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There can't be many rural landowners or tenants of agricultural holdings in Scotland who have not thought about installing some form of renewable energy generator on their land, be it wind turbines, solar panels, hydro schemes, anaerobic digesters or others. Here are just a few points for consideration, aimed primarily at Wind projects but which could equally apply to Hydro or, more rarely in the North East of Scotland, solar projects. 1. Location Consideration needs to be given as to proximity to residential property from a noise point of view; proximity to trees and other high structures from a wind protection zone point of view for wind turbines; evidence of a sufficient quantity of wind or water by way of reliable, accurate surveys since for example with wind speed, at a certain point a small drop in wind speed will make the difference between a 10 year pay back rate and a 25 year payback rate. For a hydro scheme there needs to be a sufficient drop in water height and a method for protection of fish and other river species by way of an alternative means of travelling up or down river - the cost of an environmental survey can be high and a preliminary site visit by SEPA can be very worthwhile. 2. Access issues Do you own or lease the land over which access to the site is required? If you have a right of access over, rather than own, the route from the public road to the farm, that right may well be restricted to access for agricultural purposes which would not include a wind farm. Consideration also needs to be given to over-sail issues and width at any sharp corners, junctions, narrow stretches of road or bridges for a long Wind Turbine transporter at the stages of commissioning, potentially replacement/upgrading and, eventually, decommissioning. You also may need to bear in mind that an existing servitude right of access over a stretch of private road to one piece of land is unlikely to allow use of that private road to access adjoining land unless specifically provided for in the servitude. If you don't already have these rights, negotiating them with the owners can take time and prove expensive. 3. Leased property If a scheme is being considered by a Landlord are there sufficient provisions in the lease in order to resume the land for the scheme including access and cable runs? In a traditional, unwritten, tenancy there is no right of resumption but parties to a written lease may have agreed such a right in certain circumstances and there is a statutory right of resumption in both an SLDT and LDT. If the Landlord merely requires to run cabling (for the electricity generated elsewhere) through the Tenant's land, he must check whether the lease reserves to the Landlord a right to grant wayleaves / servitude rights for the cabling to SHEPD or SSE etc. If a scheme is being considered by a Tenant is there scope for it in terms of the lease? If so, should it be by way of a tenant's improvement or diversification? If by tenant's improvement, the Landlord will require to pay compensation in respect of its remaining value at the end of the lease and can't take into account the Feed in Tariff in order to increase the rent at the next rent review. If by diversification, the Landlord won't necessarily have to pay compensation in respect of its remaining value at the end of the lease and the value of the Feed in Tariff, since significant, can be taken into account in any rent review. It is therefore clear that treating it as a Tenant's improvement generally favours the Tenant and treating it as diversification favours the Landlord. In either event a Tenant requires to serve notice on the Landlord for approval prior to undertaking the work to ensure it can be treated as one or the other. If he fails to do so the Landlord might be entitled to argue that there has been a breach and end the lease, or at least insist on the removal of any such improvement / diversification. If it remains, the Tenant may not be entitled to the value of the equipment at the end of the lease. There has been case law on the detail required in a notice of tenant's improvement and whether the Landlord requires to consent to the improvement: in R & M Whiteford v Trustees for Cowhill Trust in 2009 the Land Court held that although the notice lacked detail it was sufficient in that case to convey what was intended, but commented that as much detail as possible was preferable to avoid it being challenged and to avoid the risk that some element of it would not be eligible for compensation at waygo because the landlord has been given insufficient notice. The Court also held that the test as to suitability was whether it was "reasonable and desirable" on agricultural grounds for the efficient management of the holding. Clearly there is an argument that a renewable energy project might fall into that category, if a reasonable proportion of the electricity generated was intended to be consumed on the farm, thereby helping the agricultural business by keeping the costs down. Whether generating electricity solely for export (which would be unusual unless there are no farm buildings requiring electricity nearby) would qualify is not clear and less likely. The diversification procedure would seem more appropriate here. The Tenant also requires to ensure that the notice to the Landlord (whether for Tenant's improvement or diversification) includes a right of access and cabling not only over the leased land but also, if necessary, over the Landlord's remaining land as it will not automatically be implied in the notice, as was held in the Land Court Case, Grant v Trustees of Glengarry Estate Trust in 2008. It might be worth considering whether the Landlord and Tenant can join forces in a joint venture development. 4. Cabling and grid connection As discussed above regarding access, you should ensure that you have the right to install cabling along the whole length of the cabling track from the Wind Turbine or other renewable energy generator to the Grid connection point. Historically there has been a lot of delay in Grid connections given the lack of capacity in the National Grid lines in certain areas – this point should be checked also as it will impinge upon the date of first export of electricity and the start of payback time on the project. If there is a substation at the Turbine/generator site the cabling from there outwards will become the property of SHEPD / SSE who will seek a wayleave from the landowners over whose land the cabling passes until it joins existing national grid cabling of sufficient voltage capacity. For funding purposes the funder might require advance agreement between the developer and the landowner that such a wayleave will be granted. This is usually by way of an Option to require the landowner to enter into a wayleave and thereafter a servitude with SHEPD / SSE for which there may require to be an Option payment over and above the statutory amount payable by SHEPD. 5. Business Structure & Tax Planning From a business and tax planning point of view consideration needs to be given to how the project is run: Proceeding by way of Option and Lease is the least involved option for the Landowner whereby a Developer acquires an Option to Lease the Wind Turbine / hydro site with no financial commitment by the Landowner who obtains a percentage of the income generated by the Wind Turbines or Hydro Scheme once running. This may look like the "easy option" where the landowner does not wish to take on any risk in the project, contribute any of the finance required or take an active role in the development. However it generates the least income (assuming the project succeeds) and can cause significant tax problems if not carefully managed. Income Tax: the rental payments under the lease will be treated by the Inland Revenue as investment income and therefore liable to income tax at up to 50% (depending on the sums involved and other income received). There is not likely to be any expenditure to offset against it. Capital Gains Tax: If the Landlord's part of the lease is transferred e.g. by gift down a generation, the valuation of the lease income is then capitalised for Capital Gains Tax purposes and the resultant figure can be large. Inheritance Tax: Given the length of these arrangements (usually a minimum of 25 years for Wind and anything up to 100 years for Hydro) Inheritance Tax is likely to be involved at some stage. Investment assets are unlikely to be eligible for either Agricultural Property Relief or Business Property Relief and, depending on the ratio of investment income to business income generated by the business assets as a whole, the whole business assets rather than just the investment element can lose eligibility to Business Property Tax Relief. Without careful planning, taxation can significantly reduce or even negate any benefit achieved by the income generated and could potentially result in the need to sell on the project at a later stage in order to meet the tax demand. An alternative is to participate in the business, for example by way of a joint venture through a Limited Liability Partnership with the developer. The Inland Revenue however will carefully scrutinise the arrangement to ensure that the Landowner is not just a sleeping partner but carries significant risk and participates in the business. You should consider if you are prepared to carry such a risk profile. A Joint Venture including the risk of business failure could, if structured properly, achieve Business Property relief (currently 100%) thus avoiding the risk of an Inheritance Tax demand as well as Income Tax. Perhaps a simpler alternative in regard to an Inheritance Tax demand, is to insure the risk by way of a life policy which pays out the estimated amount of tax due on death. Given the long life time of such schemes however the tax rules could well change significantly during the course of the scheme. In conjunction with tax planning, you should consider where the profit from the project is ultimately destined and rearrange the ownership structure to achieve that result before embarking on the project and certainly before Planning Permission is obtained as, once granted, the value of the land will increase significantly and the original owner, who may not receive the benefit of the planning uplift in value or the income from the project, will be faced with a potentially large Capital Gains Tax bill. 6. Funding There are only a few banks providing funding for stand-alone Renewable Energy projects at the moment including Triodos Bank NV and The Co-op. If the funding is secured over the whole farm then there is more choice and the due diligence carried out by the Bank to check that the project is viable will be a lot lighter and less costly given the back-up security from the farm. There might however be strong accounting and tax reasons to keep matters separate. Written by Margot Sinclair, Agricultural Department, Burnett & Reid 7th February 2012 "Recent Changes to the Agricultural Holdings Legislation"The Public Services Reform (Agricultural Holdings)(Scotland) Order 2011 came into effect on 22 March 2011 and gave effect to the following changes: 1. "two man unit" becomes "viable unit" Previously in order to avoid the risk of a Landlord challenging the transfer of a secure tenancy on death to a near relative the minimum size of the farm had to be a "two man unit" i.e. capable of providing full time employment of the individual occupying it and at least one other. In recognition of the increased mechanisation of farming and the reduction in manpower necessary to run farms, rather than in an attempt to reduce the size of holding affected, that definition has been changed to a "viable" unit i.e. capable of providing fulltime employment for an individual AND the means to pay both the rent and costs to adequately maintain it. 2. Post Lease Agreements These were historically entered into to reduce or remove the Landlord's obligation to provide fixed equipment in good condition. This was deemed to be unfair on the Tenant and the 2003 Act allowed the Tenant to nullify it AFTER a rent review. On further reflection this was deemed to have gone too far in favour of the Tenant and was now unfair to the Landlord since the rent review couldn't take it into consideration. Accordingly the Tenant must now give notice of nullification 6 months BEFORE a rent review so that its financial significance can now be taken into account at the rent review. 3. Duration of SLDTs and LDTs The 2003 Act did not allow for a 10 year term which was identified as being around the optimal time for an agricultural lease. SLDTs remain at a maximum of 5 years LDTs can now be for a minimum of 10 years rather than 15 years, albeit they can endure for any length of time beyond 10 years. As previously, if an SLDT is allowed to run on beyond 5 years (either by intention of the parties or by default) it will automatically convert into an LDT. However whereas before it converted to a 15 year LDT starting on the date the SLDT ended (i.e. 20 years in total from start of SLDT to end of LDT) , it now converts into a 10 year LDT starting from the date the SLDT started (i.e. 10 years in total from start of SLDT to end of LDT). It is therefore a more attractive option from a duration point of view, but only if both parties want to adopt the features of an LDT e.g. the possibility of assignation by the tenant which is not available in an SLDT. 4. Fixed Equipment This only relates to SLDTs and LDTs and not to 1991 Act tenancies which remain unchanged. Previously the Landlord had to ensure that the fixed equipment was in good repair at the start of the lease and provide such other fixed equipment as was reasonably necessary to maintain efficient production. This was watered down to avoid discouraging Landlords from letting land so the position now is that the Landlord must, within 6 months of the start of the SLDT /LDT (or longer in certain circumstances), provide such fixed equipment as will allow the Tenant to maintain efficient production with reference to the land use specified in the lease and have such fixed equipment put in such condition as the Landlord and Tenant may agree, or as determined by arbitration if they disagree. There is no longer any requirement to list fixed equipment in the SLDT or LDT but to enter into a mandatory written schedule listing all fixed equipment let and the condition of it. The cost of this schedule is to be shared between the parties (unless otherwise agreed) and can be amended if there is a change in the fixed equipment provided or its condition, during the lease term. As a result of the change there is still unfortunately some uncertainty as to exactly what fixed equipment the Landlord requires to provide. What next? Currently under consideration are:- 1. The widening of the definition of "near family" for transfer of a secure tenancy on death of the tenant so as to include grandchildren. 2. The ending of the Landlord only initiated and upward only rent review in LDTs 3. The ending of a rent change triggered by a change in the VAT rate or the Landlord opting to tax for VAT purposes being deemed to be a "variation of rent" and thus prohibiting the Landlord from applying to the Land Court to fix the rent for 3 years. Written by Margot Sinclair, Agricultural Department, Burnett & Reid 7th February 2012 |
