Fixing fixed equipment (full version)

Useful guidance has recently been handed down by the courts regarding fixed equipment in the context of traditional 1991 Act uses, on two matters.

Legal framework

To summarise the important points for the purpose of this update:

The Agricultural Holdings (Scotland) Act 1991, s 5(2) (repeating provisions first imposed in 1949) obliges the landlord of an agricultural tenancy, subject to qualifications, to provide for the holding, at the commencement of the tenancy and in a thorough state of repair, such buildings and other fixed equipment as will enable an occupier reasonably skilled in husbandry to maintain efficient production and (subject to a concurrent obligation on the tenant to maintain the fixed equipment in as good a state of repair, natural decay and fair wear and tear only excepted), during the tenancy to effect such replacement or renewal of the buildings or other fixed equipment as may be rendered necessary by natural decay or by fair wear and tear.

Section 5(3) of the Act allowed the parties to enter into an agreement after the lease has been entered into (a “post-lease agreement”, or “PLA”) whereby one party undertakes to execute on behalf of the other, whether wholly at his expense or wholly or partly at the expense of the other, any work which the other party is required to execute in order to fulfil his obligations under the lease.

NB This provision (which was repealed by the Agricultural Holdings (Scotland) Act 2003) was widely used to pass the renewal and replacement obligations imposed on the landlord by s 5(2) onto the tenant, i.e. to create a full replacing and renewing lease.

The 2003 Act, s 16, as modified by s 4 of the Public Services Reform (Agricultural Holdings) (Scotland) Order 2011, added a new s 5(4B) to the 1991 Act which gave tenants the right, by giving written notice to their landlords, to annul PLAs, subject to adjustment of the rent and provided that, as at the date of the notice – (i) the buildings and other fixed equipment are in a reasonable state of repair; or (ii) if they were in an unreasonable state of repair when the PLA was made, they are not in a worse state of repair than they were in then.

NB For the purposes of this update, the alternative requirements just set out with regard to the condition of the fixed equipment as at the date of the nullification notice are referred to as case (I) and case (II) respectively.

Renewal/replacement of fixed equipment

Alston v Trustees of the Earl of Mansfield’s 1992 Trust SLC/87/12 concerned the obligation on the landlord to replace or renew buildings or fixed equipment rendered necessary by natural decay or fair wear and tear. The Land Court built on its decision in Telfer v The Buccleuch Estates Ltd SLC/101/07 (in which it held that there was no obligation on a landlord to improve any of the fixed equipment during the tenancy by modernising or upgrading it), by deciding that, where the roof of a stone building was “done”, the landlord had the option to decide whether to re-roof the existing building or to provide an equivalent new building.

The case has clarified a conundrum which has vexed practitioners for some time, i.e. whether, when they reach the end of their lives, older buildings have to be replaced in their traditional form, or a modern equivalent (as the Land Court decided) can be substituted. This will be of great significance where steadings consist of old style buildings, often listed.

Nullification of post-lease agreements

Legal principles

A series of decisions also between Telfer and The Buccleuch Estates Ltd has clarified to a great extent what is meant by a “reasonable state of repair” for the purposes of s 5(4B) set out above, and under what circumstances cases (I) and (II) are to apply.

Mr Telfer served notice on his landlord to the effect that his post-lease agreement was to be nullified as from 22 October 2007. This was opposed by the landlord on the ground that, at the date of the notice, the fixed equipment did not comply with s 5(4B).

This was dealt with initially by way of two debates, the purpose of which was to establish the criteria to be applied, in practical application, to the state of buildings and fixed equipment for the purposes of annulment of a PLA. These were set out by the court in terms of its notes attached to orders dated 6 May 2009 and 3 November 2010 (SLC/225/07) as follows:

• A PLA will be nullified only in so far as it renders the tenant responsible for statutory obligations of the landlord, provided the provisions caught can be separated from other provisions in the PLA without prejudice to the parties.
• The fixed equipment, the condition of which is to be assessed at the date of the tenant’s notice, is limited to that which is affected by the terms of the PLA.
• The failure to make a record does not preclude the leading of evidence as to the condition of fixed equipment at the date of the lease, nor does it preclude the landlord from relying on any other provisions of the lease, where it would otherwise be open to it to do so. (In Telfer, the lease contained an acceptance by the tenant that the fixed equipment was in tenantable condition at the commencement of the tenancy. The court indicated that it would need compelling evidence to establish that it was not, in fact, in that condition as at the date (four days later) on which the PLA was signed, although the tenant was not precluded from leading such evidence.)
• In terms of s 5(2) a tenant is bound to maintain and repair an item of fixed equipment even if the damage requiring repair is due to natural decay or fair wear and tear. The landlord’s obligation kicks in only when, due to natural decay or fair wear and tear, it requires to be renewed or replaced.
• An item of equipment which has not been declared redundant does not cease to be part of the fixed equipment for the purposes of s 5(4B) simply because it is worn out and requires to be replaced.
• The concept of a “reasonable state of repair” is an objective one, to be determined by looking at the state of the equipment without regard to the issue of which party is responsible for its condition.
• It is not possible to construe s 5(4B) as if it included a further provision allowing a PLA to be nullified when the fixed equipment was not in a reasonable state of repair on the relevant date, but the work required to put it into a reasonable state of repair was to be carried out by the landlord.
• The nature of work done on fixed equipment between the date of the PLA and the date of the tenant’s notice is irrelevant to the question of a tenant’s entitlement to nullify the PLA. It does not matter who paid for the work. The tenant’s entitlement to annul the PLA depends on an objective assessment of the state of particular items of equipment at the two dates.
• If an item of equipment, present at the date of nullification, was not present at the date on which the PLA was made, case (II) will have no application.
• Even if an item of fixed equipment, present at the date when the PLA was made, has been substantially renewed before the date of nullification, it will normally fall to be regarded as the same equipment for the purposes of case (II).
• If an item of fixed equipment, present at the date when the PLA was made, has been wholly replaced, it will not be available for comparison for the purposes of case (II).
• Whether, in relation to work outstanding at the date of nullification, the tenant has any obligation prestable after nullification is a question which depends on the terms of the PLA in question. Where a tenant has an obligation which might have been enforced immediately before nullification, that obligation will continue to be enforceable, but there is nothing which would allow the PLA to remain effective after nullification, and the mere fact of litigation over aspects of the parties’ obligations will not, of itself, create an obligation.
• In considering the state of repair of buildings and fixed equipment, it is necessary to have regard to each individual item. Although a broad approach to the question may have been intended, that approach must have regard to individual items. While it may be valid to ignore minor parts which are worn out, where any significant item is not in a reasonable state of repair it cannot be said that the fixed equipment (as a whole) is in a reasonable state of repair for the purposes of subs (4B).
• When considering case (II) it is necessary to carry out a direct comparison of individual items. In broad terms, if an original item has been replaced by a radically different piece of equipment, case (II) will not come into play in relation to that particular equipment. In other words if such a piece of equipment is not in a reasonable state of repair there will be nothing with which to compare it.
• The onus of proof that fixed equipment is in no worse a state than it was at the commencement of the tenancy (case (II)) lies with the tenant.
• The onus of showing that fixed equipment is not in a reasonable state of repair (case (I)) is on the landlord.

Practical application

The practical application of the principles set out above was tested at proof in January and February 2012 in relation to a cottage, a water-gate, drainage of two fields and a march fence. The court issued its findings on 21 April 2012 as follows:

• As at the date of the tenant’s notice, albeit the rendering, taken by itself, was not in a reasonable state of repair, the cottage was.
• Although the water-gate was not in reasonable condition on the specified date, it was in no worse a state than it had been in at the date on which the PLA had been made. In any case, a finding in relation to a single water-gate was not a sufficient basis for a conclusion that the fixed equipment as a whole was not in a reasonable state of repair, as it is not an item or part of an item of sufficient substance.
• There was no evidence to justify a conclusion that the drainage system in one field was not in a reasonable state of repair, and the court was satisfied that the drainage in the other field was not in any materially worse state in 2007 than it had been at the date of the PLA.
• The march fence was, however, held not to have been in a reasonable state of repair. It was a substantial piece of fixed equipment. The fence, as it stood on the specified date, was a replacement fence erected in 1972 which could not be said to have been in a worse state than when the PLA was made, and given the significance of the item the court held that the fixed equipment on the farm, as a whole, at the date on which the tenant sought to have the PLA set aside, was not in reasonable condition.

Appeal

Telfer appealed to the Court of Session. The appeal was heard in January 2013, when he submitted that the Land Court had erred in its construction of s 5(4B), case (II), in finding, in relation to the march fence:

(a) that, in considering the state of repair of buildings and fixed equipment, it is necessary to have regard to each individual item;

(b) that, if an item of equipment, present at the date of nullification, was not present at the date when the PLA was made, case (II) will not apply;

(c) that even if an item of equipment present at the date when the PLA was made has been substantially renewed before the date of nullification it will normally be regarded as the same equipment for the purpose of case (II); and

(d) that if an item of equipment present at the date when the PLA was made has been wholly replaced, it will not be available for comparison for the purposes of case (II).

The Court of Session issued its decision in the appeal on 31 May 2013 ([2013] CSIH 47), holding as follows:

1. The Land Court was correct that, if any individual item of fixed equipment of significance is not in a reasonable state of repair as at the date on which the tenant seeks to have the PLA annulled, the fixed equipment, as a whole, cannot be said to be in a reasonable state of repair – i.e. it upheld the item by item principle of assessment.

2. On the other hand, the Land Court’s finding that no comparison fell to be made between the new march fence and the old march fence under s 5(4B) and that, accordingly, the tenant was not entitled to nullify the PLA as at 22 October 2007, should be quashed and the case remitted to the Land Court for further procedure with a direction that a comparison does fall to be made between the new march fence and the old march fence.

In doing so, the Inner House disagreed that the Land Court was justified in drawing a distinction between “replacement” and “renewal” of fixed equipment and, accordingly, with its finding that, if an item of equipment, present at the date when the PLA was made, has been wholly replaced it will not be available for comparison for the purposes of case (II). It found the Land Court’s emphasis on physical identity unconvincing, and preferred to read case (II) as pointing to identity of function, rather than identity (more or less) of constituent parts, as determining whether an item of fixed equipment present at the notice date is available for comparison with an item of fixed equipment at the date of the PLA.

This has the effect that, if an item is not in a reasonable state of repair at the date of the notice, the tenant is entitled to claim under case (II) that it is in no worse a state than it was in at the commencement of the tenancy, even if has been replaced.

Except only so far as quashed by the Inner House, the principles laid down by the Land Court in regard to the assessment of the condition of fixed equipment for the purpose of the annulment of PLAs stand despite the long delay in their establishment, caused simply by the court process. The item by item approach is clearly of great importance. There are also lessons within the guiding principles relating to the tenant’s obligations with regard to maintenance of ailing fixed equipment.

Alasdair Fox, consultant; Adèle Nicol, partner, Anderson Strathern