BUSINESS BRIEFING
Scots law has a proud history – but farmers north of the border are finding that differences in the UK’s legal systems can impact on their borrowing capability
The great divide John Leyshon
recent past, rural businesses ought to be exploring how they can improve their “bankability” with lending institutions. What is not well known is that lending
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practices north and south of the border are shaded in different colours due to differences in the legal systems on either side of the border.
A combination of the “credit crunch” affecting everyone in the UK and a recent decision of the Chancery Division of the High Court in England raises the question of whether Scottish and English businesses are operating on a level playing field insofar as access to credit is concerned. One long-standing example of different
practice in England arises from the Agricultural Credits Act of 1928 which has no force of law in Scotland. Under Section 5 of that Act, a farmer may create an agricultural charge in favour of a bank on all or any farming stock and other agricultural assets belonging to that farmer as security for sums advanced or to be advanced to him/her or otherwise paid or to be paid on the farmer’s behalf under any guarantee by the bank and interest, commission and charges thereon. The agricultural charge may either be
a fixed charge or a floating charge or a combination of both. The property affected by the charge includes livestock progeny which is born after the date of creation of the charge and any agricultural plant which is substituted for any plant that was specified in the charge at the time of its creation.
LANDBUSINESS ISSUE 36 JUNE-JULY 2010
n these financially austere times, when credit from banks is not always as readily available as we had come to expect in the
Farmers in Scotland will find the concept of an agricultural charge over moveable property somewhat alien and this arises because Scots law does not provide space for the creation of security over moveable property unless possession is given to the lender.
English law and the 1928 Act are examples of the different approach down south – where the law does permit a lender to have security over moveable property which remains in the possession of the debtor. It would be hard to imagine banks wishing to take possession of a dairy herd in order to make their security effective.
Since 2005, a much greater divergence has emerged north and south of the border following upon introduction of the Single Farm Payment Entitlement (SFPE) Scheme.
At the time SFPE was brought into
play, I was asked to consider whether or not banks could lend money to farmers in Scotland against their SFPE as security. In simple terms, was the new SFPE Scheme an opportunity for banks to operate “equity release” to farmers based on the capital value of their Single Farm Payments? The answer was “no” in large measure, because SFPE is a moveable asset which does not attach to the land and a valid security over a moveable asset requires that asset to be delivered into the hands of the lender – which would not be feasible with SFPE.
In England, banks were advised in 2005 that SFPE could be used as collateral for bank loans and a few farmers and their banks have utilised this “equity release” by means of a simple Deed of Assignment.
In these cases, the farmer received his loan funds from the bank in return for assigning his annual Single Farm Payments to the bank for a specified number of years. The validity of these arrangements in England remained untested for some time, but in a recent unreported case of the Chancery Division, it was decided
that the nature of SFPE permitted a lender to take security over it and to take the annual Single Farm Payments directly from the Rural Payments Agency. Scotland is locked out of this
arrangement by Scots law and the time has come to ask if the law north of the border should be changed. Brian Pack is presently tasked by the Scottish Government with offering proposals for the post-2012 system of farm-income support in Scotland. During his recent round of public consultations, Brian Pack responded during one question-and-answer session that he had not considered if the post-2012 system should be designed to facilitate bank lending to farmers. It would be helpful if the matter is covered in his final report to the government.
One banker who works on both sides of the border has observed that agricultural charges are of little value to banks because it is hard to keep track of moveable livestock and plant, and auction marts fail to undertake any checks for securities. Yet he concedes that interest rates offered to farmers south of the border are slightly lower because banks can take a charge against agricultural moveable assets. Now farmers south of the border can also offer their SFPE as collateral for bank loans – while Scottish farmers cannot do likewise. The 1928 Act has not been updated to take account of animal passports – which could be made to show agricultural charges. Should something like this be introduced to Scotland and will Brian Pack consider the need for a level playing field with England when his final report offers outlines for a successor to SFPE? Any successor should be designed so that it is bank-friendly.
LB
John Leyshon is a Law Society of Scotland accredited specialist in agricultural law. John is principal of Leyshon WS, Solicitors, based in Peebles in the Borders. He can be contacted at
john.leyshon@leyshonws.co.uk
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