directly on the issues as to the proper interpretation of sections 40 and 41 of the 2003 Act we here require to decide. We would, however, in the interests of completeness, point out that in Grant v Glengarry Estate Trust 2008 SLCR 63, Sheriff MacLeod (as he then was), sitting as a Divisional Court, discussed the effect of a permitted diversification under section 40 or 41 of the 2003 Act and affirmed at paragraph [58] of the Note which accompanied his Order of 7 July 2008 the view that “it widens the scope of the permitted use of the land comprising the holding and the lease has to be read with whatever modifications are necessary to allow that … In effect the newly permitted use is put on the same footing as the original.” He also noted that the history of legislation in this area of law was a history of Parliament adjusting the competing rights and liabilities of landlords and tenants, and that, given that history, “we should be slow to read into the [2003] Act something which is not explicit”: paragraph [82].

[12] The starting point of our analysis of these provisions is that prior to the coming into force on 27 November 2003 of Part 3 of the 2003 Act, the tenant of an agricultural holding required the consent of his landlord to use the land for a purpose not sanctioned by the lease, which consent the landlord would be entirely within his rights to withhold. In the event of the landlord so doing, the tenant had no right of recourse against that decision. A change of use of the land effected by the tenant without the landlord’s authorisation may, at common law, constitute an inversion of possession giving the landlord a ground for terminating the lease: alternatively, it may result in the lease being permitted to endure, albeit shorn of its statutory protections: cf. Fyfe v Esslemont (RN SLC/67/15; Order and Note of 15 September 2016). Part 3 of the 2003 Act thus represented a significant innovation upon the previous law, in that it conferred on the tenant under a 1991 Act tenancy or a LDT a right to use the land let to him for a non-agricultural purpose, provided that he followed the prescribed procedure, and subject to the landlord’s right to object thereto on specified grounds and to impose reasonable conditions thereon.

[13] The procedure to be followed where a tenant under a 1991 Act tenancy or a LDT seeks to take advantage of this new right to use the land for a non-agricultural purpose is elaborate, entailing the giving by the tenant of notice of diversification in writing “not less than 70 days before the date on which the tenant proposes to commence using the land for that purpose” and affording the landlord the opportunity to request, and requiring the tenant to provide, “relevant information”, as defined in section 40(7) of the 2003 Act, about the proposed diversification within specified time periods before he has to decide how to respond thereto.

[14] Where the landlord does not object to the notice of diversification, or the Land Court determines that any objection made by the landlord to the notice of diversification is unreasonable, the land may be used for the non-agricultural purpose specified in the notice, with the date from which it may be so used varying depending on the particular circumstances of the case. Where the landlord has not objected to the notice of diversification and has not made a request for information under section 40(6) of the 2003 Act, the “appointed date” from which the land may be used for the non-agricultural purpose will be the date on which the tenant proposes to commence using the land for that purpose as specified in the notice of diversification: section 40(5)(a) of the 2003 Act. Where the landlord has made a request for information under section 40(6) of the 2003 Act, but not objected to the notice of diversification, the appointed date will be the date falling 70 days from the making of the request, or where more than one such request has been made, the date falling 70 days from making of the later or, as the case may be, the latest request: section 40(5)(b) of the 2003 Act. The landlord and the tenant may agree an earlier date: section 40(5)(c) of the 2003 Act. Where the landlord does object, but the Land Court determines that the objection is unreasonable, the land may be used for the non-agricultural purpose from such date as the Court may fix: section 41(1) of the 2003 Act.

[15] The effect of a permitted diversification under section 40 or 41 of the 2003 Act is that the 1991 Act tenancy or LDT does not cease to be such a tenancy by reason only that the land is used for a non-agricultural purpose: section 39(1) of the 2003 Act. Section 13(7A) of the Agricultural Holdings (Scotland) Act 1991 provides, in the context of rent review, that the Land Court shall take into account any increase in the rental value of the holding resulting from the use of the land for a [permitted] purpose that is not an agricultural purpose.

Decision

[16] Mr McColl’s two pronged argument on behalf of the Landlord, reduced to its essence, is that the language of sections 40(1) and 40 (2) of the 2003 Act is precise and unambiguous, so far as it concerns the points focused in the Landlord’s second and third pleas-in-law, and so the words used must be given their ordinary and natural meaning, and no further questions of interpretation arise. Although he did not express it in exactly these terms, he was, in effect, inviting us to apply the literal rule of statutory interpretation. In a brief reply to Mr Lean’s speech, he observed that the latter’s preferred construction invited us to ignore the actual words used in sections 40(1) and 40(2) of the 2003 Act. We are of opinion that there is considerable force in that submission. In response to the Landlord’s first argument that the giving of notice of diversification properly must precede commencement of the use of the land for the non-agricultural purpose, Mr Lean submitted that the words “intends to use” where they appear in section 40(1) of the 2003 Act could be read as including “intends to continue using.” We disagree. Mr Lean’s preferred construction not only involves reading into the statutory provision words that are simply not there, but also is incompatible with the whole scheme of Part 3 of the 2003 Act, which contemplates that before the land is diverted to the proposed non-agricultural use, the landlord will have been given notice of diversification, and had the opportunity then to request from the tenant relevant information, being information that (a) relates to (i) the intended use of the land for the non-agricultural purpose (including any proposed changes to the land); and (ii) where the intended use of the land is in furtherance of a business, the finance or management of the business; and (b) is necessary for his consideration of whether or not there are grounds for objection to the notice of diversification, before he has to decide whether or not to object thereto. It seems to us that Mr McColl was well founded in his submission that, as enacted, section 40 of the 2003 Act is entirely prospective: if the landlord does not object to the notice of diversification, or objects to the notice of diversification, but the Land Court determines that the objection is unreasonable, the diversification can go ahead, but if the objection is upheld, it cannot. The words “intends to use” in section 40(1) of the 2003 Act and “proposes to commence using” in section 40(2) of the 2003 Act, in our view, are not compatible with a construction of Part 3 of the 2003 Act which would permit notice of diversification to be given in relation to an already established use of the land for a non-agricultural purpose. We do not consider that there is anything in the language of Part 3 of the 2003 Act to suggest that the regime introduced thereby was intended by the Scottish Parliament to operate as a means by which a tenant’s subsisting breach of the use clause of his agricultural lease might be cured, either retrospectively or for the future. We have, accordingly, sustained the Landlord’s second plea-in-law, which will result in dismissal of the Application.

[17] Turning now to the second argument advanced by the Landlord for dismissal of the Application, we agree also with Mr McColl that section 40 of the 2003 Act confers on a tenant no right to give the landlord a notice of diversification in terms of which it is not the tenant who “intends to use”, or “proposes to commence using”, the land for a non-agricultural purpose, but another legal person who is not a party to the lease. We do not consider that the references to “business” in sections 40(3)(b), 40(7)(a)(ii) and 40(9)(b) of the 2003 Act alter that position. They do not, in our view, import an entitlement on the part of the tenant to introduce the complication of a third party into what was, and on Mr Lean’s argument would remain, a bilateral contractual arrangement between landlord and tenant. Even where the tenant’s intended use of the land for the non-agricultural purpose is in furtherance of a business, it must still, in terms of the legislation, be the tenant’s intended use. In the circumstances of the present case, Monarch is not the Tenant, notwithstanding that the Tenant may be a director and sole shareholder thereof, and we were not convinced by Mr Lean’s answers to our questions as to what the legal position would be if, the Tenant having in these circumstances been permitted to use the land for a non-agricultural purpose under section 40 or 41 of the 2003 Act, he ceased to have a controlling interest in Monarch. We shall, then, for these reasons, sustain the Landlord’s third plea-in-law and dismiss the Application upon that basis also. We have allowed 14 days for motions and submissions on expenses.