SECOND DIVISION, INNER HOUSE, COURT OF SESSION
Lord Justice Clerk Lord Bonomy Lord Brodie	[2012] CSIH 10 XA82/10 OPINION OF THE LORD JUSTICE CLERK In the appeal by RICHARD WALTER MORRISON-LOW Appellant; against THE EXECUTORS OF THOMAS HERBERT PATERSON Respondents: _______

Act: Reid QC; Turcan Connell

Alt: Sir Crispin Agnew of Lochnaw QC; Balfour & Manson

9 February 2012

CONTENTS

		Paragraph
I	INTRODUCTION	1
II	THE RENT REVIEW LEGISLATION	4
	The history of the rent review provisions	4
	Section 13 before 2003 Act	9
	Rent assessment before the 2003 Act	10
	The 2003 Act	12
	Section 13 as amended by the 2003 Act	15
	Rent assessment since the 2003 Act	17
III	THE SINGLE FARM PAYMENT	18
IV	THE PROCEEDINGS IN THE LAND COURT	22
	The evidence of comparables	22
	The Land Court's findings in fact regarding the SFP	27
	The Land Court's conclusions on the SFP issue	32
	The Land Court's conclusions on the rental value	38
	Open market lettings	39
	Rents agreed with sitting tenants	40
	Budgets and potential earning capacity	43
V	THE APPEAL AND THE CROSS APPEAL	44
VI	CONCLUSIONS	46
	Introduction	46
	The open market basis of valuation	48
	Problems of interpretation	52
	Distortion	53
	Best evidence	56
	Open market lettings of 1991 Act tenancies	56
	Meaning of "agricultural holding"	57
	Conclusions on best evidence	63
	The Land Court's interpretation of the evidence	67
	SFP entitlement	70
	The Land Court's general approach	70
	The primacy of the open market test	78
	Near relative successor tenants	87
	European Court of Justice	88
	Marriage value	90
	Scarcity	96
	Is the result realistic?	99
VII	PROPOSED REFERENCE TO THE EUROPEAN COURT	101
VIII	THE CROSS APPEAL	102
	Ground 1	102
	Grounds 2 and 3	103
	Ground 4	104
	Ground 5	105
IX	DISPOSAL	106

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I INTRODUCTION

[1] This is an appeal from an Order of the Scottish Land Court dated 2 June 2010 made under section 13 of the Agricultural Holdings (Scotland) Act 1991 (the 1991 Act), as amended. By this Order the Land Court determined the rent that was to be payable for Moonzie Farm, Cupar (the holding) as from 4 December 2008 (the review date). The appellant and the respondents are respectively the landlord and the tenants of the holding.

[2] The annual rent at the review date was £22,000. The landlord proposed that the reviewed rent should be £32,000. The tenants proposed that it should be £10,266.74. The Land Court determined that it should be £20,800.

[3] The difference between the parties' figures relates for the most part to a controversy as to the relevance of the Single Farm Payment (SFP) in the calculation of the rent. This point is the basis of the landlord's appeal. The tenants have cross-appealed on a number of more detailed valuation points.

II THE RENT REVIEW LEGISLATION

The history of the rent review provisions

[4] On the conferment of security of tenure on the tenants of agricultural holdings by the Agriculture (Scotland) Act 1948 there had to be a mechanism for periodic rent reviews. The relevant provisions of the 1948 Act, re-enacted in the consolidating Agricultural Holdings (Scotland) Act 1949 (the 1949 Act), required that a rent review, when duly called for by either party, had to be carried out by an arbiter. The arbiter's statutory remit was to determine "what rent should be payable in respect of the holding" (1949 Act, s 7). In making that determination the arbiter had a wide discretion that entitled him to take into account the sitting tenant factor (Guthe v Broatch, 1956 SC 132) and the tenant's personal circumstances (eg Crown Estate Commrs v Gunn, 1961 SLCR App 173).

[5] The Agriculture Act 1958 (the 1958 Act) abolished this vague criterion and replaced it with that of open market value. It provided that a reviewed rent was to be "the rent at which having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing landlord to a willing tenant," there being disregarded in addition to certain specific matters "any effect on rent of the fact that the tenant who is a party to the arbitration is in occupation of the holding" (1958 Act, s 2).

[6] The scarcity of open market lettings caused by security of tenure and the increasing competition for such tenancies as were offered on the open market, even on a limited partnership basis (infra), resulted in the notorious distortion of open market values that affected rent reviews throughout the 1970s and the early 1980s, to the disadvantage of sitting tenants (eg Kilmarnock Estates and Tenants, 1977 SLCR App 141).

[7] The Agricultural Holdings (Amendment) (Scotland) Act 1983 (the 1983 Act) mitigated the open market test by providing that at a rent review the rent should be assessed by reference to a hypothetical open market that was not distorted by scarcity of lets or other factors. This amended provision was continued in section 13 of the consolidating 1991 Act.

[8] Section 13 was amended significantly by the Agricultural Holdings (Scotland) Act 2003 (the 2003 Act) (s 63; Sched 1, para 15).

Section 13 before the 2003 Act

[9] Since some of the problems in this case result from the draftsmanship of the 2003 Act, I quote the relevant provisions of section 13 as it stood on the eve of the 2003 Act.

"13(1) ... the landlord or the tenant of an agricultural holding may, whether the tenancy was created before or after the commencement of this Act, by notice in writing served on the other party, demand a reference to arbitration of the question what rent should be payable in respect of the holding as from the next day after the date of the notice on which the tenancy could have been terminated by notice to quit (or notice of intention to quit) given on that date, and the matter shall be referred accordingly.

(2) On a reference under subsection (1) above, the arbiter shall determine, in accordance with subsections (3) to (7) below, the rent properly payable in respect of the holding as from the 'next day' mentioned in subsection (1) above.

(3) For the purposes of this section the rent properly payable in respect of a holding shall normally be the rent at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing landlord to a willing tenant, there being disregarded (in addition to the matters referred to in subsection (5) below) any effect on rent of the fact that the tenant is in occupation of the holding.

(4) Where the evidence available to the arbiter is in his opinion insufficient to enable him to determine the rent properly payable or he is of the view that the open market for rents of comparable subjects in the surrounding area is distorted by scarcity of lets or by other factors, the rent properly payable for the purposes of this section shall be the rent which he would expect to be paid, in a market which was not affected by such distortion, having particular regard to the following -

(a) information about open market rents of comparable subjects
outside the surrounding area;

(b) the entire range of offers made as regards any lease of subjects which are comparable after regard is had to the terms of that lease;

(c) sitting tenants' rents fixed by agreement for subjects in the surrounding area which are comparable after regard is had to any element attributable to goodwill between landlord and tenant or to similar considerations; and

(d) the current economic conditions in the relevant sector of agriculture ... "

Rent assessment before the 2003 Act

[10] By the 1980s the open market letting of agricultural holdings to individuals was almost unheard of. Occasionally, leases were granted to participating partnerships in which the landlord or his nominee had a direct interest (eg Buccleuch Estates and Kennedy 1986 SLCR 1); but in almost every case the lease was granted to a limited partnership, usually after strong competition.

[11] The partnership arrangement, whether limited or participating, in effect circumvented security of tenure and gave the landlord the assurance that the tenancy would last no longer than the term of the partnership, or of any period of tacit relocation that might supervene (MacFarlane v Falfield Investments Ltd 1998 SC 14). Nevertheless such a letting was a true letting of an agricultural holding. When it was concluded in open market competition, the rent was potentially a relevant indicator of open market value in a sitting-tenant rent review (Buccleuch Estates and Kennedy, supra), subject always to a possible adjustment for inter alia the less advantageous position of the farming partner under a partnership arrangement.

The 2003 Act

[12] One of the primary objectives of the 2003 Act was to put the tenanted sector of Scottish agriculture on a new footing by making it possible for landlords to let agricultural land on two forms of limited duration tenancy as well as on the traditional secure tenancy, now known as "a 1991 Act tenancy." The new forms of tenancy made it possible for landlords to let for fixed periods without having to resort to the limited partnership contrivance.

[13] The 2003 Act dealt with a recurring source of trouble where claims were made to 1991 Act tenancies in cases where the landlord had granted a grazing let (eg Bell v Inkersall Investments Ltd 2006 SC 507; Loudon v Hamilton 2011 SC 255) or had entered into a written lease from year to year when he was unaware of the legal consequences. It provided that a 1991 Act tenancy could be created only if the parties entered into it in writing before its commencement and expressly stated that the 1991 Act was to apply to it (2003 Act, s 1(2), infra).

[14] The 2003 Act also strengthened the position of an existing 1991 Act tenant by giving him a qualified right to buy (ss 24-38; cf North Berwick Trust v Miller & Co 2009 SC 305); by moderating his liabilities in respect of the fixed equipment (s 60); by giving him a limited right of retention of rent (s 64); by restricting the power of the landlord to enforce a conventional irritancy (s 65), by extending the tenant's right to assign the tenancy (s 66) and by entitling him to use the holding for certain non-agricultural purposes. The 2003 Act also conferred on the general partner in a limited partnership tenancy a qualified right to become tenant (s 70).

Section 13 as amended by the 2003 Act

[15] Section 13, as amended and so far as is relevant to this case, provides as follows:

"13(1) ... the landlord or the tenant of an agricultural holding may, whether the tenancy was created before or after the commencement of this Act, have determined by the Land Court the question what rent should be payable in respect of the holding as from the next day after the date of the notice on which the tenancy could have been terminated by notice to quit (or notice of intention to quit) given on that date.

(2) In relation to such a question, the Land Court shall determine, in accordance with subsections (3) to (7A) below the rent properly payable in respect of the holding as from the "next day" mentioned in subsection (1) above.

(3) For the purposes of this section the rent properly payable in respect of a holding shall normally be the rent at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing landlord to a willing tenant, disregarding -

(a) any effect on rent of the fact that the tenant is in occupation of the holding; and

(b) any distortion in rent due to a scarcity of lets,

but having regard to the matters referred to in subsection (4) below.

(4) For the purposes of determining the rent payable under subsection (3) above, the Land Court shall have regard to the following -

(a) information about rents of other agricultural holdings (including when fixed) and any factors affecting those rents (or any of them) except any distortion due to a scarcity of lets; and

(b) the current economic conditions in the relevant sector of agriculture ... "

[16] Certain questions arise regarding the construction of section 13(3) and (4) which I shall discuss later.

Rent assessment since the 2003 Act

[17] The 2003 Act has made the granting of limited partnership tenancies obsolete. I have described how the 2003 Act restricted the creation of new 1991 Act tenancies and strengthened the position of the tenant in an existing 1991 Act tenancy. It is unlikely that, in the absence of compelling reasons such as tax considerations, any landlord properly advised would now enter into a 1991 Act tenancy. It is likely, therefore, that there will be a dearth of evidence of open market lettings of 1991 Act tenancies on which section 13 valuations can be based.

III THE SINGLE FARM PAYMENT

[18] Before the introduction of SFP, the subsidies available to farmers were based on production. The SFP scheme was established by Council Regulation (EC) 1782/2003 of 29 September 2003 with effect from 1 January 2005. It implemented a fundamental change in the basis of community support for agriculture from production to producer. The intention of the Regulation was that the income support that was to be decoupled from production would leave the amounts paid to farmers unchanged, but would significantly increase the effectiveness of the income aid. The SFP was conditional on cross-compliance with environmental, food safety and animal health and welfare requirements, and on the maintenance of the farm in good agricultural and environmental condition.

[19] The basis of the scheme is that farmers who received subsidies under certain schemes in the reference period (2000-2002) should receive an entitlement to SFP based on the total amount of payments that were granted under those schemes. The Regulation provides that a farmer should receive "a payment entitlement per hectare which is calculated by dividing the reference amount by the three year average number of all hectares which in the reference period gave right to direct payments ... " (art 43(1)). The "reference amount" is the three-year average of the support received by the farmer under the old schemes (art 37(1)). The Regulation also provides that the total number of payment entitlements "shall be equal to the above mentioned average number of hectares" (art 43(1)). Article 36(1) provides that aid under the scheme shall be paid in respect of payment entitlements, as defined in Chapter 3, accompanied by an equal number of eligible hectares as defined in article 44(2). Article 44 provides that any payment entitlement accompanied by an eligible hectare shall give right to the payment of the amount fixed by the payment entitlement. Article 44(2) provides that "eligible hectares" shall mean "any agricultural area of the holding taken up by arable land and permanent pasture except areas under permanent crops or forests or used for non-agricultural activities." Article 44(3) provides that "The farmer shall declare the parcels corresponding to the eligible hectares accompanying any payment entitlement. Except in case of force majeure or exceptional circumstances, these parcels shall be at the farmer's disposal for a period of at least 10 months, starting from a date to be fixed by the Member State ... " Payment entitlements may be transferred only to another farmer established within the same Member State, except in case of transfer by actual or anticipated inheritance (art 46(1)). Payment entitlements may be transferred by sale or any other definitive transfer with or without land. In contrast, leases or similar types of transactions are allowed only if the payment entitlements transferred are accompanied by the transfer of eligible hectares (art 46(2)).

[20] The Common Agricultural Policy Single Farm Payment and Support Schemes (Scotland) Regulations 2005 (SSI 2005/143) implemented the scheme in Scotland with effect from 18 April 2005. They were amended by the Common Agricultural Policy Single Farm Payment and Support Schemes (Scotland) Amendment Regulations 2005 (SSI 2005/257) with effect from 16 May 2005. Of the available options on which the scheme could be based, Scotland adopted the so-called historic option in which entitlement to SFP was based on the total subsidies that the farmer had received during the reference period. To qualify for payment of the SFP a person holding an entitlement had to have occupancy of matching hectares of farm land for a period of at least ten months in the relevant year.

[21] Since the scheme was planned to run until 2012, a farmer who had an entitlement to SFP at the review date in this case could expect to receive an annual income from SFP until that year so long as he retained the right to occupy the necessary matching hectares.

IV THE PROCEEDINGS IN THE LAND COURT
The evidence of comparables

[22] Mr C B Addison-Scott spoke to a budget for the holding prepared for the landlord. He calculated a rent based on the budget and on his experience of fifty agreed rent reviews that he had negotiated with sitting tenants in 2008. The budget included SFP as part of the farm income.

[23] The landlord founded on seven comparable transactions, six of which were rent reviews agreed with sitting tenants on 1991 Act tenancies. The seventh was an open market letting of the farm of Birkhill, by Cupar, on a short limited duration tenancy.

[24] The landlord's witnesses did not attempt to derive an open market rental value for the holding from an analysis of these transactions. Instead, the landlord relied on the expert assessment of Mr Addison-Scott. Mr Addison-Scott explained that his approach in negotiating sitting tenant rent reviews was to base his assessment on specimen budgets for a range of sample holdings. He derived from this material a rate per acre for different classes of land and applied those figures to the appropriate classes of land at the holding under review. His view was that the SFP was to be regarded as part of the earnings of the farm. That had been explicit in his budgets. As far as he was concerned that was the basis on which the sitting tenant rent reviews had been settled. No tenant or tenant's agent had suggested otherwise.

[25] The tenants cited three comparables all of which they withdrew. Their expert witness, Mr E C Henderson, analysed each of the landlord's comparables and adjusted the figures so that they could be compared with the holding. He too was experienced in rent reviews. He spoke to his budget and to the comparables. His budget did not take account of SFP except in relation to the benefit to the tenant of using the holding to realise his SFP entitlement rather than having to rent naked acres elsewhere for that purpose (infra).

[26] There was also evidence, of which notice had not been given, of an open market letting on a limited duration tenancy of The Peel, a farm on Dupplin Estates, near Perth.

The Land Court's findings in fact regarding the SFP

[27] The Land Court found that a tenant of Moonzie would be able to use hectares at Moonzie to match his entitlement to SFP and thereby to qualify for payment of it, but that he could achieve the same result by leasing other land. For this purpose there was at the relevant date a ready market in Scotland in naked acres, that is to say poor quality land, usually hill land of little agricultural value, that could be rented for about £6.50 per acre (para [90]).

[28] There was also a ready market in entitlement to SFP. The market price at the valuation date in this case was about two and a half times the expected annual payment. It was therefore open to an incoming tenant of Moonzie to buy an entitlement (para [91]).

[29] The Land Court held that in the period 2005-2012 a farmer whose entitlement was based on a holding such as Moonzie might expect to receive at least £35,000 yearly by way of SFP (para [89]).

[30] The Court made the following critical findings in fact:

"[90] Any tenant of Moonzie would be able to use hectares at Moonzie to match his entitlement and meet the necessary conditions for payment, However, he could meet it by leasing other land ...

[97] We accept that the basis of allocation of SFP allows a finding that all, or virtually all, existing farmers are likely to have a SFP entitlement broadly matching their holdings. With some hesitation we have concluded that it is therefore reasonable to accept that the hypothetical incomer should be taken to have an entitlement, either because the successful offer would come from an existing farmer moving to Moonzie or from the existing tenant. Although the implications of the availability of SFP raise difficult questions which we shall go on and discuss, it is clear that, all else being equal, a potential tenant with entitlement to SFP would be able to pay a higher rent than one without and would accordingly be likely to be successful on the open market.

[98] In any event, we consider that in the context of section 13 and the purpose it is to serve it is not appropriate to make any assumption that the incomer is coming new to farming. We accept that rent should be assessed on the basis discussed in CEC v Gunn. 'A landlord will want as tenant an efficient, experienced and financially sound farmer who will make the best use of the land. It may reasonably be expected that in the open market the great majority of offers will be made by efficient and experienced farmers of adequate resources' (p 173). We accept that such a tenant should be taken to have an appropriate level of SFP to allow him, as farmer, to enjoy the support which other tenant farmers have."

[31] This was the Court's conclusion:

"There can be little doubt that, if not all, then the vast majority of tenants who have negotiated rents since 2005 have been prepared to treat their income from this source as part of the farm income to be shared with the landlord as rent" (para [86]).

That might be thought to suggest that the vast majority of those tenants were of the view that they would take account of the SFP in their calculation if they were bidding for the tenancy of their holding on the open market. The Court accepted that if SFP entitlements were excluded there would be a significant fall in rents (para [86]). It also found that SFP would be treated as part of the tenant's trading income and would therefore be taxable as such (para [100]). It would be included as farm income in routine accounting practice (para [101]). These findings are not challenged in this appeal.

The Land Court's conclusions on the SFP issue

[32] In the Land Court's detailed analysis of this issue its general approach was to regard rent as being that share of the farm income that the tenant would be prepared to give to the landlord. It rejected the landlord's comparables at the outset because the rent reviews had been agreed on the basis of budgets that included SFP as income derived from the holding (para [32]). It regarded SFP as being no different from any other source of income of the tenant or prospective tenant. The Court drew an analogy between SFP and capital that might be usefully applied to the land to generate further income. If the tenant had money in the bank, he might invest it in conjunction with his farm, but only if he could not make a higher return by employing it elsewhere (para [111]).

[33] The Land Court observed that the way in which SFP operated in practice

"has the direct effect that, in the real world, a rational tenant, however willing, would not have any reason to give half the payment stream to the landlord. This would have been the effect of the experts' budgets, if it was to be treated as part of the earnings of the farm. We would only be justified in concluding that he would agree a rent calculated on the basis that SFP was to treated as derived from the landlord, if something in the statutory assumptions forced us to take an artificial approach which had that result" (para [117]).

It added that there was no direct material, statutory or otherwise, that explicitly required the income from SFP to be taken into consideration in the assessment of rent (para [118]).

[34] The Court then reviewed the underlying policy of the SFP scheme (paras [120] to [140]). It considered it important that the historic option adopted in Scotland for SFP based a farmer's entitlement upon the direct support that he had received during the reference period (para [120]). It concluded that payment entitlement belonged to the farmer and not to the landowner or landlord (para [127]); that the SFP should not be seen as being attached to any specific land (para [131]); that the possibility of trading in entitlement to SFP was irrelevant (para [133]); that even if some part of the flow of income payments was seen to be attributed to the use of the farm, the value could not come solely from that farm (para [136]); that SFP should be treated as an asset that was brought to the farm by the tenant but was not attached to it (para [137]); that SFP entitlement could not properly be viewed as part of the earnings of the farm (para [138]); that the person holding such entitlement could not obtain the income from it without having land to match his entitlements; and that that point must have a value in the rental process (para [138]).

[35] The Court found that in relation to SFP there was an open market undistorted by scarcity, namely the market for naked acres, and that therefore the assessment of the appropriate allowance to be made for the use of the farm, purely to allow release of the payment scheme, led broadly to the conclusion that the Court had reached on a pragmatic view, namely that the tenant would pay a market rate that would reflect the convenience of having the land under his immediate control (para [138]).

[36] The Court's overall conclusion from this was that the argument that SFP income should be treated as income derived from the land and that the surplus of such income should be divided between landlord and tenant on the basis contended for by the landlord would mean that, in effect, one-half of it would go to the landowner instead. The Court thought that even if the idea of a 50:50 split were to be rejected, the inclusion of SFP in any calculation as if it was simply part of the earnings of the farm was not justified and was not a sound basis for the assessment of rent (para [139]). It concluded that SFP was not properly to be regarded as part of the earnings of the farm for the purposes of assessing the rent properly payable for the farm (para [144]).

[37] Accordingly, in the Court's view, the only relevance of SFP in the drawing up of a budget for the purpose of rental assessment was that there should be a figure to show a value for the use of the land that was necessary to realise the income from the SFP and that that use should be assessed by reference to the cost and trouble of leasing naked acres; that is to say, a rent of £6.50 per naked acre with an allowance of £2.50 per acre for the avoidance of the trouble and responsibility of maintaining naked acres outwith the tenant's immediate control (paras [141] and [202]).

The Land Court's conclusions on the rental value

[38] The Court had three sources of evidence of rental value, namely two open market lettings on limited duration tenancies; rents agreed on a section 13 basis with sitting tenants; and budgets for the holding related to the review date.

Open market lettings

[39] The Court found that Birkhill was let from 20 November 2008 on a short limited duration tenancy at a rent of £90 per acre with no SFP involved. It held that that rent was materially affected by marriage value, the amount of which it was unable to assess. It therefore concluded that it could not confidently give much weight to that transaction (paras [145] to [148]). The evidence about the open market letting of The Peel was so sketchy that the Land Court rightly dismissed it from its consideration (at para [34]).

Rents agreed with sitting tenants

[40] The Court accepted that the agreed rents to which Mr Addison-Scott referred were "reasonably comparable" (para [29]); that they were agreed on the basis that SFP was fully taken into account (para [29]) and that there was no element of scarcity (para [65]). However, the Court considered that Mr Addison-Scott had not adopted a method of making specific allowances for features such as different standards of equipment or different repairing obligations. Therefore, in the view of the Court, he was unable to explain the detail of his comparative calculations. He relied instead on his professional judgment based on his experience of the rent negotiations to which he had spoken (ibid).

[41] In my opinion, Mr Addison-Scott's approach was plainly unsatisfactory. As the Land Court observed, an expert witness must explain his methodology to allow it to be understood and tested (para [30]). It may be that an expert valuer would be justified in saying that in the course of his valuation his adoption of a particular figure, rate or percentage was an exercise of his professional judgment (Western Heritable Inv Co Ltd v Husband 1983 SC (HL) 60; Earl of Seafield v Stewart 1985 SLT (Land Ct) 35; Ass for Highland v Marks and Spencer plc [2010] RA 235). But the valuer must explain exactly what his methodology is and how he has adapted evidence of comparables to the circumstances of the holding under review. A simple assertion that the valuation is based on the valuer's knowledge and experience can never suffice.

[42] The Court accepted the general soundness of Mr Henderson's methodology (paras [31] and [35]), but decided that because of its conclusions on the SFP issue, none of the agreed rents cited for the landlord could provide a proper basis for an assessment under section 13.

Budgets and potential earning capacity

[43] The Court regarded the potential earning capacity of the holding as being of fundamental importance (para [82]). In the result, it assessed the rent on the basis of a hypothetical budget for the holding. This was a detailed exercise that I need not rehearse. It is sufficient to say that the Court assessed the gross annual output of the farm, leaving SFP out of account, and deducted from that the tenant's variable costs. That produced the gross margin. From the gross margin the Court deducted the tenant's fixed costs. That produced the "relevant net farming income" of £13,765. The Court allocated 80% of that figure, namely £11,012, to rent. To this figure it added two additional rent items, namely rents of cottages and naked acre rent for SFP purposes, totalling £9,751. That produced a total rental value of £20,763, rounded up to £20,800.

V THE APPEAL AND THE CROSS APPEAL

[44] The landlord contends that the SFP is part of the earnings of the farm. A prospective tenant would calculate the rent that he would offer on the basis that he had a SFP entitlement broadly matching the holding; that occupation of the holding would unlock his entitlement, and that his income from that occupation would to that extent be enhanced. The Land Court found in fact that the vast majority of tenants treated their SFP entitlement as part of their farm earnings; yet it created an artificial device, for which there was no basis in fact or law, to give only token recognition to it.

[45] In the cross appeal the tenants contend that the Land Court erred in law (1) in adding £2.50 to the agreed naked acre rent; (2) in its interpretation of "scarcity"; (3) in its definition of comparable "agricultural holdings" in terms of section 13(4)(a) of the 2003 Act; (4) in its approach to the tenants' budget; and (5) in its alternative approach on the hypothesis that it was wrong on the SFP issue. The tenants also invite the court to consider the making of a reference to the European Court of Justice.

VI CONCLUSIONS
Introduction

[46] I regret to say that I differ from the view of the Land Court on the central issue in this appeal. For the reasons that I will give, I am of the opinion that the Court misdirected itself in deciding the issue on considerations such as whether the SFP belonged to the farmer or the landowner; whether it was an asset attached to the farm and whether it should properly be seen as part of the earnings of the farm. These considerations were largely beside the point. I am also of the view that the Court erred in making what seems to be a finding in fact that in the real world a rational tenant, however willing, would not have any reason to give half of the SFP to the landlord; and in making what seems to be a finding in law that SFP is not properly to be regarded as part of the earnings of the farm for the purposes of section 13.

[47] In my opinion, the true question is to what extent, if any, the prospective tenant's entitlement to SFP would influence the amount of the successful offer of rent in a letting in open market competition.

The open market basis of valuation

[48] The legislative history shows that notwithstanding the modifications that have been made to the statutory test since the 1958 Act, the basis of a section 13 rent review remains that of open market value.

[49] Section 13 implies that the Land Court should take as its starting point the primary evidence of rents set in open market lettings on 1991 Act tenancies of comparable holdings. The Court must then adjust that evidence to allow for differences in the physical characteristics of the holdings and in the provisions of the leases. It must disregard the sitting tenant factor and, as I shall explain, in considering evidence of a rent achieved in open market competition, it must decide to what extent, if any, the rent is distorted by reason of a scarcity of lets. It must adjust the evidence of the comparables, if need be, to take account of current economic conditions in the relevant sector of agriculture and apply the specific regards and disregards set out in section 13(5), (6), (7) and (7A), which I need not discuss.

[50] Even without the SFP question, the rent assessment in this case would have been a difficult exercise. The Court had to consider what the rent would be if the holding were to be let on the open market on an 1991 Act tenancy; but there was no evidence of any such let. The Court had to assess the rent on secondary evidence, as will now usually be the case.

[51] Nevertheless, however difficult a section 13 review may now be, it is important to keep in mind what the bidder in the hypothetical open market letting would be bidding for; namely, the right to be a tenant of the holding with security of tenure under the 1991 Act; with the right to enforce certain potentially onerous liabilities on the part of the landlord in respect of fixed equipment (1991 Act, s 5); with rights to certain statutory compensations and payments at waygoing (1991 Act, Pts V-VI); and with the prospect that the tenancy might continue in the tenant's family for an indefinite number of generations (Succession (Scotland) Act 1964, s 16; 1991 Act, ss 11-12). To these advantages I would add the further benefits conferred on 1991 Act tenants by the 2003 Act (supra), not least the qualified right to buy.

Problems of interpretation

[52] The inadequacy of the draftsmanship of section 13(1) has already caused problems (cf Morrison-Low v Paterson's Exrs 2005 SLT (Land Ct) 2). The new wording of section 13(3) and (4) raises at least two difficulties. The first relates to distortion. The second relates to the evidential value of open market lettings of limited duration tenancies.

Distortion

[53] The former version of section 13(4) provided that if the arbiter was of the view that the open market for rents of comparable subjects in the surrounding area was "distorted by scarcity of lets or by other factors," he had to assess the rent properly payable for the purposes of section 13 as being the rent that he would expect to be paid "in a market which was not affected by such distortion." Then came the specifics to which he was to have regard, the first of which was "information about open market rents of comparable subjects outside the surrounding area." That wording made it clear that in examining an open market rent of which he had evidence the arbiter was to assess how much of that rent was attributable to scarcity. He was then to value out the scarcity element in order to arrive at a rent that he would expect to be achieved in an open market letting of the subject holding in a market that was not distorted by such scarcity.

[54] The previous version of section 13(4) therefore required the arbiter to consider whether distortion was reflected in an open market rent and, where it was, to value out its effects. In the amended version of section 13(3) and (4) the draftsman has replaced that direction with the ill-advised use of the expression "disregard," thereby raising a difficulty of interpretation similar to that considered by the House of Lords in Western Heritable Inv Co Ltd v Husband (supra). In the new version, which unaccountably omits all reference to comparables, the Land Court is directed by subsection (3)(b) to disregard any distortion of rent due to scarcity of lets. This disregard is linked to a direction in subsection (3)(a) to disregard any effect on rent of the fact that the tenant is in occupation of the holding. When these two paragraphs are read together, it might be thought that their natural meaning is that just as the Land Court must disregard the fact that the tenant is the sitting tenant, so too if there is a scarcity of lets, it must disregard the fact that such scarcity exists and therefore make no allowance for its effects. The Court is further directed by subsection (4)(a) to have regard to "information about rents of other agricultural holdings ... and any factors affecting those rents ... except any distortion due to scarcity of lets." This too suggests that where distortion caused by scarcity is a factor affecting rents of other agricultural holdings, the Land Court is to disregard the distortion, instead of making an allowance for it in its valuation. That, in my opinion, would be an absurd result. There is nothing in the legislative history of the 2003 Act to suggest that the Parliament intended to reverse a policy on scarcity that had stood since 1983.

[55] Therefore, notwithstanding the inept draftsmanship of the amended section, I conclude that the realistic interpretation of section 13(3)(b) is that the Land Court, when assessing an open market rent of a comparable holding should not disregard a scarcity of lets if it finds it to exist, but should disregard that amount of the rent that is caused by the scarcity.

Best evidence
Open market lettings of 1991 Act tenancies

[56] The best evidence in a section 13 valuation is evidence of an open market letting of a 1991 Act tenancy of a comparable holding at or near to the valuation date. For the reasons that I have given, there will rarely be evidence of any such letting. The best evidence in such cases, in my opinion, will be evidence of rents achieved in open market lettings of limited duration tenancies. On that point, however, the 2003 Act has created a further problem.

Meaning of "agricultural holding"

[57] The reference in the new section 13(4)(a) of the 1991 Act to "agricultural holdings" as comparables rather than to "comparable subjects" raises a question whether the direction to the Land Court to have regard to rents of "other agricultural holdings" covers rents paid under limited duration tenancies. In my view, these differences in language are not of any significance.

[58] The problem arises because the draftsman has made this change of style in a statute that also makes substantive alterations to the law, but has failed to do so in a way that is consistent across both the 1991 and the 2003 Acts.

[59] Section 1 of the 2003 Act, provides inter alia as follows::

"1(1) This subsection applies where-

(a) a lease is entered into on or after the coming into force of this subsection; and

(b) the tenancy under the lease is a tenancy of an agricultural holding in relation to which the Agricultural Holdings (Scotland) Act 1991 (c.55) (in this Act referred to as "the 1991 Act") would have applied had the lease been entered into immediately before the coming into force of this subsection.

(2) Where subsection (1) applies, the 1991 Act does not apply in relation to the tenancy ... unless the lease-

(a) is entered into in writing prior to the commencement of; and

(b) expressly states that the 1991 Act is to apply in relation to,

the tenancy ...

(4) Where, in respect of a tenancy of an agricultural holding-

(a) the lease is entered into before the coming into force of this subsection and the 1991 Act applies in relation to the tenancy; or

(b) the lease is entered into on or after the coming into force of this subsection and (by virtue of the conditions mentioned in paragraphs (a) and (b) of subsection (2) being fulfilled) the 1991 Act applies in relation to the tenancy,

the tenancy under the lease is in this Act referred to as a '1991 Act tenancy'."

The drafting of this section suggests to me that the expression "agricultural holding," which is defined in section 1 of the 1991 Act, is not confined to a holding to which the 1991 Act applies.

[60] Section 1(1) of the 1991 Act provides that "agricultural holding" means "the aggregate of the agricultural land comprised in a lease ... " An oral lease that would otherwise have constituted a lease of an "agricultural holding" does not create a 1991 Act tenancy (2003 Act, s 1, supra); but in my view it will, if properly constituted and proved, be a valid lease of an aggregate of agricultural land. I see no reason why a limited duration tenancy regulated by the 2003 Act should not likewise constitute a tenancy of an "aggregate" of agricultural land. It is inconceivable that the Parliament, having drastically reduced the likelihood that new 1991 Act tenancies would be created, would at the same time have restricted the range of comparables relevant to section 13(4) to transactions of that kind, thereby turning a blind eye to the best available evidence of lettings of agricultural land in the open market. In my view, the interpretation urged on behalf of the tenants would be impracticable. That is a sufficient reason to reject it (Bennion, Statutory Interpretation: A Code, 5th ed, para 313).

[61] Counsel for the tenants pointed out that the equivalent provisions in the 2003 Act for rent review of limited duration tenancies refer to comparables as "agricultural tenancies" rather than "agricultural holdings." The former term is not defined in the 2003 Act. Sections 4(1)(b) and 5(1)(b) of the 2003 Act, which define the two types of limited duration tenancies, refer simply to "agricultural land" rather than to "the aggregate of the agricultural land". Various provisions of the 2003 Act apply provisions of the 1991 Act, but with references to "the land" instead of to "the holding" (eg ss 14, 15, 53). The provisions in sections 14, 15 and 53 of the 2003 Act applying the 1991 Act to limited tenancies amend only references to "the holding" and leave intact the references to "an agricultural holding" in each of the corresponding provisions of the 1991 Act (ss 7, 9, 46). That may be an oversight on the draftsman's part; but it shows that it may be dangerous to draw any firm inference as to legislative intent from these changes of language.

[62] If, contrary to my view, the effect of the 2003 Act is to exclude limited duration tenancies from the scope of the expression "agricultural holding" in the new section 13(4) of the 1991 Act, I would nevertheless consider that open market rents of limited duration tenancies were relevant to a valuation under section 13. The positive directions given to the Land Court by section 13 to have regard to certain sources of evidence do not forbid the Court from having regard to other sources. Since the Land Court's over-riding duty is to fix an open market rent, it is entitled, in my view, to have regard to open market evidence of this kind. If it were not, the mechanism of rent review under section 13(4) would soon become unworkable.

Conclusions on best evidence

[63] In a section 13 valuation evidence of a rent for a limited duration tenancy let on the open market is not ideal. The Land Court must adjust it, usually with the help of expert evidence, in order to arrive at the rent at which the holding would be let on the open market on a 1991 Act tenancy, with all the advantages for the tenant that I have described. Nonetheless, it is primary evidence of the open market in the letting of agricultural land and therefore in such circumstances, in my view, the best available evidence.

[64] A more indirect, and less satisfactory, indicator of open market value is evidence of rent reviews agreed between landlords and sitting tenants under existing 1991 Act tenancies of comparable holdings.

[65] In my opinion, the valuation of an open market rent on the basis of a farm budget should be a method of last resort. The profitability of the holding is obviously a relevant consideration in the framing of an open market offer; but, as the Land Court has rightly held, questions of profitability must invariably be subsidiary to the open market criterion (Buccleuch Estates Ltd and Kennedy, supra, at p 23). It is fallacious, in my opinion, to assume that a successful open market offer would be no greater than a budget for the holding would indicate. A farm budget may provide no more than a snapshot of the position as at the valuation date. It is critically dependent on certain key assumptions and on sensitive variables, such as cereal prices (cf Note, paras [135] and [173]). An open market bidder may take a wider view.

[66] There can be many reasons why in the real world of open market competition a credible offer would exceed the amount that an expert's budget might be thought to justify. In this case the Land Court recognised that it might not always be the case that an open market rent would be set at no greater figure than a realistic budget for the holding would justify (para [64]); but later, in its discussion of section 13(4)(b), it said that it accepted "that the open market rent would not be one which was beyond the capacity of the holding" (para [82]). I am not convinced that that is so. Even if there were no scarcity of lets, it is conceivable that open market bidders might offer a greater rent than a budget would justify if they took a certain view of market trends, particularly since the successful bidder would have the safety net of periodic rent reviews under section 13.

The Land Court's interpretation of the evidence

[67] It is my impression that part of the problem in this case is the way in which the landlord's case was presented. It appears that the landlord's advisers concentrated on the sitting-tenant agreements negotiated by Mr Addison-Scott and on the related issue of budgets on which his negotiations were based. It may be that if the facts of the open market letting of Birkhill had been more fully explored, the Land Court could have drawn firmer conclusions on questions such as comparability, scarcity and marriage value.

[68] The Land Court found that Mr Addison-Scott's evidence was inadequate (paras [29]-[31]): but quite apart from that, having decided that SFP entitlement had to be excluded from consideration, it decided that none of those agreements, in all of which the tenant's entitlement to SFP had been taken into account, could provide a proper basis for its valuation (para [32]). For reasons that I will give on the SFP issue, I disagree with that decision.

[69] Having rejected the evidence of the sitting-tenant agreements, the Court turned to the question of budgets. In this part of the exercise, the Land Court looked at farm budgets in the context of rent agreements with sitting tenants (cf para [117]), in which rent was seen as a sharing of the income of the farm by the tenant with the landlord. In this way, in my view, the Court lost sight of the hypothetical open market. That, I think, is the fundamental flaw in its decision.

SFP entitlement

The Land Court's general approach

[70] The budget-based approach immediately raised the SFP issue. The Land Court considered two questions, namely (1) was the willing tenant in the hypothetical transaction contemplated by section 13 to be taken to hold a suitable level of SFP entitlement? and (2) was the payment stream flowing from SFP to be regarded, in whole or in part, as part of the earnings of the farm? (para [93]).

[71] The first question was answered by the finding that the hypothetical successful bidder should be taken to have an SFP entitlement and to have an appropriate level of SFP to allow him, as a farmer, to enjoy the support that other tenant farmers had (paras [97]-[98], supra).

[72] The second question was, I think, the wrong question. The real question was a question of fact; namely, what influence, if any, an SFP entitlement would have in the framing of an offer of rent in an open market competition at the valuation date. The answer to that question, in my opinion, should have been the determining factual issue on that aspect of the valuation. In this exercise, which I have summarised, the Court considered that in rental negotiations some sources of the tenant's income were to be disregarded; that the SFP was not an asset that was attached to the farm; and that the tenant would have no reason to share it with the landlord since there was no justification for treating it as part of the earnings of the farm.

[73] For reasons that I shall give, I reject this whole approach; but even if it were appropriate, I would differ from the Land Court in its conclusion on these issues. The important starting point, in my opinion, is that in modern times open market agricultural rents have been set in a subsidised market place. It is common ground that the output-based subsidies that preceded the SFP were recognised to be a material factor in the framing of an open market rental bid and in the assessment of rent in terms of section 13 (Note, para [89]).

[74] SFP is a producer-support subsidy granted on a different basis; but it is a subsidy nonetheless. It was intended as a straight replacement for the previous system that would leave the amounts paid to farmers unchanged. I cannot see how the payment to the tenant of one form of agricultural subsidy in place of another can justify the conclusion that the new form of subsidy must be irrelevant to the assessment of an open market rent.

[75] The Land Court thought that the policy behind the 2003 Regulations was that SFP should be left out of account in the assessment of rent (para [120]). It was of the view that a tenant who had SFP was in the same position as a tenant who had money in the bank (para [112]). I can find nothing in the Regulations to warrant that conclusion.

[76] Moreover, I disagree with the Land Court's conclusion that SFP is irrelevant to a rental valuation because it is an asset brought to the farm by the tenant but not attached to it. In my view, what matters is that it is directly connected with the tenant's occupation of the holding. The Land Court accepted a submission for the tenant that SFP was merely part of the tenant's general income, unrelated to occupation of the holding, like, say, a pension or the income from a lottery win. In my view, that is not the case. It is directly related to the occupation of agricultural land. It is that occupation that unlocks the payment (para [138]). It is paid to the recipient on the condition that the land is farmed or kept in good agricultural condition. The Land Court found that all existing farmers are likely to hold SFP entitlements broadly matching their holdings (para [97]) and that buying in an SFP entitlement had no realistic part to play in the assessment of the rent in this case (para [133]). There is therefore plainly a direct connection between SFP and the occupation of the holding.

[77] In my view, these were side issues; but they led the Land Court to think that what is to be treated as part of the potential earning capacity of the farm is a matter for the Court (para [68]). Proceeding in that way, it made what was in substance a finding in law that because SFP is not an output-based subsidy, it should not be a factor in any section 13 valuation. That, in my opinion, was an error. It amounted to the making of a conclusive presumption on an essentially factual issue.

The primacy of the open market test

[78] In its reasoning on the SFP question, the Land Court reflected the central theme in the written case for the tenant, namely that "the landlord is only entitled to be paid rent for what he has provided; ie the land and any fixed equipment provided by the landlord." Counsel for the tenant submitted that section 13 had to be construed in the context of that principle "and therefore that the Land Court was correct to conclude that a prospective tenant would not be willing to let SFP be taken into account as income of the farm." This submission culminated in the proposition that

"The Land Court therefore was correct to disregard evidence of rents of agricultural holdings and in reaching the conclusion that the tenant should not be rented on his SFP, beyond the amount that the tenant might have to pay for naked acres."

[79] In my opinion, this line of argument is misguided. The functioning of the open market in agricultural rents is not regulated by a priori rules. In an open market competition, there are all manner of influences in the framing of an offer of rent; for example, the prospective tenant's proposed farming policy, his assessment of the productivity of the holding, his assessment of future market trends, and his subjective appreciation of the location and layout of the holding, or of the style and quality of the farmhouse. What matters is the outcome of the bidding process. It is the real-world evidence of open market lettings that provides the raw data that have to be analysed and adjusted to take account of section 13. It may be that in certain open market lettings the element of SFP entitlement does not arise; but for such a finding to be made there would have to be evidence. In my opinion, it was not open to the Court simply to conclude that in an open market competition an SFP entitlement would have no influence on the amount of the successful bid, still less to hold as a matter law that in the application of the open market test under section 13 it should be disregarded.

[80] In its extended discussion of this issue, the Land Court, in my view, shifted the focus from the considerations that would or might influence an offerer in the open market to the considerations that would affect a rent review negotiation between landlord and sitting tenant. But even in the context of sitting-tenant rent agreements, I think that the Court's conclusion on the question of SFP is at odds with its finding in fact that in most rent agreements SFP is a material factor (cf paras [17], [28], [29], [97] and [144]).

[81] The Court accepted that in all fifty of the rent reviews negotiated by Mr Addison-Scott in 2008, the tenants' entitlement to SFP was taken into account. From Mr Addison-Scott's evidence it concluded as follows -

" ... there is no doubt that the whole flow of income from SFP was an important factor in each of the agreed rents. We consider that this makes it impossible for us to place any reliance on use of information derived from rents of the 50 farms as comparables" (para [143]).

[82] Despite its findings in fact as to the influence that the SFP income had in those transactions, the Land Court drew the sweeping conclusion that SFP should never be taken into account (paras [68], [144]).

[83] The obvious question arising from these findings is: in the open market would a prospective tenant, knowing that the hectares available at Moonzie would unlock his entitlement to an annual payment of the order of £35,000 be influenced by that consideration in the calculation of his bid? That is a matter for valuation evidence. The possibility that that consideration might influence the amount of an open market offer cannot, in my view, be excluded by an arbitrary judgment of the Court.

[84] The Land Court has stated the proposition in outright terms. That would be appropriate, in my view, only if there was clear evidence that in the hypothetical open market letting of a 1991 Act tenancy, the income from SFP would be disregarded in the calculation of any bid. That is an improbable idea, in my view, in light of the findings in fact that most sitting-tenant negotiations include SFP as a material factor; that it is occupation of agricultural land that unlocks the payment and that the hypothetical tenant of Moonzie would have an appropriate SFP entitlement (para [97]).

[85] There was no evidence at all that SFP was excluded as a consideration in negotiations between landlord and sitting tenant in the real world. In all of the sitting tenant agreements of which there was evidence, SFP entitlement was taken into account. The Land Court nevertheless decided that the evidence of agreed rents between landlords and sitting tenants was not a reliable basis for an open market determination because SFP had been taken into account. I think that that conclusion begged the question. In the face of that evidence the Court should, I think, have considered whether the presence of SFP as a material factor in such cases was a significant pointer to the open market. That point was obvious because the Court found that most hypothetical bidders would have an SFP entitlement; that this would enable them to offer a higher rent; and that, all else being equal, a tenant with SPF entitlement would be likely to gain the tenancy (para 97]).

[86] These findings indicate, in my view, that the payment of SFP may go to the heart of the hypothetical bidder's assessment of rent.

Near relative successor tenants

[87] Counsel for the landlord submitted that if the Land Court's reasoning is sound, the decision appealed against may adversely affect the position of a tenant who is a near relative successor of a deceased tenant. The landlord is entitled, on certain grounds set out in Schedule 2 to the 1991 Act, to seek the consent of the Land Court to the operation of a notice to quit served on such a successor within a specified time limit. Under Part I, Case 2, and Part II, Case 6, of the Schedule, one of the grounds is that inter alia the holding is not a "viable unit" (cf 1991 Act, s 25; Sched 2, Part III, para 1, as amended by the Public Services Reform (Agricultural Holdings) (Scotland) Order 2011 (SSI No 232)). This criterion replaced the "two-man unit" test. In terms of the 2011 amendment, a viable unit means "an agricultural unit which in the opinion of the Land Court is capable of providing an individual occupying it with full-time employment and the means to pay (a) the rent payable in respect of the unit; and (b) for adequate maintenance of the unit." Counsel for the landlord submitted that if in such a case the unit was providing the tenant with full-time employment and that he had the means to pay the rent and adequately maintain the unit, but only because of the tenant's SFP, the landlord's case under these provisions would be bound to succeed. On that view, the converse would apply under Cases 3 and 7. On the view that I have taken on section 13, these would appear to be surprising results; but these related issues can be decided on another day.

European Court of Justice

[88] Counsel for the tenant submitted that since the SFP is a form of producer support, it is "sacrosanct." Therefore it was unlawful for the landlord to have any part of it. He relied on the Opinion of the Advocate General in the European case of Harms v Heidinga (C-434/08, February 2010, para 35) for the proposition that a contract by which all or any of the incoming tenant's SFP entitlement would be held for the benefit of the landlord would be unlawful. In my opinion, if the opportunity to unlock an SFP entitlement was a factor influencing the amount of an open market offer of rent, the acceptance of the offer cannot be construed as constituting a contract by which the tenant gives the landlord all or any part of his SFP. The landlord is not demanding a share of the SFP. He is simply seeking a rent at a level set in the open market. This is consistent with how the European Court of Justice ultimately resolved the case of Harms v Heidinga (supra). The court held that an arrangement to hold SFP entitlement on behalf of another was permissible where that arrangement was a bona fide mechanism for determining the sale price of the SFP. The same must be true of a lease that calculates rent with reference to SFP payments and, by extension, to a level of rent affected by the availability of SFP payments.

[89] Counsel for the tenant also relied on Kornelis van Dijk v Gemeente Kampen (C-470/08, 21 January 2010). That case establishes the proposition that since SFP is not linked to specific land, the tenant is not required to transfer it to the landlord at the termination of the lease nor to compensate the landlord if he takes the SFP entitlement with him. Counsel submitted that that consideration supported the view that because the landlord had no interest in the SFP, he was not entitled to share in it during the tenancy. This submission simply repeats what I consider to be the fallacious view that an open market rent that has been influenced by the tenant's SFP entitlement constitutes a contractual sharing of the SFP with the landlord. These cases, in my opinion, are irrelevant to the present appeal.

Marriage value

[90] The element of marriage value and the uncertainty as to its rental significance caused the Land Court to reject the open market comparable of Birkhill. In alluding to the question of marriage value in the context of section 13, the Court suggested that the dicta on the point in Aberdeen Endowments Trust v Will (1985 SLT (Land Ct) 23) might have to be reconsidered in the light of subsequent English authority (para [150]).

[91] I think that in Aberdeen Endowments Trust v Will (supra) the Land Court was considering marriage value only in the context of assessing comparables. It said nothing about marriage value in relation to the subject holding.

[92] In my opinion, it is legitimate and proper in a consideration of an open market comparable letting to establish whether the successful bid included a premium paid by a neighbouring farmer for the advantage of farming the holding along with his existing land. If there is such premium it should be valued out of the successful offer because it represents a consideration special to that transaction and, to that extent, is not a reflection of the open market.

[93] Under the former, and clearer, wording of section 13 it was obvious that in the direction to the arbiter to value out of comparable open market evidence the effect of distortion caused "by scarcity of lets or by other factors," the other factors included marriage value (s 13(4), as enacted).

[94] The amended version of section 13, which could scarcely be described as an improvement, no longer includes reference to "other factors." Instead, section 13(3) now requires the Land Court, in applying the open market test, to disregard the sitting tenant factor (ss (3)(a)) and any "distortion ... due to a scarcity of lets" (ss (3)(5)). However, section 13(4) requires the Land Court to have regard to "information about rents of other agricultural holdings (including when fixed) and any factors affecting those rents (or any of them) except any distortion due to a scarcity of lets" (ss (4)(a)) and the current economic conditions in the relevant sector of agriculture (ss (4)(b)). Notwithstanding this strange wording, I take the view that "any factors affecting" the rent in an open market transaction that is cited as a comparable must include the factor of marriage value and that such value must be left out of account.

[95] The principle is different however where it is the holding under review that offers marriage value to local farmers. If there is reliable evidence that an open market letting of the subject holding would attract a premium element by reason of such marriage value, that element must be taken into account. On that question I agree with the analysis of the Court of Appeal in Childers' Trs v Ankers ((1997) 73 P & CR 458).

Scarcity

[96] It is convenient at this point to refer to a rather abstract controversy regarding the meaning of "scarcity" that was aired before the Land Court in the context of other disputes about SFP, marriage value and budgets (paras [53], [61], [66]). Counsel for the tenants submitted that the reference to "scarcity" in section 13(3)(b) required the Land Court in every case to envisage an exact equality of supply and demand. For example, in considering the case where there is marriage value inherent in the subject holding (para [61]), counsel submitted that the court had to assume that for each farmer in the neighbourhood of Moonzie who sought to enlarge his farm there was a neighbouring farm similar to Moonzie available to let. In that event there would be sufficient land for prospective bidders to enlarge their enterprises. Therefore marriage value should not be included in the valuation of the rent.

[97] The Land Court rejected these contentions. It considered that the implications of such an approach would result in a radical change in valuation methodology. It would presuppose an unlimited supply. There would cease to be any connection with the open market. The calculation of rent would no longer be an exercise for practical valuers (paras [60], [61]).

[98] The submissions for the tenant on this point have been renewed in the cross-appeal. I agree entirely with the Land Court on the point. The argument for the tenants, in my view, parts company with reality. I have already said that marriage value inherent in the subject holding is relevant when arriving at the rent properly payable. Looking at the question of scarcity overall, I consider that the submissions for the tenants on this point are misconceived. They confuse the case where demand outstrips the supply of farms of a particular kind or of farms in a particular location, with the case where there is a general scarcity of broadly suitable farms overall. There is a distinction between a premium for scarcity and a premium for special amenity (Metropolitan Holdings Ltd v Finegold [1975] 1 WLR 349.) There could in theory be a perfectly balanced market with equal numbers overall of lessors and bidders. In such a market, there could be some holdings that attracted no offers and others that attracted keen competition. The value of an agricultural tenancy is not distorted by scarcity because it is highly sought after for the quality of the land or of the buildings; or of the convenience of the location. Marriage value is just a particular type of special amenity. It follows, in my opinion, that the observations of the Land Court in Aberdeen Endowments Trust v Will (1985 SLT (Land Ct) 23, at p 25) to the effect that the court should hypothesise a reasonably balanced market, rather than an exact equality of supply and demand, remain a sound and practical guide to valuation.

Is the result realistic?

[99] It is useful at the end of any valuation exercise for the valuer to examine the result in its whole context. In the present case the Land Court's determination would mean that if the cottages were left out of account, the rent would be equivalent to about £30 per acre; whereas on the undisputed evidence for the landlord, sitting tenant rent reviews on comparable holdings were being concluded around the relevant date in the range £60-£65 per acre. That, I think, should have caused the Court to consider whether its valuation was realistic.

[100] The Land Court's conclusion is also called into question by the evidence that the farm of Birkhill was let on a short limited duration tenancy, at a rent of £90 per acre. Even allowing for differences in the quality of the land and for scarcity and marriage value, that rent, in my opinion, raised the obvious question whether an open market letting of Moonzie on a 1991 Act tenancy at a rent of only £30 per acre was a plausible idea.

VII PROPOSED REFERENCE TO THE EUROPEAN COURT

[101] Counsel for the tenant, relying on the European cases to which I have referred, proposed that if we should be against the tenant on the SFP issue, we should refer to the European Court of Justice the question whether the tenant's SFP entitlement should be relevant to a section 13 rent review. In my opinion, that is not a true question of European law. Although there is a European dimension to this case, the essential issue is a question of the interpretation of Scottish legislation. We can decide that issue for ourselves.

VIII THE CROSS APPEAL

Ground 1

[102] On the view I have taken to the Land Court's approach to SPF, its treatment of naked acres is academic.

Grounds 2 and 3

[103] I have dealt elsewhere with the questions of scarcity and the construction of the expression "agricultural holding" in the 1991 Act.

Ground 4

[104] I have already explained my view that budgets should be used for valuation only as a last resort and that a comparison with rent reviews is a preferable, though not an ideal, alternative. As the Land Court should not have rejected the landlord's comparables because of the effect of SFP, it follows that its approach to the valuation based on a budget also becomes academic in this case.

Ground 5

[105] The tenants challenge the Land Court's finding on the basis of Mr Addison-Scott's evidence that, if the Court was wrong about SFP, the rent properly payable would be £65 per acre for class 3(1) and £60 per acre for class 3(2) land. Although the Land Court held that Mr Addison-Scott's valuation methodology was unsatisfactory, it appears to have accepted him as a reliable witness to fact in relation to the amounts of the agreed rents to which he spoke. The link between that evidence and the rent properly to be payable for Moonzie was supplied by Mr Henderson, whose methodology was for the most part accepted by the Land Court. I cannot see how the Land Court's finding on this point, if that is what it was, can be interfered with in this Court.

IX DISPOSAL

[106] I propose to your Lordships that we should allow the appeal, recall the Order appealed against and return the case to the Land Court so that it can revise its valuation in the light of the views that I have expressed.

SECOND DIVISION, INNER HOUSE, COURT OF SESSION
Lord Justice Clerk Lord Bonomy Lord Brodie	[2012] CSIH 10 XA82/10 OPINION OF LORD BONOMY In the appeal by RICHARD WALTER MORRISON-LOW Appellant; against THE EXECUTORS OF THOMAS HERBERT PATERSON Respondents: _______

Act: Reid QC; Turcan Connell

Alt: Sir Crispin Agnew of Lochnaw QC; Balfour & Manson

9 February 2012

[107] I agree entirely with the Opinion of your Lordship in the chair and have nothing useful to add.

SECOND DIVISION, INNER HOUSE, COURT OF SESSION
Lord Justice Clerk Lord Bonomy Lord Brodie	[2012] CSIH 10 XA82/10 OPINION OF LORD BRODIE In the appeal by RICHARD WALTER MORRISON-LOW Appellant; against THE EXECUTORS OF THOMAS HERBERT PATERSON Respondents: _______

Act: Reid QC; Turcan Connell

Alt: Sir Crispin Agnew of Lochnaw QC; Balfour & Manson

9 February 2012

[108] For the reasons given by your Lordship in the chair, I agree that this appeal should be dealt with as you propose. I have nothing further to add.