There are around 500 tenants still farming via Limited Partnership tenancies in Scotland. A number of these Limited Partnerships are now under notice of termination, with many having dissolved on 28 November 2017. Most tenants will have traded via their Limited Partnership, which is therefore the entity that will own the tenant’s stock, crop and implements - and critically the Basic Payment Entitlements (“BPE”).
Where Limited Partnerships terminate, tenants will need to consider making arrangements to confirm what their future trading vehicle is. One issue that potentially arises from that process is the transfer of BPE and a possible risk of the ‘siphon’ on the value of the entitlements that can be applied by Rural Payments and Inspections Division (RPID) where BPE are transferred without land.
In terms of the Partnership Act of 1890, the remaining assets of partnerships will ultimately devolve to the partners on dissolution of the partnership. While a Limited Partnership operates under the Limited Partnerships Act 1907, Section 7 of that Act says that the law relating to General Partnerships will otherwise apply to Limited Partnerships. This provision should be sufficient to see most assets of the Limited Partnership pass to the former general partner(s). However, some assets, such as motor vehicles or BPE, which have their registered keeper or ownership registered elsewhere, may need further steps taken to complete the transfer process.
On termination of a Limited Partnership, Section 72 of the Agricultural Holdings (Scotland) Act 2003 (the “2003 Act”) allows, in certain circumstances, a former general partner to take the tenancy (which ‘continues to have effect’) into their own name. That can only be done after the lease to the Limited Partnership has terminated (and by implication the Limited Partnership has dissolved). The tenancy is then terminable by the Landlord following the double notice procedure under S73 of the 2003 Act. If a tenant who is a former general partner of the Limited Partnership is to continue in occupation of a holding on this basis, their ability to farm with the benefit of BPE will be important. They will want to know that in transferring the BPE from the Limited Partnership to the former general partner, a siphon will not apply.
A contradiction arises from the way S72 of the 2003 Act works when considering BPE transfers. As the tenancy can only be claimed by the former general partner after lease has technically ended (and the Limited Partnership dissolved), how can the Limited Partnership transfer the BPE to the general partner before its dissolution (ie while the lease continues) and still be a transfer with land, such that siphon does not apply?
It is understood (following correspondence with the RPID) the Scottish Government’s view is that where a general partner claims a tenancy in their own right under S72 of the 2003 Act, they will regard that (despite the absence of a new lease or a conveyance) as a transfer of the rights and obligations of the Limited Partnership, by the operation of law, to the (incoming) former general partner. S72(6)(a) of the 2003 Act provides that in this situation ‘the tenancy continues to have effect’ with [any general partner] becoming the tenant (or a joint tenant) under the tenancy in the partner’s own right. It is further understood that the Scottish Government will consider an accompanying transfer of BPE as sufficient to constitute a transfer of BPE with land provided the S72 notice has been validly given.
When a general partner intends to claim a tenancy in their own name under S72 of the 2003 Act, they may want to consider, ahead of the dissolution of the Limited Partnership, completing the transfer of entitlement forms to take effect immediately before the actual date of dissolution of the Limited Partnership. Doing it this way will see the transfer of BPE take place immediately before the tenancy continues in the name of the former general partner. Having the BPE transfer take place immediately prior to dissolution of the Limited Partnership is perhaps viewable as a least worst option that is a quirk of the way S72 of the 2003 Act works when combined with a BPE transfer.
If the Entitlement Transfer Unit in Stornoway ask to see evidence of the transfer with land (as they often ask to see missives/lease assignations) then it is advisable to make an accompanying submission with the transfer forms stating that the BPE are being transferred along with the rights and obligations of the Limited Partnership, by the operation of law, to the (incoming) former general partner. It is suggested that tenants should also provide a copy of the notice by the former general partner taking the tenancy into their own name and evidence the notice has been served. It may also be helpful to explain that the transfer is under S72 of the 2003 Act on termination of a Limited Partnership.
Where former general partners remain on the holding after dissolution of the Limited Partnership, but under a new lease such as a Modern Limited Duration Tenancy, then there may be a question as to whether the BPE can be transferred to the former general partner as a transfer ‘with land’ in that situation as there is no lease which ‘continues to have effect’ even if the Business Reference Number of the farmer remains the same.
An alternative in this situation may be to keep the Limited Partnership alive for use as the trading vehicle (with the former general partner being tenant under the new lease), but the Landlord may have concerns in proceeding that way. This is a fairly complicated area and professional advice on how best to deal with the transfer of BPE is recommended. If you would like further information on this issue, one of our rural services experts would be happy to help.