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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President
Lord Menzies
Lord Drummond Young
[2018] CSIH 40
P321/15
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in the petition of
R A McMASTER AND OTHERS
Petitioners and Reclaimers
against
THE SCOTTISH MINISTERS
Respondents
for judicial review of (one) the actings of the Scottish Ministers in making The Agricultural
Holdings (Scotland) Act 2003 Remedial Order 2014; and (two) the decision of the Scottish
Ministers not to pay compensation to the petitioners in respect of the loss, injury and
damage sustained by them as a consequence of the making of the said 2014 Order
Petitioners and Reclaimers: Sir Crispin Agnew of Lochnaw QC, Blair; Davidson Chalmers LLP
Respondents: Mure QC, Ross QC; Scottish Government Legal Directorate
12 June 2018
[1] The petitioners are six limited partnerships that carry on the business of farming on
tenanted land, together with the general partners of those partnerships. They have raised
proceedings for judicial review against Scottish Ministers, in which they claim that they
have suffered loss in consequence of the making by Scottish Ministers of the Agricultural
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Holdings (Scotland) Act 2003 Remedial Order 2014 (the “Remedial Order”). It is alleged
that the making of the Remedial Order without express provision for the assessment and
payment of compensation to the petitioners was in breach of the petitioners’ rights under
article 1 of the First Protocol to the European Convention on Human Rights, and was
accordingly outwith the powers of Scottish Ministers or the Scottish Parliament in terms of
section 57(2) of the Scotland Act 1998.
History of the Remedial Order
[2] In general terms, the background to the petitioners’ claims is as follows. The
Agricultural Holdings (Scotland) Act 1948 conferred statutory security of tenure for an
indefinite period on agricultural tenants, and the relevant legislation was re-enacted and
consolidated in the Agricultural Holdings (Scotland) Act 1991. Far-reaching security of
tenure was perceived as a problem by the owners of agricultural land, and it became
common practice for landowners to circumvent security of tenure by granting leases of
farms to limited partnerships in which one of the limited partners was an agent of the
landlord, the general partner being the individual in charge of the farming operations. The
limited partner was able to dissolve the partnership by giving the stipulated period of
contractual notice. In this way the statutory security of tenure was rendered ineffective
because, following the dissolution of the partnership, there was no tenant and the lease
necessarily came to an end. The validity of such arrangements was upheld by the Court of
Session in MacFarlane v Falfield Investments Ltd, 1998 SC 14. A detailed account of the history
of the legislation and the use of limited partnerships to avoid the effects of security of tenure
is found in the opinion of the Lord Justice Clerk in Salvesen v Riddell, 2013 SC 69, at
paragraphs [7] et seq.
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[3] In MacFarlane v Falfield Investments Ltd, supra, it had been submitted that the use of
limited partnerships was contrary to the public interest, and that the statutory security of
tenure for agricultural tenants should be protected. While that argument was rejected by
the court, it came to be recognized that there was a need for a new statutory structure for
leases of agricultural land; in particular it was recognized that what was required was a
system that could offer security of tenure to the tenant but which gave the landlord the
prospect of recovering vacant possession at the end of a fixed term agreed at the outset of
the lease. Proposals to that effect were put forward in a White Paper published by the
Scottish Executive in May 2000, Agricultural Holdings – Proposals for Legislation. It was
proposed in particular that it should be possible to create a new form of limited duration
tenancy, and that correspondingly it should no longer be possible to create new tenancies in
favour of limited partnerships. The White Paper formed the background to the Agricultural
Holdings (Scotland) Act 2003.
[4] Under that Act, the standard form of tenancy is the new limited duration tenancy, as
provided for in section 1. It remained competent, however, to create a tenancy that was
subject to the provisions of the 1991 Act (referred to as a “1991 Act tenancy”: section 1(2) and
(4)). The Act made express provision for leases in favour of partnerships. Section 72 dealt
with the rights of the parties where a lease had been granted in favour of a limited
partnership. That section operated in the context of section 70, which applied to leases
where the tenant was a partnership and one of the partners was the landlord or the
landlord’s associate and there was another partner; in such cases if the landlord attempted
to terminate the tenancy, by dissolving the partnership or otherwise, any partner not
connected with the landlord might give notice under section 70(6), which had the effect that
the party giving the notice became tenant in his own right. In this way the use of a limited
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partnership to confer security of tenure was effectively nullified. The provisions of
section 72 dealt with cases where the tenant was a limited partnership and any limited
partner was the landlord or an associate of the landlord or certain other persons connected
with the landlord. That section provided that a purported termination of the tenancy as a
consequence of the dissolution of the partnership by notice served on or after 16 September
2002 by a limited partner connected with the landlord in the foregoing manner attracted the
provisions of section 72(3)-(10). It is important that the latter provisions, and in particular
subsection (6), only applied to leases where the landlord or the landlord’s representative
served notice dissolving the partnership, or performed certain other acts intended to bring
the tenancy to an end, during the period running from 16 September 2002 (the date when
the Bill was introduced in Parliament) to 1 July 2003, the date that was subsequently fixed by
Scottish Ministers as the “relevant date” for the purposes of subsections (7) and (10) of
section 72.
[5] For present purposes the critical points of section 72 are subsections (4)-(10). In their
original form, these provided, as follows:
“(4) Subsection (6) does not apply if –
(a) the conditions mentioned in subsection (5) are met; or
(b) the Land Court makes an order under subsection (8).
(5) For the purposes of the subsections (2) and (4)(a), the conditions are –
(a) that –
(i) a (or the) notice of dissolution of the partnership has been (or
was) served before 4th February 2003 by a limited partner mentioned
in subsection (1)(b); and
(ii) the partnership has been dissolved in accordance with the
notice; and
(b) that the land comprised in the lease –
(i) has been transferred or let
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(ii) under missives concluded before 7th March 2003, is to be
transferred; or
(iii) under a lease entered into before that date, is to be let,
to any person.
(6) Where this subsection applies, notwithstanding the purported termination of
the tenancy –
(a) the tenancy continues to have effect; and
(b) any general partner becomes the tenant (or a joint tenant under the
tenancy in the partner’s own right,
if the general partner gives notice to the landlord within 28 days of the purported
termination of the tenancy or within 28 days of the coming into force of this section
(whichever is the later) stating that the party intends to become the tenant (or a joint
tenant) under the tenancy in the partner’s own right.
(7) Where –
(a) a tenancy continues to have effect by virtue of subsection (6); and
(b) the –
(i) notice mentioned in paragraph (a) of subsection (3) was served
before the relevant date; or
(ii) thing mentioned in paragraph (b) or (c) of that subsection
occurred before that date,
the landlord may, within the relevant period, apply to the Land Court for an
order under subsection (8).
(8) An order under this subsection –
(a) is an order that subsection (6) does not apply; and
(b) has effect as if that subsection never applied.
(9) The Land Court is to make such an order if (but only if) it is satisfied that –
(a) the –
(i) notice mentioned in paragraph (a) of subsection (3) was served
otherwise than for the purposes of depriving any general partner of
any right deriving from this section; or
(ii) thing mentioned in paragraph (b) or (c) of that subsection
occurred otherwise than for that purpose; and
(b) it is reasonable to make the order.
(10) Where –
(a) a tenancy continues to have effect by virtue of subsection (6); and
(b) the –
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(i) notice mentioned in paragraph (a) of subsection (3) was served
on or after the relevant date; or
(ii) thing mentioned in paragraph (b) or (c) of that subsection
occurred on or after that date,
section 73 applies”.
The “relevant date” (subsection (7)) was to be specified by Scottish Ministers
(subsection (11)), and was in fact determined to be 1 July 2003.
[6] The result of these provisions was that if the landlord of a limited partnership served
notice dissolving the partnership between 16 September 2002 and 30 June 2003 with the
intention of terminating the lease, the general partner became entitled to serve a notice
under subsection (6). In that event, the general partner was given a 1991 Act tenancy of the
holding. That was so even though the general partner was not one of the parties to the lease,
which of course was in favour of the limited partnership. The landlord was entitled to
apply to the Land Court for an order under subsection (9), but the grounds on which such
an order could be granted were very restricted. Thus section 72 made limited partnership
arrangements ineffectual in most cases where notice dissolving the limited partnership was
given during the period from 16 September 2002 to 30 June 2003. Furthermore, landlords
who gave notice between those dates were denied the opportunity of converting the existing
tenancy into the new form of limited duration tenancy of the subjects. This was the result of
subsection (10), which provided that section 73 of the Act should apply if notice dissolving
the limited partnership were given on or after the authorized date, 1 July 2003. Section 73
permitted a landlord to bring a tenancy to an end by giving notice under subsection (3) of
that section; the latter provision permitted a landlord to bring an agricultural lease to an end
by giving notice at least two years and not less than three years before the expiry of the
stipulated endurance of the lease. That was the manner in which the new form of limited
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duration tenancy introduced by the 2003 Act was available to landlords who had let
agricultural land to limited partnerships, but subsection (10) of section 72 had the effect of
excluding leases where a limited partner had taken steps to dissolve the limited partnership
prior to 1 July 2003.
[7] The paradox created by section 72 was summarised by the Lord Justice Clerk in
Salvesen v Riddell, 2013 SC 69, as follows (paragraph [82]):
“In this way the Parliament conferred on the general partner a form of tenancy the
creation of which section 1 of the 2003 Act was designed to restrict and a form of
tenancy that had caused the problems that the 2003 Act sought to cure”.
Thus section 72 had an adverse, and somewhat incongruous, effect on the rights of landlords
who gave notice to dissolve a limited partnership tenancy within a relatively limited period,
running from the introduction of the Bill to 30 June 2003. Other landowners who had let
farms to limited partnerships but did not give notice during that period were not affected.
In Salvesen v Riddell, 2013 SC 69; 2013 SC(UKSC) 236, it was argued on behalf of a landlord
who had given notice to dissolve a limited partnership on 3 February 2003 that section 72
was incompatible with article 1 of the First Protocol to the European Convention on Human
Rights; article 1 provides that every natural or legal person is entitled to peaceful enjoyment
of his possessions and that no one is to be deprived of his possessions except in the public
interest and subject to conditions provided for by law. The Second Division held that the
landlord’s rights under article 1 of the First Protocol were infringed by section 72 of the 2003
Act, with the result that that section was outwith the legislative competence of the Scottish
Parliament.
[8] On appeal, the United Kingdom Supreme Court held that section 72 violated article 1
of the First Protocol, but restricted the order made by the Court of Session. They held that
the finding of incompatibility with Convention rights and the consequent lack of legislative
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competence should not extend further than was necessary to deal with the facts of the
particular case. The finding of lack of legislative competence was accordingly restricted to
section 72(10) of the 2003 Act. The effect of this finding was suspended for 12 months or
such shorter a period as might be required for the defect to be corrected and for the
correction to take effect: Lord Hope at paragraphs [57] and [58]. At paragraph [57] Lord
Hope, delivering the opinion of the court, explicitly addressed the possible retrospective
effect of the finding that subsection (10) was outside the legislative competence of the
Scottish Parliament and the manner in which that defect might be corrected. He declined to
make an order removing or limiting such retrospective effect, on the basis that that matter
should be left to the Scottish Parliament. Furthermore, decisions as to how the
incompatibility was to be corrected, for the past as well as the future, should be left to
Parliament together with Scottish Ministers. That would enable proper consultation and
research to be conducted.
[9] As the UK Supreme Court contemplated, its decision in Salvesen v Riddell was
followed by further legislation in the form of the Agricultural Holdings (Scotland) Act 2003
Remedial Order 2014. Article 2 of the Remedial Order repealed subsections (4), (5) and (7) to
(11) of section 72, with certain consequential amendments to other subsections;
subsection (10) of that section had of course already been held incompatible with
Convention rights. The Remedial Order further inserted a new section 72A into the 2003
Act. Section 73 of the Act enabled tenancies to be ended by the landlord by giving between
two and three years’ notice. The new section 72A(1) provided that section 73 should apply
to a tenancy continuing to have effect by virtue of section 72(6) unless the tenancy were a
relevant tenancy. “Relevant tenancy” was defined by subsection (4) to cover tenancies that
continued to have effect by virtue of section 72(6) where a limited partner had taken steps to
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terminate the tenancy prior to 1 July 2003 and there was no ongoing application to the Land
Court for an order under subsection (8) of section 72. If the tenancy was a relevant tenancy,
section 72A(2) provided that section 73 should apply to the tenancy from the date on which
the landlord gave notice in writing intimating that he might bring the tenancy to an end in
accordance with section 73; such notice required to be given within 12 months of
28 November 2014. In this way the landlord was able to convert the tenancy into the new
form of limited duration tenancy, in the same way as landlords of holdings let to limited
partnerships who had not given notice to terminate the partnership prior to 1 July 2003.
The petitioners’ challenge to the Remedial Order
[10] There are at present six sets of petitioners. Each set comprises the general partner of
a limited partnership that was dissolved by notice given on 3 February 2003 together with
the limited partnership itself; we were informed that the general partner was acting on
behalf of the dissolved partnership with a view to winding up its affairs. Prior to 2003 the
limited partnerships were the tenants of agricultural land which they farmed. On
3 February 2003 representatives of the landlords of each of the holdings served notices
under section 72(6) of the 2003 Act. In the case of the last three sets of petitioners, the notice
dissolving the limited partnership was followed by proceedings brought by the landlord in
the Land Court under subsection (7) of section 72; in the case of the first three sets no such
application was made. The result is that the general partners in the first three sets of
petitioners became tenants with secure 1991 Act tenancies, in accordance with section 72(6)
of the 2003 Act. The proceedings in relation to the last three sets of petitioners have been
sisted in the Land Court, and consequently the general partners are not yet secure tenants,
although if the landlords’ applications are unsuccessful they will become tenants with
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secure 1991 Act tenancies. For present purposes, however, nothing appears to turn on the
distinction between the two groups, as in both cases the landlords are entitled, on the face of
the Remedial Order, to convert the tenancy into a limited duration tenancy by giving notice
under section 73 of the 2003 Act as amended by the Remedial Order, as permitted by
section 72A(2) of the Remedial Order.
[11] Following the making of the Remedial Order, the landlords of each of the holdings
served application notices under section 72A(2) and (4) of the 2003 Act as amended by the
Remedial Order with a view to bringing the tenancies within section 73 of the Act. The
effect of those notices was that the general partners ceased to be entitled to secure 1991 Act
tenancies. Instead, the tenancies became subject to section 73, so that the landlords could
terminate them on giving not less than one nor more than two years’ notice before the
expiry of the stipulated endurance of the lease. We understand that following the coming
into force of the Remedial Order all of the landlords have issued termination notices under
section 73 in order to terminate the tenancies.
[12] The petitioners have brought proceedings for judicial review of the actions of
Scottish Ministers in making the Remedial Order and deciding not to pay compensation to
the petitioners for loss that they claim to have sustained in consequence of the making of the
Remedial Order. The petition and answers proceeded to a hearing before the Lord
Ordinary, who on 31 May 2017 pronounced an interlocutor which deleted substantial
elements of the petition. In particular, the Lord Ordinary sustained the respondents’ pleas-
in-law challenging the relevancy of the claims made by the limited partnerships and the
limited partners and the interest of limited partnerships and limited partners to bring the
present proceedings. The result was that only the claims made by the general partners
remained. The Lord Ordinary further deleted the petitioners’ claims in so far as they were
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based on an alleged legitimate expectation that following the passing of section 72 of the
2003 Act in its original form they would in due course acquire a secure 1991 Act tenancy.
[13] Consequently the general partners’ claims for loss were limited by the Lord Ordinary
to losses sustained as a consequence of reasonable reliance by the general partners upon
having a secure 1991 Act tenancy. That would include elements of frustration and
inconvenience, but any claims were subject to the counterbalancing effect of setting off the
value of benefits obtained by the qualifying general partners arising from the extended
period of tenancy that they had enjoyed (from 1 July 2003 until the Remedial Order came
into force on 3 April 2014). In his opinion the Lord Ordinary set out the principles that he
considered should apply to the valuation of those claims. The critical point was that the
petitioners’ claims did not extend to compensation for loss of the secure 1991 Act tenancies
of the farms but were restricted to the consequences of any reliance by the general partners
on the belief that they were entitled to such tenancies. That meant that the general partners
could not recover the value of the secure tenancy that they claimed to have lost. Subject to
that restriction, and the rejection of claims by petitioners other than the general partners, the
Lord Ordinary made arrangements for the petitioners’ claims to be pled in greater detail and
amended to reflect the principles that he had set out in his opinion. Thereafter, following a
proof if necessary, a decision could be reached on whether there had in fact been any
infringement of the general partners’ rights under article 1 of the First Protocol to the
Convention as a result of their reasonable reliance on the apparent grant of a secure 1991 Act
tenancy.
Grounds of appeal
[14] The petitioners have reclaimed against the Lord Ordinary’s decision. Their grounds
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of appeal in their original form were complex and somewhat difficult to follow. In the
written submissions to the Court, however, the petitioners distilled their arguments into two
sets of propositions. These were as follows:
1. The Lord Ordinary ought to have had regard to the reality of the situation,
which is that the general partner obtained a “possession” for the purposes of
article 1 of the First Protocol on the coming into force of section 72 on
27 November 2003. The general partner was the farmer who possessed the
major part of the capital in the limited partnership. Initially the possession
was a legitimate expectation linked to the general partner’s right to obtain a
secure 1991 Act tenancy. In due course this possession was converted into a
secure 1991 Act tenancy. Thereafter the general partner had a possession, in
the sense of the secure tenancy. The reality of the situation was that all along
the general partner had the secure tenancy as a possession, and his actings in
reliance on that possession from 27 November 2003 onwards had been
compromised by the Remedial Order. In that way loss and damage was
caused to him, for which he should be compensated.
2. The tenancy and the farming business conducted on the tenanted land were
interrelated. The general partner was granted a secure 1991 Act tenancy
which was taken away by the Remedial Order. That deprived the general
partner of a valuable asset, namely the tenancy with the farming business
associated therewith. The general partner was entitled to compensation for
the loss of that asset, because the state is required to compensate for loss
occasioned by its error. Consequently the value of the tenancy and the
farming business should not have been disallowed at this stage, but should
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have been considered along with other factors in determining the level of
compensation that would provide just satisfaction.
Issues raised on appeal
[15] The various matters raised in the grounds of appeal can most conveniently be
organized into five issues.
1. The nature of the “possession” obtained by the general partner in each of the
limited partnerships on the coming into force of section 72 of the 2003 Act,
and in particular, whether the general partners are entitled to compensation
for the value of a secure 1991 Act tenancy as against the tenancy that the
general partners now enjoy, which is a limited duration tenancy subject to
section 73 of the Act.
2. The applicability of the concept of legitimate expectations, and in particular
whether the general partner in each of the limited partnerships (or the limited
partnerships themselves) obtained a legitimate expectation for the purposes
of article 1.
3. Whether the petitioners’ claims should include the value of the “family
farming business”; and in particular whether the “family farming business” is
a possession for the purposes of article 1 of the First Protocol.
4. The Lord Ordinary’s general approach to compensation.
5. The relevancy of the claims made on behalf of the limited partnerships,
together with the interest to sue of the limited partnerships or the general
partners on their behalf. This includes the question of whether the limited
partnerships had “victim” status for the purposes of the Convention.
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[16] Before the specific matters raised in the grounds of appeal are considered, however,
it is necessary to consider the general interpretation of article 1 of the First Protocol, and
thereafter to analyze the rights enjoyed by the general partners and the limited partnerships
throughout the period from February 2002 to the raising of the proceedings for judicial
review. This involves consideration of the rights enjoyed at the outset of that period and the
effect on those rights of the 2003 Act, the decision of the United Kingdom Supreme Court in
Salvesen v Riddell, and the Remedial Order (together with the landlords’ exercise of the rights
under the Remedial Order).
Article 1 of the First Protocol
[17] Article 1 of the First Protocol is the major provision in the Convention that protects
the right to property. It is in the following terms:
“Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the public interest
and subject to the conditions provided for by law and by the general principles of
international law.
The preceding provisions shall not, however, in any way impair the right of a State
to enforce such laws as it deems necessary to control the use of property in
accordance with the general interest or to secure the payment of taxes or other
contributions or penalties”.
It is clear from its terms that article 1 applies to interference with the “possessions” of a
person, whether natural or legal. Interference can take the form of outright deprivation, as
contemplated in the second sentence of the article, or lesser forms of restriction or control,
including the control of use of property. Such interference may be justified by the public
interest, and in that event a further range of considerations become relevant: whether the
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interference is in accordance with law, whether it is intended to achieve legitimate purposes,
and whether the degree of interference is in all the circumstances proportionate.
[18] It is well established that the Convention should be applied in a manner that is
practical and effective, so that the Convention rights of those affected are properly
recognized and properly enforced; authority for that proposition is found in, for example,
the opinion of the European Court of Human Rights in Artico v Italy, (1981) 3 EHRR 1, at
paragraphs [32]-[33]. Counsel for the petitioners placed particular stress on this
requirement, and submitted that the court should have regard to the reality of the situation
rather than to legal niceties. We agree with such an approach, although we would observe
that it is not fundamentally different from the manner in which the Scottish courts interpret
domestic legislation. First, regard should always be had to the context in which legislation
operates. Two types of context are relevant. The first of these may be described as the
general context: the social and economic background to the legislation under consideration:
in this case that is the context of tenanted agricultural land, the history of security of tenure
and the former practice of using limited partnerships to avoid security of tenure. This is of
particular importance in the present case in relation to the alleged concept of a family
farming business, discussed below at paragraphs [47] et seq.
[19] The second form of context may be described as the internal context of the
legislation; it is obvious that a statutory provision must invariably be construed in the
context of the whole of the statute in which it occurs. The internal context may be wider
than that, however. In particular, if one statute is designed to amend another, as occurred in
the present case, the internal context plainly consists of both of those statutes. The context
can go even further than that. In the present case the Remedial Order was designed to
amend the 2003 Act and incorporated important references to the 1991 Act, but it was also
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designed to deal with the effect of the decision in Salvesen v Riddell and the difficulties
identified in that case that arose under the Convention. We consider that all of these
elements, the 2003 Act, the 1991 Act and the decision in Salvesen v Riddell, must be
considered as the internal legislative context in which the Remedial Order falls to be
construed.
[20] Secondly, legislation should be interpreted in a purposive manner which gives effect
to the substance of the legislation and does not become unduly concerned with niceties of
wording or minor details. A purposive interpretation ensures that the fundamental
objectives of legislation, or indeed any legal text, are achieved. In this way the rights created
by the legislation are rendered “practical and effective”, and not merely “theoretical and
illusory”, in the words of the European Court of Human Rights in Artico v Italy, supra, at
paragraph [33]. To that extent the method of interpretation used in domestic law appears to
us to be fully in line with the Convention. Thirdly, in interpreting legislation regard should
be had to common sense, including where appropriate the commercial reality of the
situation in which the legislation operates. This is of importance in relation to the nature of
a family farming business, discussed below. Fourthly, it is obvious that legislation must be
properly enforced, thus ensuring that it is effective at a practical level.
[21] Nevertheless, the fact that the Convention must be applied in a manner that is
practical and effective does not mean that proper legal analysis at a domestic level can be
abandoned. Before the Convention can operate, it is first necessary to ascertain what the
parties’ domestic rights and obligations are and, in a case such as the present, how those
rights and obligations have been affected by domestic legislation. Counsel for the petitioners
submitted that, in assessing the reality of the situation as to the possessions of the general
partners, it was evident that Scottish Ministers when introducing the provisions which
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became the 2003 Act did so on the basis that the de facto position was that the general partner
was the tenant. It was further submitted that the court must have regard to the appearances
of the situation, rather than the actual validity of the legal position in terms of domestic law.
In our opinion those submissions must be rejected. Before article 1 can be applied to the
2003 Act and the Remedial Order, it is essential to determine precisely what those provisions
did as a matter of domestic law; anything else would lead to total incoherence. As a matter
of domestic law, the tenant was the limited partnership, not the general partner; that is the
clear import of the decision in MacFarlane v Falfield Investments Ltd, supra, and any other
assumption would seriously distort the problem that section 72 of the 2003 Act was
designed to deal with. That in turn would distort the solution adopted in that section, of
permitting the general partner to take over from the limited partnership as the tenant.
Furthermore, it would distort the reasoning in Salvesen v Riddell, supra, which is of
fundamental importance to the situation that the court must address in the present case.
Nature of the petitioners’ claims under article 1: the Lord Ordinary’s analysis
[22] Against the foregoing background, we propose now to consider the Lord Ordinary’s
analysis of the 2003 Act, the decision of the UK Supreme Court in Salvesen v Riddell and the
Remedial Order.
[23] The Lord Ordinary held that the only persons among the petitioners who had a
possession that was capable of being interfered with by the Remedial Order were the
general partners who had served a notice in terms of section 72(6) (paragraphs [136]-[152]).
He then gave detailed consideration to the nature of the petitioners’ claims
(paragraphs [153]-[195]). The first question was whether there had been interference with a
possession of the general partners for the purposes of article 1 of the First Protocol, and the
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nature of that interference. It was accepted by Scottish Ministers that the tenancy held by
each general partner who had served a notice under section 72(6) was a possession of that
general partner for the purposes of article 1. The Lord Ordinary held that, in order for a
deprivation of property to occur for the purposes of article 1, it must be definitive and
involve an irrevocable expropriation or transfer of property rights. That included
deprivation of contractual rights. One of the rights that formed the general partner’s new
tenancy was the security of tenure given by a secure 1991 Act tenancy. Nevertheless,
deprivation of a single right relating to property was not the same as deprivation of the
property right, but was rather a control of use of the property. The Remedial Order had
fundamentally altered the position of the general partners as tenants, as it was subject to the
notice procedure under section 73 of the 2003 Act which could convert the tenancy into a
limited duration tenancy, thus depriving the general partners of security of tenure. That in
the Lord Ordinary’s opinion amounted to a control of use of the tenancies, rather than
outright deprivation.
[24] The next issue was whether there had been a violation of article 1. The Lord
Ordinary noted that the requirements under article 1 of legal certainty and justification in
the general public interest were both established; indeed they were not disputed by the
petitioners. The issue under the Article accordingly became one of proportionality. The
Lord Ordinary analyzed the background material to the Remedial Order, and concluded
that Scottish Ministers accepted that there might be valid claims for compensation as a result
of the passing of the Remedial Order, and that it would be left to them to deal with any such
claims (paragraph [169]). Scottish Ministers had not considered it necessary, however, to
provide a scheme to deal with such claims within the Remedial Order itself; instead, they
had accepted that such claims would have to be dealt with as they arose. In this respect the
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Lord Ordinary relied in particular on a letter from the Cabinet Secretary for Rural Affairs,
Food and Environment to the Convener of the relevant Parliamentary committee dated
5 November 2014: paragraph [171]. The Lord Ordinary accordingly concluded that it was:
“within the area of discretion afforded to the legislature [and, it would seem, the
executive] to leave the question of compensation to be determined by the
‘assessment processes’ to be applied by the Scottish Ministers rather than to create a
scheme for the assessment of compensation under the Remedial Order itself”.
For this reason the Remedial Order itself did not violate the rights of any of the petitioners
under article 1.
[25] The critical question was accordingly the validity of the decision of Scottish Ministers
to refuse to meet the compensation claims advanced by the petitioners. That involved an
assessment of the proportionality of Scottish Ministers’ response. Proportionality required
to be considered in context, and raised the issue of fair balance in relation to the decisions of
Scottish Ministers. The Lord Ordinary considered that matter, referring to case law of the
European Court of Human Rights and certain English courts, and then analyzed the effect of
the 2003 Act and the Remedial Order.
[26] Prior to the 2003 Act the general partners were members of limited partnerships
which were subject to termination; consequently there was no security of tenure beyond the
contractually agreed duration. After the 2003 Act some of the general partners were able to
obtain an enhanced security of tenure, although this resulted from an unlawful piece of
legislation. The general partners had not given any consideration for their enhanced
security of tenure. When the position was corrected by the Remedial Order, the general
partners were placed in the same position as other general partner tenants, where notice to
dissolve the limited partnership had not been given prior to 1 July 2003 (paragraph [180]).
The general rule as to compensation for deprivation of property had much less force when
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20
what was being done was to rectify an unlawful piece of legislation from which the qualified
partners had benefited for no consideration. In the circumstances the Lord Ordinary
concluded that, even if the effect of the Remedial Order were viewed as a deprivation of
property, the striking of a fair balance did not warrant or require payment of compensation
reasonably related to the value of the tenancy (paragraph [181]).
[27] Thereafter the Lord Ordinary considered the nature of the claims that the general
partners might have, excluding the value of the secure 1991 Act tenancy, and set out the
manner in which such claims might arise and the principles for their computation
(paragraphs [190]-[195]). Scottish Ministers were required to strike a fair balance among the
interested parties and to pay proper levels of compensation. That would involve having
regard to a number of factors. These included the conceptual background, the various
legislative changes, including the fact that the general partners acquired secure 1991 Act
tenancies without giving value or consideration, and the enjoyment by them of several years
of tenancy beyond what would otherwise have been the termination date. On the other side
was the fact that general partners might, through no fault of their own, have made
expenditure in reasonable reliance upon the apparent right to a secure tenancy that had been
unlawfully conferred. That could have caused loss. In addition, the general partners might
have suffered frustration and inconvenience. The European Court of Human Rights had
recognized in certain cases, notably Trgo v Croatia, 11 June 2009, App No 35298/04, and
Klibavičienė v Lithuania, 21 October 2014, App No 34911/06, that a person who relied on
legislation enacted by mistake or subsequently abrogated as unconstitutional should not
bear the consequences of the state’s own mistake. That proposition was not challenged by
either party, but we should record that we are in full agreement with it; it is amply vouched
by those and other cases.
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21
[28] It was on that basis that the Lord Ordinary held that Scottish Ministers should
compensate individuals for loss directly arising from reasonable reliance upon defective
legislation, in the form of the original section 72 of the 2003 Act. Specific losses incurred as a
direct result of reasonable reliance would nevertheless require to be established. Reliance on
the defective legislation would require to have occurred in the period after the service of the
notice under section 72(6) but before it was known or ought to have been known that the
landlords’ Convention rights had been infringed by section 72. The act in question would
require to be in reliance on having a secure 1991 Act tenancy, rather than being an act which
would have occurred even if a tenancy subject to termination under section 73 had been
held. Only those losses would fall within the principle of reasonable reliance.
[29] The petitioners’ averments make no claim for specific losses suffered as a direct
consequence of reasonable reliance on the holding of a secure 1991 Act tenancy. The Lord
Ordinary held, however, that such claims could not be excluded if a closer analysis were
carried out. In addition, the general partners might have suffered frustration and
inconvenience, for which a relatively modest sum might be awarded; claims of £5,000 per
general partner were made in this respect. The Lord Ordinary held that because prior to the
2003 Act the limited partnership tenancies were due to come to an end in any event as a
result of contractual provisions that had been freely entered into, the striking of a fair
balance did not require compensation to be paid for any other consequences of termination
of the tenancy. Furthermore, the tenancies had been excluded from the limited duration
tenancy regime in section 73 as a result of an unlawful act; consequently the striking of a fair
balance did not require compensation to be paid in respect of the value of the tenancy.
[30] Against the foregoing factors, certain matters required to be counterbalanced,
namely the value of the benefits obtained by the general partners as a result of the extended
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22
period of tenancy that they had enjoyed. Without more detailed pleadings and in due
course argument and possibly evidence, the Lord Ordinary could not reach a definitive view
on the possible claims that might arise. He decided to put the case out by order to discuss
further procedure. When the case called by order, he ordained the remaining petitioners
(the general partners) to lodge a minute of amendment in process. This should give
specification of their status as “qualifying general partners”, and also:
“(ii) any specific losses directly caused to them as qualifying general partners as a
consequence of their reasonable reliance (during the period after service of a relevant
section 72(6) notice before it was known or ought to have been known that the
landlords’ rights had been, or are likely to have been, infringed by the Agricultural
Holdings (Scotland) Act 2003) on having a secure 1991 Act tenancy; and (iii) the
benefits obtained by such qualifying general partners arising from any extended
period of tenancy enjoyed by them by virtue of their obtaining a secure 1991 Act
tenancy, and the value of any such benefits”.
[31] We now propose to consider the specific arguments advanced on behalf of the
petitioners.
The general partners’ possessions and their right to compensation for the loss of secure
1991 Act tenancies in consequence of the Remedial Order
[32] As the Lord Ordinary noted, Scottish Ministers do not contend that no compensation
is payable to general partners in consequence of the making of the Remedial Order. This is
important, because the primary question that arises in the present case is not whether
compensation is payable but the circumstances in which such compensation is payable and
how it should be calculated. In particular, a critical question is whether compensation
should be payable in respect of the value of the secure 1991 Act tenancies that were enjoyed
by the general partners as a result of section 72(6) of the 2003 Act, or whether compensation
should be confined to losses sustained by the general partners in consequence of their
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reliance on having been awarded such a tenancy. It is not in dispute that the 1991 Act
tenancies created by section 72 were possessions of the general partners and as such
protected by article 1. The Lord Ordinary nevertheless held that the purpose of the
Remedial Order was to correct an unlawful feature of the 1991 Act tenancies, namely that
they could not be converted into limited duration tenancies subject to section 73 of the Act.
The general partners in question had not given any value for that benefit. Consequently the
Lord Ordinary held that the striking of a fair balance did not require compensation to be
paid in respect of the value of the 1991 Act tenancies conferred in consequence of
section 72(6) (paragraph [193]). We agree with that conclusion.
[33] In answering this question, it is essential in our opinion to analyze the rights that the
general partners had throughout the period from 3 February 2003 to the making of the
Remedial Order. In conducting that analysis, it is important in particular to consider the
legal position that existed prior to 3 February 2003 and the changes made as a result of the
2003 Act, the decision in Salvesen v Riddell and the Remedial Order; the internal context of
the legislation includes all of those elements. The notion of a “possession” is relatively
straightforward; it includes property rights, including such contractual and other rights as
can be considered intangible property. Prior to 3 February 2003 the limited partnerships
were the tenants under the leases and the general partners had rights against the limited
partnerships under the limited partnership agreements. The rights under the leases were
limited, however. The leases were for fixed terms, and more importantly they could be
brought to an end through the dissolution of the limited partnership by a limited partner
who acted as the landlord’s representative. On 3 February 2003 the limited partnerships
were dissolved, and that brought the tenancies to an end. Thus immediately after that date
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24
the general partners had no continuing rights in the land that could properly be considered
possessions for the purposes of article 1.
[34] Section 72 of the 2003 Act was then enacted. It took effect on 22 May 2003. Under
section 72(6), the general partners were empowered to give notice to the landlord within
28 days of the coming into force of the section that they intended to become tenants under
the tenancy in their own right. All of the general partner petitioners exercised that power.
Consequently on the face of things the general partners had all acquired secure 1991 Act
tenancies in their own right. Those tenancies conferred virtually unlimited security of
tenure because the landlords were precluded from setting up the new form of limited
duration tenancy that other landlords could create by virtue of section 73. This was different
from cases where a lease had been granted to a limited partnership but the landlord did not
attempt to dissolve the limited partnership tenant between 16 September 2002 and 1 July
2003; in those cases the landlord was permitted to convert the lease into the new form of
limited duration tenancy. In Salvesen v Riddell both the Second Division and the United
Kingdom Supreme Court held that the distinction between those two categories of landlord
was not justified under article 1 of the First Protocol. The Second Division held that the
result of this was that the whole of section 72 was vitiated. The United Kingdom Supreme
Court, however, held that it was unnecessary to declare the whole of section 72 incompatible
with the Convention and confined the declaration of incompatibility to subsection (10).
[35] Despite this restriction in the declaration of incompatibility we are of opinion that
the clear import of the decision in Salvesen v Riddell was that the policy in section 72 of
prohibiting a limited class of landlords from making use of the new power to grant a limited
duration tenancy was incompatible with article 1. The enactment of provisions that gave
effect to that prohibition was accordingly outwith the powers of the Scottish Parliament, and
Page 25 ⇓
25
to that extent section 72 was an unlawful piece of legislation. This was a matter of
substance, not mere form, and it went to the practical effect of section 72. The result was
that the alleged statutory right of the general partners to secure 1991 Act tenancies was a
nullity; the existence of an indefeasible 1991 Act tenancy was inevitably based on the
illegitimate hypothesis that a limited category of landlords should not be entitled to convert
the existing tenancies into the new form of limited duration tenancy. The fundamental
problem, in other words, was not the creation of 1991 Act tenancies but the inability of the
landlords to convert those tenancies into the new form of limited duration tenancy. Thus
the consequence of section 72 was to confer security of tenure on the general partners for
years, possibly many years, beyond the period of the lease in favour of the limited
partnership.
[36] It was against that background that the Remedial Order was enacted. The purpose
of the Remedial Order was to remedy the incompatibility with article 1 that was identified in
Salvesen v Riddell. It did so by amending section 72 of the 2003 Act and inserting a new
section 72A; in our opinion these provisions are properly regarded as in the form that would
have been enacted had the original provisions of the 2003 Act been compatible with the
landlords’ Convention rights, and hence within the powers of the Scottish Parliament. The
Remedial Order accordingly did no more than correct a contravention of article 1.
Furthermore, the general partners had given no value for the creation of the 1991 Act
tenancies. Thus it cannot be said that the Remedial Order caused any loss to the general
partners; to the extent that it restricted the value of their possession (the 1991 Act secure
tenancy) it merely removed a right that should not have been granted and for which no
consideration had been given.
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26
[37] Moreover, the fundamental defect in section 72 of the 2003 Act did not involve an
attempt by the state to deprive persons of their property; it rather consisted of a failure to
balance the interests of two groups of people, landlords and general partners. A
fundamental policy of the 2003 Act was to create a new form of limited duration tenancy,
and landlords generally were permitted to convert leases into that form of tenancy. The
exception to that was the limited group of landlords who had attempted to bring limited
liability partnerships to an end during the period between 16 September 2002 and 1 July
2003. In Salvesen v Riddell it was decided that that involved an unfair and disproportionate
interference with the rights of that category of landlords. That in turn meant that the general
partners received rights as against those landlords that they should not have received. In
our opinion there is nothing unfair in bringing matters back to the position that would have
obtained had the 2003 Act conformed to article 1 of the First Protocol. For these reasons we
agree with the Lord Ordinary that the alteration in the general partners’ rights brought
about by the Remedial Order did not require the payment of compensation in order to strike
a fair balance between the landlords and the general partners qua tenants.
[38] It does not follow, however, that if the general partners acted in reliance on the
secured 1991 Act tenancies that were apparently conferred by the 2003 Act they cannot
recover losses sustained in consequence of such reliance. The state has passed legislation
which on its face appears to confer rights on individuals or other legal persons but which is
invalid owing to its incompatibility with article 1. If that occurs, it is evident that
individuals who believe that they have acquired rights under the legislation may reasonably
act in reliance on those rights. In doing so they may incur expenditure or obligations or
perform other acts that turn out to have no legal foundation, and they may suffer loss in
consequence. That in itself amounts to a deprivation of possessions. Consequently the
Page 27 ⇓
27
person affected is potentially entitled to recover such loss from the state that has caused it,
provided that the reliance on the apparent rights has been reasonable in all the
circumstances. Authority to that effect is found in Trgo v Croatia, App No 35298/04, 11 June
2009, where the European Court of Human Rights stated (at paragraph [67]):
“[T]he Court considers that the applicant, who reasonably relied on legislation, later
on abrogated as unconstitutional, should not – in the absence of any damage to the
rights of other persons – bear the consequences of the State’s own mistake committed
by enacting such unconstitutional legislation.… In this connection, the Court
reiterates that the risk of any mistake made by the State authority must be borne by
the State and the errors must not be remedied at the expense of the individual
concerned, especially where no other conflicting private interest is at stake”.
[39] That formulation assumes that the state’s error has caused loss to an individual. If
all that corrective legislation does is to restore matters to conformity with article 1, it cannot
be said that there is any true loss from the legislation by itself, since the individual
concerned obtains what he ought to have had if the legislation had conformed to the
Convention. In such a case, the only loss that can be said to arise from acts of the state other
than those compelled by the Convention is loss that arises from reliance on the invalidly
enacted legislation. That alone is a loss that would not have occurred but for the state’s
enactment of defective legislation. This is in our opinion the proper analysis of the claims
that the Lord Ordinary has allowed to proceed. He describes these (paragraph [195]) as:
“specific losses directly caused to the qualifying general partners as a consequence of
reasonable reliance by them upon having a secure 1991 tenancy and for frustration
and inconvenience, subject to the counterbalancing effect of setting off the value of
the benefits obtained by the qualifying general partners arising from the extended
period of tenancy which was enjoyed”.
Such claims are in our opinion properly recoverable under article 1, and we do not
understand this point to be disputed, at least as a matter of principle, by Scottish Ministers.
The quantification of such claims must still, of course, be decided.
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28
Legitimate expectation
[40] The petitioners’ submissions relied in large measure upon the concept of legitimate
expectation. It was argued in particular that from the coming into force of section 72 of the
2003 Act on 27 November 2003, the general partner had a possession in the form of a
legitimate expectation that he would have a secure 1991 Act tenancy; once this was
converted into a secure tenancy the general partner was entitled to continue to act upon the
basis that he held a secure tenancy. Our initial observation on these arguments is that, if the
legitimate expectation is converted into a possession in the full sense of that word, the
question of whether or not there was a legitimate expectation is irrelevant; it is the
possession itself that is then protected under article 1. Scottish Ministers concede, however,
that the protected 1991 Act tenancy purportedly conferred by section 72(6) was a possession
for the purposes of article 1. On that basis it is not obvious why it is necessary to consider
the law on legitimate expectations in relation to the 1991 Act tenancies.
[41] The petitioners also appear to rely on the concept of legitimate expectation to
broaden the scope of their entitlement to possessions to cover matters such as the farming
businesses conducted on the farms. Such use of the concept is in our opinion misplaced.
The meaning of the expression “legitimate expectation” has been considered by the
European Court of Human Rights in a number of cases, and it is clear from these that a
legitimate expectation is inevitably an adjunct to a possession, in the sense of a property
right that is itself protected by article 1. This is apparent, for example, from the detailed
discussion of the concept in Kopecký v Slovakia, (2005) 41 EHRR 944, in which reference is
made to the previous case law on the subject. In that case the applicant sought redress for
her inability to recover gold coins that had been confiscated from her father in 1959 by the
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29
then Communist government of Czechoslovakia. The European Court of Human Rights
noted that the claim that the applicant’s father had against the state required the
intervention of the courts; consequently it could not be characterized as an “existing
possession” (paragraph 41).
[42] Against that background the Court went on to consider whether the applicant had a
legitimate expectation for the purposes of article 1. Reference was made to Pine Valley
expectation arose when outline planning permission had been granted, in reliance on which
the applicant companies had purchased land with a view to its development. The planning
permission was described in that case as “a component part of the applicant companies’
property”. In a later case, Stretch v United Kingdom, (2004) 38 EHRR 12 the applicant had
leased land for a period of 22 years with an option to renew at the expiry of the term, and
had erected at his own expense a number of buildings for light industrial use which had
been sublet. The Court found that the applicant had at least a “legitimate expectation” of
exercising the option to renew. (We would note that the option would itself have been an
item of intangible property, and the option can be exercised directly, without the
intervention of the courts, as in Kopecký itself. On that basis it is difficult to understand why
it was not treated as an existing possession).
[43] The Court in Kopecký then continued (paragraph 47):
“In the above cases, the persons concerned were entitled to rely on the fact that the
legal act on the basis of which they had incurred financial obligations would not be
retrospectively invalidated to their detriment. In this class of case, the ‘legitimate
expectation’ is thus based on a reasonably justified reliance on a legal act which has a
sound legal basis and which bears on property rights.”
Another aspect of the notion of “legitimate expectation” was then referred to, under
reference to the Court’s decision in Pressos Compania Naviera SA v Belgium, (1996) 21 EHRR
Page 30 ⇓
30
301, a case concerning claims for damages to shipping arising out of the alleged negligence
of Belgian pilots. In that case the claims were classified as assets attracting the protection of
article 1, and the applicants could be said to have a legitimate expectation that those claims
would be determined in accordance with the general law of tort (delict). The significance of
this case was that it was implicit in the decision that no legitimate expectation could come
into play in the absence of an “asset” falling within the ambit of article 1 of the First
Protocol, in that instance the claim in tort.
[44] It is accordingly clear from the Strasbourg case law that a legitimate expectation for
the purposes of article 1 of the First Protocol is not an independent concept but must be
related to a legal act which bears on property rights. Its function is to deal with possible
restrictions on the property right, such as the need to assert a claim in litigation and to have
it recognized by the court, as in Pressos, or the need to enforce the exercise of an option, as in
Stretch. Alternatively, it may deal with what may be considered component parts of the
applicant’s property, as with the outline planning permission that had been granted in Pine
Valley; in that case the planning permission was clearly essential to maintain the value of the
applicant’s property. In the present case, by contrast, it is clear that the tenancy held by a
general partner who exercised the right available under section 72(6) was a possession of the
general partner in question; that was expressly conceded by Scottish Ministers. There was
no need for any adjunct to that right to ensure that it could be enforced or that its full value
could be enjoyed. The right to the protected 1991 Act tenancy under section 72(6) failed
because its unqualified nature, denying a limited class of landlords the ability to create a
new limited duration tenancy, was held to have contravened article 1. The concept of a
legitimate expectation does not have any bearing on that analysis.
Page 31 ⇓
31
[45] Furthermore, both the Scottish Parliament and Scottish Ministers accept that some
compensation is likely to be payable in consequence of the Remedial Order’s removal of a
right to an unqualified protected 1991 Act tenancy. The Lord Ordinary expressly held that
there was such a right to compensation, albeit that he limited it to losses caused by
reasonable reliance upon the provisions of section 72 of the 2003 Act, and excluded the value
of the tenancy itself from the right to compensation. We do not understand that the concept
of a legitimate expectation can add to that analysis. An aspect of the general partners’
possession, namely immunity from conversion into a limited duration tenancy, failed
because it contravened article 1, and for this purpose it is immaterial whether the immunity
is classified as an aspect of the right to possession or as a legitimate expectation. We are
accordingly of opinion that the concept of a legitimate expectation does not assist the
general partners’ claims.
[46] It is likewise of no assistance to the limited partnerships. For reasons discussed
subsequently, we are of opinion that the limited partnerships had no property right or
legitimate expectation associated with a property right that they would ever enjoy secure
1991 Act tenancies. The right to those tenancies was conferred on the general partner by
section 72(6), not on the limited partnerships, which had ceased to exist by the time that the
right became available.
The “family farming business”
[47] For the petitioners it was submitted that the Lord Ordinary ought to have had regard
to the interrelationship between the tenancy of each farm and the farming business
conducted on the tenanted land; that relationship was said to be part of the reality of the
situation. The result, it was argued, was that the Remedial Order deprived the general
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32
partner of both the tenancy and the farming business associated with the tenancy, and the
general partner was entitled to compensation for the loss of both the tenancy and the
farming business. Thus the fundamental contention that is made in this regard is that the
“family farming business” was itself an asset, associated with the lease, which formed part
of the general partner’s possessions for the purposes of article 1 and for the loss of which
compensation should be payable.
[48] In our opinion this argument is without foundation, for two reasons. In the first
place, it is not apparent from the petitioners’ pleadings or from their note of argument what
the “family farming business” is supposed to be. The expression “business” is in common
use to signify the economic activity carried on by a person together with the assets used in
carrying on that activity, but the expression covers a collection of concepts. This can best be
illustrated by considering the sale of a “business”. The sale will usually include the assets
that are used to carry on the business. These will include premises or land, such as a shop or
workshop or factory. In the case of a farming business, the farm and farm steading, together
with any other structures built on the land, will fall into this category. Moveable assets will
also be included, such as plant and machinery (in so far as it does not become a fixture
attached to the premises), raw materials and stock in trade. In the case of a farming
business, this would include elements such as seeds, fertilizers, harvested crops and
livestock. A third category of assets comprises what is known in Scots law as incorporeal
property and to economists and accountants as intangible property. In the case of a
business, these will usually be a set of contractual rights of various natures, notably debts
due to the person carrying on the business, and they might also include claims against third
parties.
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33
[49] Apart from the foregoing categories of asset, the sale of a “business” is likely to
include the goodwill of the business, if it has marketable goodwill. For reasons that we will
discuss shortly, the last qualification, the need for marketable goodwill, is a matter of
importance. At a general level, goodwill represents the amount paid for a business in excess
of the fair value of its assets at the date of acquisition. It may be looked upon as its ability to
earn future profits above those of a similar newly formed enterprise, or it may be seen as the
“goodwill” of customers and the established network of contacts, staff and management. It
represents, in short, the component in the value of a business that exceeds the value of its
tangible and intangible assets.
[50] The meaning and evaluation of goodwill has been considered in a number of cases
on article 1 of the First Protocol. For present purposes it is sufficient to refer to the opinion
of Richards LJ, in which the other members of the Court of Appeal concurred, in The Queen
[2012] Imm AR 563, in which the earlier decision of the European Court of Human Rights in
(paragraph [84]):
“Denimark Ltd v United Kingdom… provides a useful statement by the Strasbourg
court of the distinction that has been developed in the authorities between loss of
goodwill and a mere loss of future income. In considering the extent to which the
applicants’ ‘possessions’ had been affected by a statutory prohibition on handguns,
the court said this:
‘The Court recalls its case-law that goodwill may be an element in the
valuation of a professional practice, but that future income itself is only a
“possession” once it has been earned, or an enforceable claim to it exists...
The Court considers that the same must apply in the case of a business
engaged in commerce. In the present case, the applicants refer to the value of
their businesses based upon the means of earning an income from those
businesses as “goodwill”. The Court considers that the applicants are
complaining in substance of loss of future income in addition to loss of
goodwill and a diminution in value of their assets. It concludes that the
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34
element of the complaint which is based upon the diminution in value of the
business assessed by reference to future income, and which amounts in effect
to a claim for loss of future income, falls outside the scope of Article 1 of
Protocol No 1’”.
[51] The nature of goodwill in the context of article 1 was also considered in R (Nicholds) v
Security Industry Authority, [2007]1 WLR 2067, another case referred to in New London College
(at paragraph [85]), where the judge followed the distinction between goodwill, which
might constitute a possession, and an expectation of future income, which was not a
possession. As to the meaning of “goodwill”, the judge considered that the word was not
used in the technical accounting sense of the difference between the cost of an acquired
entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities. It
was rather used in the economic sense of the capitalized value of a business or part of a
business as a going concern which, according to modern theory of corporate finance, was
best understood as the expected free future cash flows of the business discounted to a
present value. It is not in our opinion necessary for present purposes to decide the precise
meaning of “goodwill” as a matter of accounting or economic theory; it is sufficient to note
that it represents an element in the value of a business that is additional to the tangible and
intangible assets of the business. What is critical on the basis of the Strasbourg case law is
that the goodwill should be an asset with a monetary value, and should represent more than
an expected stream of future income which has not been capitalized; that is apparent from
the passage quoted above from Denimark Ltd v United Kingdom.
[52] In the present case neither the petitioners’ averments nor their written argument
gives any indication of whether it is goodwill in the proper sense that is said to have been
lost or merely an expected stream of future income. If it is the latter, it is clear on the basis of
the case law in the European Court of Human Rights that no “possession” exists and that
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35
the loss is therefore not recoverable. Consequently, if the petitioners are to recover for loss
of goodwill, they must make the nature of that goodwill clear, in such a way that it
represents an element in the value of the enterprise itself over and above the value of its
assets and distinguishable from the mere loss of future income. This has not been done at
present, and for that reason alone the petitioners’ claim for the value of the “family farming
business” is irrelevant and must be rejected.
[53] The second reason for rejecting the petitioners’ argument about the value of the
“family farming business”, with reference in particular to the element of goodwill, relates to
the nature of such a business and the extent to which it has any marketable goodwill. The
nature of a farming business is obviously well known, but two particular features are
important for present purposes. The first is that the business involves the exploitation of the
land on which it is carried out, whether for growing crops or for grazing livestock. The
business is entirely dependent on use of the land. The farmer’s interest in the land,
however, is one of the assets of the business. That is so whether the land is owned by the
farmer or tenanted by him, although in the latter case it is the tenancy that is the asset of the
business, and clearly its value may be small or non-existent (if it cannot be assigned). Thus
the “goodwill” of the business, in so far as it is possible to use that expression, is
indissolubly linked to an asset of the business.
[54] The second feature of a farming business that is important for present purposes is
that it normally produces standard products, for example beef, lamb, milk, cereal crops or
potatoes, for which a well-established market exists. There is no difficulty in selling farm
produce, if it is of the requisite quality, if only because farms in the United Kingdom only
produce about half of the country’s demand for farm produce. The existence of well-
established markets means that individual trading connections are not of great commercial
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36
importance; any farmer can take his cattle or sheep to the local market and sell them there,
or can sell his cereals and potatoes to wholesalers.
[55] The result of the foregoing features is that a farming business has little or no
“goodwill” in the ordinary sense of that word. The ability to trade is indissolubly linked to
the land, and the value of the business is the value of that land together with stock, raw
materials, produce and fixed equipment. If the land is tenanted it obviously cannot be sold,
although provisions exist under the Agricultural Holdings Acts for the payment of
compensation for fixed equipment. The stock can be sold, and indeed when the tenancy of a
sheep farm is transferred hefted stock are normally sold by the outgoing tenant to the
incoming tenant. In the present case, however, the general partners will be able to obtain full
payment for the value of their stock, plant and equipment and the like. All that remains is
the value of the tenancy itself. For the reasons already discussed, we are of opinion that the
Remedial Order, in so far as it deprived the general partners of protected 1991 Act tenancies,
did not involve any contravention of Convention rights; see paragraphs [35]-[37] above.
The Lord Ordinary’s general approach to compensation
[56] In the course of their submissions the petitioners challenged the Lord Ordinary’s
general approach to compensation. The major specific challenges related to the value of the
protected 1991 Act tenancies and the notion of the family farming business; we have already
dealt with both of those matters. In addition, the petitioners made certain general
challenges to the method adopted by the Lord Ordinary, which we have summarized at
paragraphs [27]-[30] above.
[57] The petitioners submitted that the state should bear the risk of errors made by it; the
individuals concerned should not bear the risk of those errors. Reference was made to the
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37
decisions of the European Court of Human Rights in Trgo v Croatia, supra, and Klibavičienė v
Lithuania, supra, both of which were cases relied on by the Lord Ordinary. The proposition
that the state should bear the risk of errors made by it has considerable force in cases where
the error has resulted in a benefit to the state, as occurred in both of those cases. Where,
however, the error involves the striking of a balance between groups of private individuals
and the error consists of a contravention of the Convention rights of one of those groups of
individuals in such a way that the other group is favoured, we do not agree that the state
must bear the full cost of the error. The beneficiary of the error was not the state but one of
the two affected groups of private individuals. Moreover, in the present case it is the
benefited group that are now claiming for the loss of rights that they were given in
contravention of Convention rights, and for which they did not pay any consideration. In
those circumstances we are of opinion that as a matter of fairness the state should not
require to pay the formerly benefited group for the loss of the benefit that they should not
have received. On the other hand it is fair that the state should bear the cost of any losses
that were incurred by persons who reasonably relied on the existence of the defective
legislation. Those are the losses that can truly be said to be caused by the state’s defective
act. The effect of the Lord Ordinary’s decision, and our own, is that losses within the latter
category should be compensated but not losses within the former category. That in our
opinion is fully in accordance with the case law of the European Court of Human Rights.
[58] For the petitioners it was further submitted that in setting compensation for breach
of Convention rights the approach followed in domestic law should be avoided. The
purpose of compensation for breach of Convention rights was to provide just satisfaction,
which might involve both restoring the victim to the position that would have occurred but
for the violation of Convention rights and compensating him for any consequential loss: R
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38
(Greenfield) v Home Secretary, [2005] 1 WLR 673, at paragraph [19]; Papamichalopoulos v Greece,
awarding just satisfaction damages, adopts a relatively broad and equitable basis for
determining the amount. Nevertheless, one of the reasons for adopting a broad and
generally equitable approach in Strasbourg is that the Court does not have power to call and
examine witnesses; consequently damages are awarded in respect of a factual situation that
appears from the documents presented to the court. Before proceedings can be taken in the
European Court of Human Rights it is normally essential to exhaust domestic remedies.
Consequently it is appropriate that a Scottish court, which obviously has power to hear
witnesses, should award just satisfaction damages on the basis of evidence led before it.
That is what is proposed in the present case.
The position of the dissolved limited partnerships
[59] The Lord Ordinary allowed certain aspects of the claims made by the petitioners on
behalf of the general partners to proceed to proof. In respect of the limited partnerships,
however, he decided that the claims under article 1 were irrelevant. No link had been
identified between the limited partnerships and the right to the tenancy conferred by
section 72(6), and it could not be argued that the limited partnerships had some form of
legitimate expectation in view of the meaning of that expression in the Strasbourg case law.
Furthermore, the limited partnerships could not have any legitimate expectation of enjoying
a property right on the basis of section 72(6) because they could never enjoy that right; that
subsection conferred the right on the general partner, and thus it was only the general
partner who could have a legitimate expectation for the purposes of article 1
(paragraph [144]).
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[60] The limited partnerships have of course all been dissolved, and thus no longer exist
as legal persons. It is nevertheless possible for the general partners to continue to assert the
rights of the limited partnerships for the purpose of winding up their affairs; the petitioners’
contention to that effect was not disputed by Scottish Ministers, and is in any event well
vouched by authority, notably Douglas Heron & Co v Gordon, 1795, 3 Pat App 428.
Nevertheless, if the dissolved limited partnerships are to have any claim under article 1,
they must establish that they had a property right, or conceivably a legitimate expectation
connected with a property right, that was affected by the Remedial Order. For the reasons
given by the Lord Ordinary, we are of opinion that no such right or legitimate expectation
has been identified. The right created by section 72(6) was not conferred on the limited
partnerships but on the general partners. Consequently it is only the general partners that
can conceivably have been deprived of such a right by the Remedial Order. For this reason
we adhere to the decision of the Lord Ordinary on this issue.
Conclusion
[61] For the foregoing reasons we are of opinion that the Lord Ordinary reached the
correct decision in the present case. This applies in particular to his refusal of the
petitioners’ claims for the value of the purported secure 1991 Act tenancies, his rejection of
claims based on the concept of the “family farming business” and legitimate expectations,
and his decision that the claims made by the limited partnerships were irrelevant. We are
further of opinion that the Lord Ordinary’s general approach to compensation was correct.
We agree that it is necessary that the general partners should provide greater specification of
their claims for compensation for losses incurred through reasonable reliance on the
apparent secure 1991 Act tenancies conferred by the 2003 Act, as specified in the interlocutor
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of 31 May 2017 quoted at paragraph [30] above. For these reasons the reclaiming motion
must be refused. Thereafter we will remit the case to the Lord Ordinary to proceed in
accordance with his interlocutor of 31 May 2017.
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