Tim Macdonald, Senior Solicitor in our Rural Services team, examines the differences between limited duration tenancies under the previous legislation and the new regime.
Modern limited duration tenancies (“MLDTs”) are now in effect (from 30 November 2017) replacing limited duration tenancies (“LDTs”) as Scotland’s main long-term agricultural letting vehicle. LDTs can no longer be created.
The name suggests a major overhaul, but in fact little has changed. The new sections of the Agricultural Holdings (Scotland) Act 2003 dealing with MLDTs—inserted by the Land Reform (Scotland) Act 2016, Part 10—are nearly identical with the equivalent sections for LDTs. The Land Reform Group aimed for revolution, but the Scottish Government has chosen evolution.
The changeover
A lease of agricultural land for a term of 10 years and over will now be an MLDT unless it is a service tenancy, a 1991 Act tenancy or a repairing tenancy (not yet in force).
Existing LDTs continue mostly unaffected and short limited duration tenancies (“SLDTs”) for terms up to five years are untouched. However, there is still a gap between 5 and 10 years and leases with a stated term in the gap will be 10-year MLDTs.
Fixed equipment
One of the most notable differences concerns fixed equipment, although more is the same than has changed. Landlords must still provide, at entry, fixed equipment enabling the tenant to maintain efficient production. However, landlords can now contract out of their obligation to renew or replace fixed equipment during the tenancy when required by natural decay or fair wear and tear. This is now implied unless the lease provides the contrary (s.16A(5)). This means renewal obligations will become a commercial point in future lease negotiations – parties will need to consider how they wish to deal with this.
The obligation to agree a schedule of fixed equipment now has a deadline of 90 days from the tenancy commencing (s.16A(3)).
Break clause
The other major change is the optional break clause (s.5B) which is entirely new to the 2003 Act. Its content and operation are strictly prescribed.
If the tenant is a “new entrant to farming”, the MLDT may contain a mutual break clause. The legislation does not imply one – if desired it must be an express term. The break can operate only as follows (s.8D):-
- the break date must be exactly five years after the tenancy commences – not one day earlier or later
- the break may be exercised by written notice given by either party to the other, between 1 and 2 years before the break date
- if the landlord gives notice, reasons must be stated, which may only be:
- if the tenant gives notice, no reasons need be stated
- the tenant is not using the land in accordance with the rules of good husbandry (as per Agriculture (Scotland) Act 1948, Schedule 6); or
- the tenant is otherwise failing to comply with any other provision of the lease.
Landlord-only or (strangely) tenant-only break clauses are apparently prohibited, as are any break clauses where the tenant is not a new entrant.
Importantly, this clause only applies if the lease was always an MLDT. It does not apply if the lease starts life as an SLDT, LDT or 1991 Act tenancy and later becomes an MLDT (which might happen by agreement, or, in the case of an SLDT, by operation of law).
Where s.5B cannot be used, an alternative is a 5-year SLDT which can either be ended (more easily than exercising a break clause), or extended by agreement if things go well. These may become more widely used in order to sidestep the break clause restrictions.
Who is a new entrant?
Regulations defining “new entrant” for this purpose are also now in force (Agricultural Holdings (Modern Limited Duration Tenancies and Consequential etc. Provisions) (Scotland) Regulations 2017). Briefly, it means someone who has not previously owned over three hectares of agricultural land or held an agricultural lease (except an SLDT for less than three continuous years). The regulations contain detail on joint tenancies and corporate or partnership tenants.
How can landlords be 100% sure the tenant is a new entrant? Probably they cannot. Where a break clause is desired, landlords should consider having the tenant(s) warrant they are new entrants under s.5B, and include the permitted reasons for breaking the lease as grounds of irritancy.
Assignation
The assignation provisions for MLDTs (s.7B) are almost identical with those for LDTs (s.7), with one important difference: the landlord’s “right of pre-emption” over the tenant’s interest does not apply. That aside, the LDT assignation provisions are carried over wholesale to MLDTs. For LDTs, the provisions are unchanged. S.7 was recently amended to restrict the grounds on which the landlord can object to “near relative” assignees, and the same restrictions apply to MLDTs.
Termination and Prolongation
MLDTs are terminated at expiry by a “double notice” procedure, beginning 2-3 years before the end of the stated term or any continuation period.
However, the continuation period is different. If not terminated at expiry, the MLDT continues for another seven years (s.8E). If not terminated then, it continues for seven more years, and so on. The curious “cycle of continuations” for LDTs (3 years, then 3, then 10; repeat) is not carried over.
MLDTs can, like LDTs, be terminated by agreement (s.8A), provided this is entered into after the tenancy commences and deals with compensation. MLDTs can be extended by agreement (s.8E).
Irritancy
Irritancy (termination of a lease as a result of failures on the part of the tenant) remains contractual, but enforcement is harder (s.18A). Before irritating on grounds of a breach, landlords must give tenants written notice specifying (a) what the breach is, and (b) a period of at least 12 months for remedying it (subs (6)). The period can be lengthened by agreement, or by the Land Court on the tenant’s application (subs (7)).
Unlike with LDTs, the notice period is the same whether the breach is failure to pay rent or anything else. Nothing is said about irremediable breaches and so, bizarrely, the tenant must be given at least 12 months to remedy even where this is impossible.
Irritating the lease is one thing; removing the tenant is another. For removal, (a) the period mentioned above must expire without the specified breach being remedied, and (b) a second notice must be given of the landlord’s intention to remove the tenant, at least 2 months before the removal date (subs (8)). S.18A does not specify whether the two notice periods may run concurrently: the cautious approach is to let the first notice period expire before serving the second notice.
Conversion
A 1991 Act tenancy or LDT may be converted to an MLDT by agreement. This works by terminating the lease and entering into an MLDT – the ordinary termination rules are then disapplied.
For 1991 Act tenancies, the rules match the current rules for converting to LDTs (s.2A): at least 25 more years must be granted and compensation for improvements is due immediately.
For LDTs, the term of the new MLDT must be at least the remaining term of the LDT, and improvements are carried forward (s.2B).
It is unclear whether the new MLDT can be shorter than 10 years from the conversion date if the LDT has less than 10 years left, but a strict reading suggests not.
In both cases, the agreement cannot be made more than 30 days before it takes effect. Either party can withdraw without penalty by giving written notice before the conversion takes effect.
Repairing tenancies
The 2016 Act will also create repairing tenancies, which allow the tenant to take on the obligation to provide fixed equipment but must be for at least 35 years. When these provisions will come into force remains unknown.
Conclusion
It is interesting to reflect that the 2003 Act followed only 12 years after the 1991 Act. The 2016 Act now introduces MLDTs just 14 years later – before the first LDTs have reached their full term (originally 15 years). Time will tell whether the Scottish Parliament will allow MLDTs granted in 2017 to run their course.