Agricultural holdings — Succession — Whether drawings from a farming partnership account are derived from agricultural work in years where more than 50% of net profit derived from non-agricultural sources
In September
1988 the appellant’s father, who held an agricultural tenancy of a 147ha holding
from the respondent landlords, died. The holding had been farmed by the
appellant and his father through a partnership. In four of the seven years
before the father’s death the appellant’s drawings from the partnership were
attributable not to farming profits for those years, but to injections of
capital from himself, his father, banks and family loans; in only three of the
seven years before the father’s death did the appellant draw sums which
exceeded 50% of the farming profits to which he was entitled. On the
appellant’s application, the Agricultural Land Tribunal made a direction under
section 39 of the Agricultural Holdings Act 1986 entitling him to a tenancy of
the holding on the ground that during the relevant period the appellant was
engaged in agricultural work on the holding and his principal source of
livelihood was his drawings from the farm business whether or not there were
net profits to which he was entitled generated by that business to fund the
drawings. The appellant appealed from the decision of Popplewell J (see [1994]
2 EGLR 4), who held that the appellant failed to satisfy the test in section
36(3)(a) that his principal source of livelihood was from his
agricultural work in at least five of the relevant seven years.
certain sums which were in the partnership account had come from, but why the
appellant was able to have access to those sums in the four years in issue. The
only reason he was able to draw on partnership funds was because of his
agricultural work on the holding. Section 36(3)(a) of the Agricultural
Holdings Act 1986 requires the applicant for a tenancy to establish his
economic dependence on the holding; the appellant’s work on the holding was the
sole source of his livelihood and where the net profits were insufficient, it
was irrelevant how his living expenses were funded.
The following
case is referred to in this report.
Bailey
v Sitwell [1986] 2 EGLR 7; (1986) 279 EG
1092
This was an
appeal by Thomas Andrew Casswell from the decision of Popplewell J, who had
allowed the appeal of the landlords, Sir Richard Bruno Gregory Welby Bt and
D&S Farms Ltd, by way of a case stated from the direction of the
Agricultural Land Tribunal that the appellant should succeed his father.
Derek Wood QC
and Martin Rodger (instructed by Palmer Wheeldon, of Cambridge) appeared for
the appellant; Paul Morgan QC (instructed by Burges Salmon, of Bristol)
represented the respondent landlords.
Giving the
first judgment, STUART-SMITH LJ said: Sir Richard Welby Bt and D&S
Farms Ltd, the respondents to this appeal, are the landlords of 147ha of land
at Casthorpe Farm in Lincolnshire. At the material time the land was let to the
father of Thomas Andrew Casswell, the appellant. I shall refer to the father as
the tenant and Thomas Andrew as the son. On September 18 1988 the tenant died.
The son began working for his father on the holding in 1980 and in March 1981
he became a partner with his father. From then until his father’s death he
worked full time on the farm.
On December 13
1988 the son applied under section 39 of the Agricultural Holdings Act 1986
(the Act) for a direction that he was entitled to a tenancy of the holding in
succession to his father. The Agricultural Land Tribunal made a determination
in his favour on March 21 1992. At the request of the landlords, the tribunal
stated a case for the opinion of the High Court. On March 8 1994 Popplewell J
allowed the landlords’ appeal on the case stated*. The judge held that the son
could not satisfy one of the statutory conditions relating to eligibility to
succeed. The son now appeals.
*Editor’s
note: Reported at [1994] 2 EGLR 4.
Statutory
provisions
Although the
Agricultural Holdings Act 1948 afforded security of tenure for the farming
tenant, it afforded no protection for his family after his death. This
protection was introduced by the Agricultural (Miscellaneous Provisions) Act
1976 and the relevant provisions were subsequently re-enacted in Part IV of the
Act, which also contains provisions relating to succession on retirement. The
Act applies, inter alia, to a tenancy of an agricultural holding granted
before July 12 1984 where the sole or sole surviving tenant dies and is
survived by a close relative, which includes a child: section 34(1)(a)
and section 35(1) and (2). An ‘eligible person’ may apply under section 39 to a
tribunal for a direction entitling him to a tenancy of the holding: section
36(1).
Section 36(3),
which is at the heart of this case, provides:
For the
purposes of this section … ‘eligible
person’ means … any surviving close
relative of the deceased in whose case the following conditions are satisfied —
(a) in the seven years ending with the date of
death his only or principal source of livelihood throughout a continuous period
of not less than five years, or two or more discontinuous periods together
amounting to not less than five years, derived from his agricultural work on
the holding or on an agricultural unit of which the holding forms part, and
(b) he is not the occupier of a commercial unit
of agricultural land.
Para (b)
is referred to as the ‘occupancy condition’ and is satisfied in this case. The
dispute turns on para (a), which is referred to as the ‘livelihood
condition’. There is a deeming provision relating to the livelihood condition
where the close relative is in full-time education during part of the relevant
period: Schedule 6, Part 1. But it is not material in this case.
So far as is
material, section 39 provides:
(1) An
application under this section by an eligible person to the Tribunal
for a direction entitling him to a tenancy of the holding shall be made within
the period of three months beginning with the day after the date of death.
(2) Where
only one application is made under this section the Tribunal, if satisfied —
(a)
that the applicant was an eligible person at the date of death, and
(b)
that he has not subsequently ceased to be such a person,
shall
determine whether he is in their opinion a suitable person to become the tenant
of the holding.
The question
of the suitability of the son was in issue before the tribunal, but not on this
appeal.
There are
provisions as to what is to happen if there are two or more applicants or the
tenant has designated someone in his will, which are not material.
Where the
application is made under section 39 and the tribunal finds that the applicant
is both eligible and suitable, then, subject to certain qualifications which
are not relevant, the tribunal must make a direction: section 39(5).
This is to be
contrasted with the provisions of section 41(1), which applies to any surviving
close relative of the deceased who for some part of the seven years ending in
the date of death engaged (whether full time or part time) in agricultural work
on the holding, being a person in whose case: (a) the occupancy condition is
satisfied; and (b) the livelihood conditions ‘though not fully satisfied is
satisfied to a material extent’. This includes cases where the close relative’s
agricultural work on the holding fell short of providing him with his principal
source of livelihood because the holding was too small: section 41(6). Provided
the application is made within three months of the death, the tribunal has a
discretion to determine that the applicant is to be treated as eligible for the
relevant purposes
if it appears
to the tribunal that in all the circumstances it would be fair and reasonable
for the Applicant to be able to apply under section 39 above for a direction
entitling him to a tenancy of the holding.
Although it is
possible to apply both under sections 39 and 41, for some reason which is not
apparent, the son’s application was only made under section 39. It was common
ground at the bar that the phrase ‘principal source of livelihood’ connotes
more than 50%.
Case
stated
The essential
findings of fact and the issue that arises are succinctly stated in para 6 of
the case:
The Applicant
being a partner with his late father in the farming business, made drawings
from the farming business with which to disburse his living expenses. On
analysis in only three farm financial years within the seven years ending with
the date of his father’s death had the Applicant made drawings from accumulated
farming net profits which exceeded 50% of the amount actually drawn. We were
satisfied that the gross receipts of the business substantially exceeded the
moneys drawn by the Applicant even in the other farm financial years within
that seven-year period, but the net profits did not. The capital deployed in
the farming business in the relevant period included injections of capital by
the Applicant and his father from outside sources, family loans and increases
in the bank overdraft. The issue between the parties was over the proper
construction of the requirement of section 36(3)(a) of the Act that the
Applicant to be eligible had to show the derivation from agricultural work on
the holding of his principal source of livelihood. If in the case of a
proprietor of the farming business this meant that he had to demonstrate
sufficient net farming profits to constitute the principal source of his living
expenses, the Applicant was only able to pass the livelihood test in three of the
farming financial years in the seven years ending with the date of death. If it
were sufficient for him to show that he was engaged in agricultural work on the
holding and his principal source of livelihood was his drawings from the farm
business whether or not there were net profits to which he was entitled
generated by that business to fund the drawings, then he had satisfied the test
for the whole relevant period. We found that the latter requirement was all
that he needed to satisfy the test and we found the facts as set out in our
Statement of Reasons.
The tribunal
posed four questions of law for the opinion of the court, of which the first is
the critical one and is in these terms:
In those
periods in which the farming business carried on the subject holding by the
Applicant and his late father made losses, or profits amounting to less than
half the moneys drawn by the Applicant and disbursed on living expenses, and in
which capital injections were made into the business from outside sources did
the Applicant derive his principal source of livelihood from his agricultural
work upon the subject holding within the meaning of section 36(3)(a) of
the Agricultural Holdings Act 1986?
In questions
two and three the tribunal in effect ask if they were right in resolving the
issues in favour of the son. The fourth question does not arise. The judge
answered the first three questions in the negative.
Landlords’
case
Mr Paul Morgan
QC, on behalf of the landlords, submits that the tribunal have to determine the
ultimate source of the money which the son uses for his living expenses and not
the immediate source, which is the drawings on the business account of the
partnership. He concentrates on the words ‘derived from his agricultural work’
and submits that if the business is not making sufficient profits to enable 51%
or more of the drawings to be paid out of them, they must be derived from some
other source.
In four out of
the potentially relevant seven years, the son’s share of any profits was less
than 50% of the money he drew and on which he lived. It follows that in those
four years more than 50% of the money which the son drew and on which he lived
had a source other than his share of the profits of farming the holding.
Accordingly, in those four years, the son’s principal source of livelihood was
not his share of the profits of farming the holding.
A
self-employed person running a business cannot be said to derive his livelihood
from that business if the business makes a loss; perforce, he must live on
something else. A self-employed person running a business cannot be said to
derive his livelihood from a loss making business even though he is in a
position to make drawings out of the turnover of that business. The result of
making drawings out of turnover is to increase his debts above what they would
otherwise be if the drawings had not been made. The detailed banking
arrangements which the businessman makes do not affect any of the foregoing.
The number and nature of his bank accounts may make it easier or more difficult
as a matter of fact to trace the origin of his income, but ought not to affect
the issue of principle.
If a
self-employed businessman carries on two separate businesses and business A
consistently makes a loss and business B consistently makes a profit, it cannot
be right to say that the businessman derives his livelihood from business A
rather than from business B. Again, if it is necessary to distinguish between
his sources of livelihood, the detailed banking arrangements will not affect
the matter in principle although they may make it easier or more difficult as a
matter of fact to determine that source. If, in the example given above
business A makes a small profit and business B makes a large profit and the
businessman draws all of the available profit from both businesses, one could
not say that the principal source of livelihood was business A rather than
business B. For present purposes, there is no relevant distinction to be drawn
between a farming business and any other business.
The position
of a self-employed businessman (whether he be a farmer or something else) is
materially different from the position of an employee (whether he be a farm
worker or something else). The employee’s contract of employment provides for
the payment of a wage or salary in return for the employee’s work. The source
of the wage or salary is the employee’s work. It is irrelevant for present
purposes whether the employer makes a profit or makes a loss.
Any harsh
result of adopting the landlords’ construction is mitigated by the provisions
of section 41 of the Act.
Son’s case
Mr Derek Wood
QC, for the son, submits that the solution is to look at the immediate source
of the income. As a matter of ordinary language a person who has no significant
source of income other than his drawings from a partnership account, and is
entitled to make those drawings because he is engaged full time in agricultural
work on the
The judge’s
approach was to consider where certain sums which were in the partnership
accounts had come from. The proper inquiry is to ask why the son was able to
have access to those sums. The only reason he was able to draw on partnership
funds was because of his agricultural work on the holding. The direct result of
the son’s agricultural work was an arable crop and the products of the sheep
enterprise which, when sold, constituted the gross output of the holding. That
gross output always substantially exceeded the son’s drawings. The Act does not
require that all of the outgoings of the business should first be deducted from
the gross output before it can be said that the business is the source of an
applicant’s livelihood.
To equate
external injections of capital with income from stocks and shares or the
benevolence of relatives unconnected with an applicant’s agricultural work is
to ignore the tribunal’s crucial finding that all of the external capital was
invested in the business. It was not a pot of money on which the son could
draw, it had literally been ploughed into the business in the form of purchase
of seed, fertilizer and sprays, livestock or services. Only after the capital
had been deployed did it produce an income on which the son was able to draw.
The landlords’
construction makes satisfaction of the livelihood condition a lottery dependent
on the range of external factors which affect farming profits including the
weather, produce prices, the level of subsidies and interest rates. It
distinguishes between partners and employees in a manner which is not justified
by any consideration of policy. The landlords’ construction might operate
against the policy of the agricultural holdings legislation as a whole, namely
the promotion of efficient agriculture. A succession scheme dependent on ability
to demonstrate a net profit would act as a disincentive to investment based on
borrowing. Potential applicants would be anxious to keep interest charges as
low as possible and would not undertake the type of investment which might only
show a long-term return.
Conclusion
In my
judgment, Mr Wood’s submissions are to be preferred. Like most questions of
construction, this one is largely a matter of impression. Moreover, I consider
that the subsection should be construed in a purposive manner and very much in
the way that a jury would do and without adopting too legalistic an approach.
Livelihood can be defined as ‘means of living’ (see Shorter Oxford
Dictionary), that is to say what is spent or consumed for the purpose of
living. The source of one’s livelihood in so far as it is money, is income; in
so far as it is the use or consumption of goods, it is benefits in kind. An
applicant may have income derived from one or more sources. If so, in order to
qualify under section 36(3)(a), the income derived from work on the
agricultural holding must be greater than his income from his other sources.
That problem does not arise in the present case; the son’s only income came
from his work on the holding in the form of his drawings on the business
account of the partnership. If asked the question ‘from what is his income
derived?’, the son and the juryman would reply ‘from his work on the farm’.
Although, as a matter of strict legal analysis, the money of a partnership
business is no different from the money of the partners themselves, and
therefore if money is lent to the business it is lent to the partners, in
common parlance one would say that the son derives his income from the
business; one would not go further and see how the business is financed. To my
mind, this situation is quite different from one where a father makes a
substantial allowance to a son from his own resources and a smaller sum is
drawn in wages for agricultural work from the partnership farming account. It
is also different from a case where the principal source of income derives from
dividends. If injections of capital are made and invested in the business,
whether it be in the form of plant and machinery, stock, seeds, fertilizer or
work on the holding, expenditure on such items is the expenditure of the
business; it matters not whether the source of the capital is the partners’ own
resources, the bank or a generous relative.
If the
landlords’ construction is adopted, it gives rise to two serious difficulties,
to which, in my view, Mr Morgan had no satisfactory answer. The first is the
case where in three or more of the relevant seven years there has been heavy
capital investment by the partnership of tenant and close relative, with the
result that only modest profits or losses are made in those years with a view
to increased profits in later years. This is a perfectly sensible way of
conducting any business. The capital raised, whether it be in the form of bank
lending or the capital of partners, is designed to fund the business during the
lean years and that must include paying for labour in whatever form it is
provided. It would, I think, be astonishing if in such a situation it could be
said that the close relative, because he was a partner, could be said not to
derive his income from work on the holding. To say, as Mr Morgan does, that the
language of section 36(3)(a) precludes this, to my mind begs the
question.
The second
difficulty is graphically illustrated by Mr Wood’s example of the father with
two sons. The elder, who perhaps may have invested capital derived from some
other source, in the business of farming the holding which he carries on in
partnership with his father. Both work full time on the farm. The younger son
is paid a wage. The elder draws a similar amount on the partnership account. If
the profits are insufficient so that a similar situation develops to that which
arises here, the younger son would be eligible and the elder not. That, to my
mind, would be patently unjust. Moreover, section 41 would not necessarily
provide a solution, since the younger son would be eligible as of right and the
elder would require an exercise of discretion. While it is perfectly true, as
the judge said, that parties can so organise their affairs to take maximum
advantage of legislative provisions, a family partnership between father and
son in farming must be one of the commonest ways in which farms have been run
for many years.
In the case
where the son is an employee, independent contractor doing work on his father’s
farm, or where there is a limited company which operates the farm and pays the
son as a director or employee, it is common ground that the son would be
eligible, even though the farm made a loss or inadequate profits at the
material times. This is because the business is a separate legal entity from
the son. But although in the case of a partnership the position is technically
different as a matter of legal analysis, the ordinary perception is that the
business carried on by the partners is separate from their other activities,
whether they yield financial gain or not, and the partnership assets are
separate and distinct from the assets of the individual partners.
The question
of profitability of the business may be relevant when the tribunal is
considering the suitability of the applicant. If a business has made consistent
losses or wholly inadequate profits to earn the partner’s drawings, it may
raise a question as to the skill and competence of the close relative and hence
his suitability to be the tenant, at least without some explanation. Indeed, it
seems to have been the basis of the landlords’ case before the tribunal that
the son was not suitable, because of the poor profit record.
At first
instance there has been a divergence of opinion on the issue raised in this
appeal. I respectfully agree with the decision of Hodgson J in Bailey v
Sitwell [1986] 2 EGLR 7. Popplewell J, as he was entitled to do, declined
to follow that decision and he expressed some doubt as to whether on the
material available it was possible to determine the source of the applicant’s
money during the relevant period. Mr Morgan accepts that the decision is
against him; he submits it was wrong. But, for reasons I have given, I think
that decision was correct. I would allow the appeal and answer the first three questions
posed by the tribunal in the affirmative.
Agreeing, MILLETT
LJ said: Becky Sharpe and her husband lived well in Paris on nothing a
year. They achieved this by not paying their bills. Their living expenses were
financed (involuntarily) by their creditors. But I do not think that the
ordinary person would say that their livelihood was derived from the creditors.
He would say that they had no means of livelihood.
It is common
ground that the source of the appellant’s livelihood was the drawings which he
made from the partnership bank account. He was able to make the drawings
because his father consented and
drawings by advancing the money. It is said that the drawings were derived from
the bank and were therefore not derived from the appellant’s work on the
holding; and it is said that they could not, as a matter of law, have been
derived from his work on the holding to the extent to which they exceeded his
share of the annual net profits of the farming partnership.
I do not
accept either proposition. I do not accept them because I do not accept the
unspoken premise on which they are based, viz that a man can derive his means
of livelihood within the meaning of section 36(3)(a) of the Agriculture
Holdings Act 1986 from his own money or from money advanced to him. In so far
as he does so, he may be said to live beyond his means. The section is not
concerned with whether an applicant for a new tenancy was living beyond his
means or with how the excess was funded. It requires him to establish his
economic dependence on the holding by showing that his work on the holding
provided his main means of livelihood. In the present case it provided his only
means of livelihood.
The net
profits from the farming business were not enough to support the appellant, and
in so far as they were not his living expenses were financed by the bank, by
other creditors or from his own capital. In my view, that did not prevent his
work on the holding from being his sole source from which he derived his
livelihood.
I, too, would
allow the appeal.
WAITE LJ agreed and did not add anything.
Appeal
allowed.
