Expanding the country file

Having recently hosted the first in a series of seminars at Morton Fraser under the broad banner of “rural diversification”, our view has been reinforced, if it was ever in any doubt, that diversification is very much in the minds of owners, occupiers and managers of rural properties.

Spurred on by the pressures of the current recession to secure alternative income streams, and having decided on the development to deliver that outcome, all too often the structure and means of delivery to comply with the ever- increasing regulatory framework are, if not overlooked, given a back seat, or sometimes just put to one side. A financially successful development is a great outcome, but can create its own issues which might have been avoided if attention had been given to some of the “boring” details, often teased out by the business planning process – not forgetting the sales and marketing action plans, so beloved of management!

At the outset it is perhaps worth drawing a distinction between diversification reflecting traditional and non-traditional land uses.

Traditional options

Diversification within the traditional land uses of farming, forestry, fishing/sporting, and possibly the residential letting of surplus farmworkers’ cottages, is common and those of us practising in this area of the law will be familiar with the issues that arise.

For example, if farmland comes back in hand, should it be relet and, if so, on what basis? A secure 1991 Act tenancy (extremely unlikely), or one of the new(ish) forms of limited duration tenancy? Or should the landowner farm in hand using his own employees or through a contractor? Are there single farm payment issues to consider? Will the basis of occupation impact on the availability of agricultural and business property reliefs from inheritance tax?

Remember the general principle that for the latter relief to be available, the nature of the main activities must be trading. If cottages are being let, is this on the basis of short assured tenancies and the ever-increasing regulatory burden which applies to such tenancies, or on the basis of the hopefully more tax efficient holiday let?

On a different level, diversification could mean securing new markets (timber for biomass), or bringing forward new products, such as ice cream, potato crisps or innovative uses for oilseed rape.

Expanding opportunities

Many non-traditional uses of rural properties are by no means new, and most lawyers practising in this area will be familiar with some of the opportunities that are taken up by rural property owners seeking to maximise return from their capital assets, such as wedding venue hire, corporate hospitality, mountain biking, quadbiking or white water rafting.

The nature and scope of the proposed diversification most suited to the client’s property will depend on a number of factors. A detailed analysis of what these might be is outwith the scope of this article. However, obvious factors include the nature of the property itself (does it include a “big house”?), and its geographical location and accessibility to the chosen market. What existing skillsets and expertise does the client have at their disposal, and will they need to bring in hired help? Will the diversification project impact on any existing uses?

It is absolutely essential that at the outset, the client does their homework on the commercial viability of the venture. One initiative should be considered at a time, and having a sense of priority is key. Once satisfied that there is the potential of a worthwhile venture, it is time to consider the potential pitfalls that await.

Pitfalls and bear traps

Irrespective of the type of diversified use proposed, traditional or otherwise, there are issues in common that invariably arise. There are also issues which are not perhaps so readily apparent.

Succession

Although not necessarily at the top of the client’s agenda, it is always important when considering a diversification project to explore what effect a successful outcome might have on the dynamics of the client’s existing business structures and the family dynamics. It is worth endeavouring to set expectations within the family and, for appropriate cases, the concept of a “family charter” is worth exploring. Open and regular discussions within the family group can prove most beneficial in maintaining cohesion and a sense of purpose and ownership.

Who will undertake the venture?

Is it the intention of the client to undertake the venture themselves, or simply make their property available to a third party in return for some form of guaranteed rent or rental equivalent? If the former, should the client undertake the venture in their own name or establish a new legal entity to do so?

At this juncture, conflicting issues come into play. On the one hand, the client may wish to distance themselves from potential liability in terms of financial loss, or worse, a claim for damages in respect of injury, which is always a concern when inviting third parties onto your property. On the other hand, establishing separate businesses may prevent the client from offsetting losses incurred in a new venture (a possible outcome especially in the early years) against profits from other parts of their business – cross subsidisation can be of great benefit to a startup business.

While establishing a new legal entity may be relatively inexpensive, never underestimate the costs involved in keeping it going. All attending our recent seminar on diversification agreed with the advice given to “keep it simple” and “look to the future”.

Branding and intellectual property

The client should consider at the outset what kind of brand they wish to create. Do they wish to create and register their own trade mark? Is there already a recognised brand in the area in which they wish to do business and, if so, do they wish to compete directly with that or seek differentiation?

Health and safety

If any of us needed reminding, the tragic death at Warwick Castle (in respect of which the operator was recently fined £350,000 and had costs awarded against them of £145,000) has highlighted the importance of compliance with health and safety legislation. However, it is not just claims from visitors but also from employees that the client needs to be aware of.

Licences and consents

Where the diversification venture involves hosting events, the client must remember to obtain the appropriate consents and licences relevant to the event in question, which may include a public entertainment licence, a liquor licence, a wedding licence or a late hours catering licence.

They must also bear in mind the implications of environmental health legislation and any relevant local byelaws.

Tax

Tax, in particular income tax, will be an important factor in determining the most appropriate vehicle to run the venture. Do not forget VAT and, if leases are to be involved, stamp duty land tax. Accountancy advice to ensure the new venture sits neatly within/alongside the existing business is a must.

Legislation

Those of us working in the rural sector are well used to having to keep up to date with ever-changing legislation, and there is little likelihood of that diminishing in the immediate future. What may seem a viable project one day could be rendered non-viable almost overnight due to increased regulation or unexpected policy changes – the recently proposed reduction in the feed-in tariffs for solar energy springs to mind.

Informed choice

For any owner, occupier or manager of rural property, undertaking anything but the most simple and straightforward diversification project can lead to unexpected consequences without proper planning and advice at the right time. It may not always be obvious when that right time might be – there is little point in spending much-needed cash putting in place the perfect legal and tax efficient structure, if the venture then turns out to be a dud. That said, clients should be encouraged to have initial discussions with professional advisers at an early stage, which should be relatively inexpensive and represent money well spent to plot an informed course to the establishment of a viable business.

Kenneth Mackay and James Rust are partners in Morton Fraser LLP

Who shares in the common grazings? 

Brian Inkster introduces an important case before the Land Court on the nature and effect of common grazing rights

The Crofters Commission (before it became the Crofting Commission) lodged a reference to the Scottish Land Court for an order, under s 53 of the Crofters (Scotland) Act 1993, determining various matters of law concerning shares in common grazings. This includes the status of the grazing right linked to a croft, where the croft land has been purchased but the grazing right has not, and the scope and effect of s 3(4) and (5) of the 1993 Act in relation to such a grazing right and in relation to the assignation of crofts and their grazing rights.

A hearing on this reference is set down for 12, 13 and 14 June. The court decision will be a significant one for crofting lawyers and will be reported in the Journal in due course.

The reference was considered necessary to clarify the law following a number of potentially contradictory decisions from the Land Court, some of which did not accord with the Commission’s understanding and administration to date of grazing share issues.

Proposed answers

The Commission took the view that it would be inappropriate for it to promote any particular answer to the questions referred to the Land Court. Accordingly, the Commission requested Inksters Solicitors to instruct Sir Crispin Agnew of Lochnaw QC, on the basis that both Inksters and counsel should act independently of the Commission, to respond to the Land Court’s request to suggest appropriate answers to the questions posed.

The suggested answers to the questions will be tested at the Land Court hearing by Iain Maclean, advocate, who has been appointed amicus curiae by the court, and also by any of the respondents who may have points to make.

The following general comments have been made to the court in relation to a grazing share, in so far as these are generally relevant to the specific questions involved:

Section 3(4) of the 1993 Act is quite clear that “(a) any right in pasture or grazing land held or to be held by the tenant of a croft, whether alone or in common with others… shall be deemed to form part of the croft”. In Ross v Graesser 1962 SC 66 the Lord President recognised that a grazing right was a pertinent of the croft. The economic importance of the grazing right that is part of the croft is well known. It is therefore submitted that in construing the 1993 Act in relation to grazing rights, this fundamental attachment of the grazing right to the croft requires to be borne in mind.

It is generally accepted that the croft, and the grazing right that is part of the croft, retains its status and physical integrity whether the croft is vacant, tenanted or owner-occupied – s 3(1)(a) of the 1993 Act. The crofting status that attaches to the croft and to its grazing right can only be altered or removed by the Land Court or by the Crofting Commission in accordance with the provisions of the Act.

Land, including grazing and other rights, can either be resumed from crofting by order of the Land Court or be de-crofted following an order of the Commission. Other changes to the status or integrity of a particular croft require the consent of the Commission: e.g. a grazing share can only be assigned with the consent of the Commission (s 8); a croft cannot be divided without the consent of the Commission (s 9); and this includes attempted division by other means such as partial renunciation of a tenancy (Mackay v Crofters Commission 1997 SLT (Land Ct) 4), or the letting of part of a vacant croft (s 23).

The questions put to the Land Court, and the suggested answers and submissions, are set out in an extended article on Journal Online: access via bit.ly/KR0D8F