As the process of partnership lease termination accelerates on a number of estates, tenants should take early advice to help secure their future. Andrew Linehan, Partner in our Rural team considers the complexities of the process and highlights the benefit for tenants who engage with advisors promptly.
Since the advent of the Agricultural Holdings (Scotland) Act 2003 (the “2003 Act”) there has been a general trend towards ending partnership lease structures (as granted under the 1991 Act) and converting them to leases under the 2003 Act. On a number of estates this process is accelerating, and any land that owners are able to remove from 1991 Act tenure they are taking the opportunity to do so. However, terminating limited partnerships is a complex area and one that should not be undertaken without the correct advice from an agent, lawyer and accountant. Those who choose to sign replacement documentation without taking advice do so at very significant risk.
The processes of termination limited partnership leases
The device used in limited partnership leases was, prior to their effective prohibition under the 2003 Act, to grant a 1991 Act lease to a limited partnership, where the land owner or a connected party was the limited partner, with a notional capital share, and with the “tenant” being the general partner. The term of the lease was then effectively within the landlord’s control as the term of the partnership would be for a fixed duration. While it was not within the landlord’s gift to end the lease, what the landlord could do was collapse the partnership, and with no tenant the lease would then terminate.
There are two ways in which partnerships generally come to an end, and depending on which provision is in a partnership lease different options will be available for tenants.
Firstly, where a partnership is terminable following notice being given by a limited partner then with effect from the date that the partnership would have so terminated, the “tenant” (or general partner) is able to serve notice on the landlord of the lease taking the tenancy into his own name under Section 72 of the 2003 Act. Following a complex double notice procedure over a three year period, the landlord is then able to bring that lease to an end.
What this means for a tenant in such situations is that a three year extension is possible. In any negotiations on ending a partnership lease and granting a new lease, this possibility may be borne in mind.
The second alternative is that a Partnership Agreement ends on a fixed date without any requirement for notice. In that situation the rights under Section 72 described above do not apply. The partnership (and consequently the lease) simply ends when it is stated to end. Doubtless tenants whose partnership ends automatically in this way are in a worse position than those whose partnership terminates by notice so it is important to understand what the termination provisions in a partnership are. For a tenant to discover at the eleventh hour that the firm is about to dissolve automatically will give no space for discussion as to what future arrangements there may be.
New arrangements
Assuming the landlord is willing to re-let the farm (or such part of it as does not get taken for tree planting…) any new lease granted will be a lease under the 2003 Act. In some cases shorter tenancies only are on offer, with Brexit and tenancy reform cited as reasons for avoiding longer term arrangements at present.
There are a number of consequences in going from the 1991 Act lease to a limited partnership to a 2003 Act lease, most likely to individuals, to be aware of.
Such change of lease does of course constitute a waygoing. That being so, it is critical that full account is taken of improvements made during the term of the partnership lease. This will allow for such improvements/tenants fixtures to be either compensated for at the termination of the partnership lease or rolled forward into the new lease and noted as improvements/fixed equipment belonging to the tenant under the new lease. A failure to take account of this may lead the tenants to lose their claim to improvements at the end of the new lease as there are strict time limits following the end of a lease for waygoing claims to be made.
While there are exceptions to this where there are successive leases to the same tenant, in moving from a lease to a limited partnership, to a lease to an individual (often the former general partner of the limited partnership) the new lease will be treated as being wholly separate from the old one.
A further complication in dissolving the limited partnership can arise from the fact that many families will use the limited partnership as the entity through which they trade. To that end, it will often be the partnership which, in accounting terms, owns the tenant’s stock, crop and implement, and critically Basic Payment Entitlements (BPE). If the limited partnership is to terminate then the tenants will need to liaise with their accountants on establishing a replacement business structure.
Where this can become very complicated is in relation to ownership of BPE. Whereas single farm payment entitlements could freely be transferred/traded between different entities, the effect of transferring or trading BPE without land is that a 50% syphon on payment value will be applied. Accordingly, if the limited partnership transfers the BPE to a successor individual or entity then such a syphon of value can apply, meaning the payment received in future claim years could be significantly reduced.
Even worse, if the partnership has been the Intergrated Administration and Control System (IACS) claimant in May of any year but then ceases to exist by the time that the payment is made at the end of the calendar year, then the Department would have no person to make the payment to. Clearly this is a catastrophic result for the tenant. There is a suggestion that the Department may view successive farm business with the same name and Business Reference Number as being one, even though the entity has changed from being registered at Companies House as a limited partnership under the Limited Partnerships Act of 1907, to a general partnership under the Partnership Act of 1890. The two are different legal entities.
Land and Buildings Transaction Tax (LBTT)
Nearly all limited partnership leases will have begun when Stamp Duty was in force. Stamp Duty has now been replaced in Scotland by LBTT. The grant of the new lease will come under the new LBTT regime and there may be tax to pay. In some cases an LBTT return must be submitted even though no tax is due (most likely with Limited Duration Tenancies). If a return is submitted (whether tax is due or not) then, unlike with Stamp Duty, further returns must be submitted every three years, and also at the end of the lease. The purpose is so that Revenue Scotland know whether anything material has changed (e.g. more tax is due following a rent review) but the return must be made regardless and penalties may be charged if it is not. Revenue Scotland do not send reminders ahead of time so diarising is the tenant’s responsibility. The tenant’s accountant will need a copy of the original return to refer to in the three-yearly returns.
There are special rules in the LBTT legislation to deal with the renunciation of an existing lease in return for the grant of a new lease. Generally these reduce the tax due. However, if the existing tenant is a limited partnership and the new tenant is the general partner as an individual, these will not apply as the parties are not technically the same.
A wider mix of elements to consider
Elsewhere within the mix lies the role of the Tenant Farming Commissioner (TFC) and numerous industry Codes of Conduct. Whatever the rights and wrong in a situation where a landowner looks to end one agreement and move forward on another, in terminating limited partnership arrangements it is inevitably the landlord that will ultimately hold most, if not all, of the cards. Whether or not a landlord wants to move forward on to a new arrangement is not something that can be forced.
While it is to be hoped that the role of the TFC and the industry agreed Codes will create a helpful space within which negotiations can take place, it must be remembered that the landlord will very rarely be obliged to enter into a new agreement. How best to utilise the existence of the TFC, Codes, the improvement amnesty, the possibility of a three year tenancy claim under Section 72, and indeed which improvements/fixtures to then claim, are doubtless all part of a wider mix that tenants and their advisors will need to consider in the round when deciding how to progress matters.
Moving from a historic 1991 Act lease to a new lease under the 2003 Act is a complex procedure but provided tenants and their advisors engage ahead of time the tenant’s position can ultimately be adequately protected. Tenants must be aware of the basis of the termination provisions of the partnership, and engage with their advisers, and their landlord, with plenty of time before the partnership is due to terminate.
This article was featured in the STFA’s June 2017 newsletter to their members.
