Report for the Hearing delivered in Case 5/88

I — Facts and procedure

1. The Community provisions applicable

a) Council Regulation (EEC) No 856/84 of 31 March 1984 amending Regulation (EEC) No 804/68 on the common organization of the market in milk and milk products (Official Journal 1984, L 90, p. 10) introduced, for a period of five years, an ‘additional levy’ on deliveries of quantities of milk which exceed a reference quantity to be determined.

b) The general rules for the application of the additional levy are laid down in Council Regulation (EEC) No 857/84 of 31 March 1984 adopting general rules for the application of the levy referred to in Article 5c of Regulation (EEC) No 804/68 in the milk and milk products sector (Official Journal 1984, L 90, p. 13). Article 2(1) o'. Regulation No 857/84 determines the reference quantity referred to in the basic regulation, No 856/84, that is to say the quantity which is exempt from the additional levy. Basically, it is equal to the quantity of milk or milk equivalent delivered by the producer during the 1981 calendar year (formula A) or to the quantity of milk or milk equivalent purchased by a purchaser during the 1981 calendar year (formula B), plus 1%. However, under Article 2(2), Member States may provide that on their territory the reference quantity shall be equal to the quantity of milk or milk equivalent delivered or purchased during the 1982 calendar or the 1983 calendar year, weighted by a percentage established so as not to exceed the guaranteed quantity. Furthermore, under Articles 3, 4 and 4a of the aforementioned regulation, the Member States may take account of certain special situations when determining the reference quantities or allocate specific or additional reference quantities. In this regard, reference should be made in particular to Article 4(l)(a) of Regulation No 857/84, which reads as follows: Article 7(1) and Article 7(4) of Regulation No 857/84, as amended by Council Regulation No 590/85 of 26 February 1985 (Official Journal 1985, L 68, p. 1), read as follows : Article 12 of Regulation No 857/84 defines a number of the terms used in the regulation, including the terms ‘producer’ and ‘holding’ (Article 12(c) and (d)):

‘1. In order to complete the restructuring of milk production at national or regional level or at the level of the collecting areas, the Member States mpy, in connection with the application of formulas A and B: (a) grant to producers undertaking to discontinue milk production definitively compensation paid in one or more annual payments; ...’

‘1. Where a holding is sold, leased or transferred by inheritance all or part of the corresponding reference quantity shall be transferred to the purchaser, tenant or heir according to procedures to be determined.

...

4. In the case of rural leases due to expire, where the lessee is not entitled to an extension of the lease on similar terms, Member States may provide that all or part of the reference quantity corresponding to the holding or the part thereof which forms the subject of the lease shall be put at the disposal of the departing lessee if he intends to continue milk production. ...’

‘(c) producer: a natural or legal person or group of natural or legal persons farming a holding located within the geographical location of the Community:

selling milk or other milk products directly to the consumer,

and/or supplying the purchaser;

d) holding: all the production units operated by the producer and located within the geographical territory of the Community’.

c) The detailed rules for the application of the additional levy were laid down in Commission Regulation (EEC) No 1371/84 of 16 May 1984 laying down detailed rules for the application of the additional levy referred to in Article 5c of Regulation (EEC) No 804/68 (Official Journal 1984, L 132, p. 11). Article 5 of that regulation provides as follows:

‘For the purposes of applying Article 7(1) of Regulation (EEC) No 857/84 and without prejudice to Article 7(3) of the same Regulation, the following rules shall apply to the transfer of reference quantities granted to producers and purchasers in application of formulas A and B and of reference quantities granted to producers selling for direct consumption:

1. Where an entire holding is sold, leased or transferred by inheritance, the corresponding reference quantities shall be transferred in full to the producer who takes over the holding.

2. Where one or several parts of a holding is sold, leased or transferred by inheritance, the corresponding reference quantity shall be distributed among the producers operating the holding in proportion to the areas used for milk production or according to other objective criteria laid down by Member States. Member States may disregard transferred parts the area of which used for milk production is less than a minimum size which they shall determine.

3. The provisions of subparagraphs 1 and 2 above shall also be applicable in other cases of transfer which, under the various national rules, have comparable legal effects as far as producers are concerned. Member States may apply the provisions of subparagraphs 1 and 2 in respect of transfers taking place during and after the reference period.’

2. The German provisions implementing the Community rules

The Federal Republic of Germany made use of the power conferred by Article 4(l)(a) of Council Regulation No 857/84 to grant compensation to producers undertaking to discontinue milk production definitively by enacting the Gesetz über die Gewährung einer Vergütung für die Aufgabe der Milcherzeugung für den Markt (Law on compensation for the discontinuance of the production of milk for sale) of 17 July 1984 (Bundesgesetzblatt I, p. 942) and the Verordnung über die Gewährung einer Vergütung für die Aufgabe der Milcherzeugung für den Markt (Order on compensation for the discontinuance of the production of milk for sale) of 20 July 1984 (Bundesgesetzblatt I, p. 1023).

In order to be awarded compensation it is necessary, under Paragraph 3(1) of the implementing order, for the claimant to be a producer, within the meaning of Article 12(c) of Regulation No 857/84, and to undertake to discontinue milk production definitively within six months of the date on which compensation is awarded. Under Paragraph 3(2) of the implementing order a lessee of a holding within the meaning of Article 12(d) of Regulation No 857/84 must submit a written authorization from the lessor.

3. The dispute in the main proceedings

The main proceedings pending before the Verwaltungsgericht Frankfurt am Main are concerned with the question whether the Bundesamt für Ernährung und Forstwirtschaft is required to pay the farmer Hubert Wachauf compensation for definitive discontinuance of milk production under the Gesetz über die Gewährung einer Vergütung für die Aufgabe der Milcherzeugung für den Markt of 17 July 1984 and the implementing order of 20 July 1984 adopted pursuant thereto.

Mr Wachauf had leased a farm (land and buildings). The lease did not require him to engage in milk production. The elements normally required for milk production, that is to say, a herd of dairy cattle and the technical facilities for milk production, did not form part of the leased property.

The Bundesamt für Ernährung und Forstwirtschaft refuses to pay the compensation to Mr Wachauf because it takes the view that he must submit an authorization from the lessor under Paragraph 3(2) of the implementing order.

The Verwaltungsgericht has doubts as to whether the lessor's consent matters in this case. Since the lessor never himself engaged in milk production on the leased farm and the essential elements of a milk-production unit (dairy cows and so forth) had remained the property of the lessee, the lessor had possibly not let a milk-production holding within the meaning of Article 12(d) of Regulation No 857/84 but only an agricultural holding in which products other than milk could have been produced.

In the event that, regardless of that doubt, it must be assumed that the farm is a milk-production holding, the Verwaltungsgericht raises the question whether the surrender of the leased property constitutes a transfer having comparable legal effects, within the meaning of Article 5(3) of Regulation No 1371/84, with the legal result that upon surrender of the property the lessee's reference quantity is transferred to the lessor. A reversion to the lessor of the allocated reference quantity would appear justified only if the lessor had himself produced milk in the year in respect of which the reference quantity is determined so that he thus acquired a certain right of enjoyment. If, on the other hand, the lessor did not produce milk in the relevant reference year and did not otherwise contribute to the development of a milkproducing unit by the lessee, the transfer to the lessor of the reference quantity allocated to the lessee would deprive the lessee of the fruits of his labour. This would amount to unconstitutional expropriation without compensation.

In those circumstances, the Verwaltungsgericht Frankfurt am Main, by order of 17 December 1987, suspended the proceedings and submitted the following questions to the Court in accordance with Article 177 of the EEC Treaty:

‘Is an agricultural production unit having neither dairy cattle nor facilities (such as milking parlours) capable of being used exclusively for milk production a “holding” within the meaning of Article 12(d) of Council Regulation (EEC) No 857/84 of 31 March 1984 (Official Journal L 90, 1.4.1984, p. 13)? Is the surrender of leased property upon the expiry of the lease a case having “comparable legal effects” within the meaning of Article 5(3) of Commission Regulation (EEC) No 1371/84 of 16 May 1984 (Official Journal L 132, 18.5.1984, p. 11), if the leased property is an agricultural undertaking without dairy cattle and without any facilities capable of being used only for milk production (for example, milking parlours) and where the lease provided for no obligation on the part of the lessee to eneaee in milk nroducrion?’

4. Proceedings before the Court

The order for reference was registered at the Court on 8 January 1988.

In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities, written observations were submitted by the Bundesamt für Ernährung und Forstwirtschaft, represented by Dr Apelt, by the United Kingdom, represented by H. R. L. Purse, of the Treasury Solicitor's Department, and by the Commission of the European Communities, represented by its Legal Adviser, Peter Karpenstein.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure without any preparatory inquiry.

By decision of 7 December 1988 the Court assigned the case to the Third Chamber in accordance with Article 95 of the Rules of Procedure.

II — Written observations

1. The first question

The Bundesamt für Ernährung und Forstwirtschaft suggests that the first question should be answered in the affirmative. The United Kingdom and the Commission take a restrictive view in so far as they consider that the term in question, ‘holding’, covers only agricultural property which is suitable for milk production.

a) The Bundesamt für Ernährung und Forstwirtschaft considers that an agricultural production unit is a holding within the meaning of Article 12(d) of Regulation No 857/84, even if movable property for the operation of the production unit operated by the producer and located within the geographical territory of the Community do not belong to it. Article 12(d) of Regulation No 857/84 defines the term ‘holding’ as all the production units operated by the producer and located within the geographical territory of the Community. According to that legal definition, the term ‘production unit’ relates exclusively to immovable production units and does not cover movable production equipment or accessories. The word ‘located’, according to its meaning and usage, relates only to immovable objects, for example land and real property. Thus the only production units which could be considered production units located within the geographical territory of the Community are corresponding immovable units, that is to say land and buildings. Article 12(d) also refers (in the German text) to ‘der vom Erzeuger bewirtschafteten Produktionseinheiten’. Since in an agricultural holding only land is typically ‘bewirtschaftet’ (farmed, cultivated), this once again makes it clear that land is involved. All movable production units (cows and technical facilities) are merely the means for farming the agricultural land. Agricultural 12(d) does not define the term ‘holding’ exclusively as a milk-producing holding. As is clear from the definition of the term ‘producer’ contained in Article 12(c), a producer is a person farming a holding located within the geographical territory of the Community selling milk or other milk products directly to the consumer and/or supplying the purchaser (dairy). However, this does not mean that only production units on which only milk is produced enter into consideration. Other production units are relevant, like for example farming land. The term ‘producer’ is chosen here only for reasons of simplification; it is also used in other provisions as a synonym for farmer (for example in Article 5 of Regulation No 1371/84). The answer to the question whether a producer is a ‘lessee of an agricultural holding located within the geographical territory of the Community’ within the meaning of Article 12(d) likewise does not depend on whether the lessee has leased an agricultural holding in which he can and may engage ‘only’ in milk production or whether his contract allows him to decide for himself the kinds of agricultural products to which he wishes to devote his holding. Community law does not look to the intended use of the land but to the way in which it is actually used.

b) In the view of the United Kingdom, the definition of ‘holding’ set out in Article 12(d) of Regulation No 857/84 is to be interpreted as extending to any agricultural land capable of being used for milk production. The definition of ‘holding’ is limited in three significant ways. Firstly, it is made clear that it is all the production units operated by the producer, rather than each production unit severally, which collectively form his holding. Secondly, the definition applies to ‘production units’ but makes no distinction between production units owned by the producer and those leased by the producer, nor between production units utilizing dairy cows and equipment which are owned by the producer, and those utilizing cows and equipment which are leased by the producer. Thirdly, the term ‘producer’ used in the definition is itself defined by reference to milk production. The United Kingdom takes the view, however, that ‘production units’ do not necessarily mean units used exclusively for the production of milk, as opposed to use for the dual purpose of milk production and the production of other agricultural produce. In the United Kingdom it is not unusual for a producer to own his dairy cows but to lease the land that is being farmed. It is comparatively unusual for a producer to lease both land and animals. If the agricultural land was to be regarded as a ‘holding’ for the purpose of the transfer of the reference quantity only in the latter case and not in the former case, this would create different consequences for producers who own their cows but lease land and for those who lease both cows and land together. This would create discrimination between producers and thus be contrary to Article 40(3) of the EEC Treaty. The national court's suggested interpretation, to the effect that where essential elements necessary for milk production are not present, the agricultural land may be regarded as a holding only if the owner has decided in a clear and binding manner that the land may not be used for anything other than milk production, would be an unreasonable fetter on the producer's economic activity. It would mean, for example, that a lessee who had entered into such an agreement would either be unable subsequently to undertake to discontinue milk production definitively or would, by so doing, be in breach of his agreement with his lessor. Such a consequence would be inconsistent with the objective of the additional levy. The term ‘holding’ should be given a wide construction of land capable of being used for milk production (i.e. excluding woodland, marshland and so on). It is important to note that if a reference quantity has been allocated to a producer farming an area of land, it would have been on the basis of his actual milk production. If the whole of the land is subsequently transferred, the whole of the corresponding reference quantity will also be transferred with it, in accordance with Article 7 of Regulation No 857/84 and Article 5 of Regulation No 1371/84. If, however, only a portion of the land is sold, then the corresponding reference quantity will be apportioned according to the areas used for milk production.

c) The Commission takes the view that a holding within the meaning of Article 12(d) of Regulation No 857/84 must be regarded as being any holding located in the Community which, having regard to the structure of its land and the existing buildings, is suitable for milk production. It does not matter whether the dairy herd and the equipment for the production of milk are introduced by the lessor or by the lessee or whether the lease lays down an obligation to engage in milk production. In many Member States it is usual for the lessee of a farm to introduce the herd and the equipment necessary for milking the herd. In those circumstances, a narrow interpretation of the term ‘holding’ would not only be divorced from reality but would also mean that the rules laid down in Regulation No 857/84 in relation to the allocation of reference quantities in the cases of leases would largely be deprived of their meaning. In that case, the reference quantity would, upon the expiry of the lease, normally be transferred to the lessee and would thus no longer pass with the holding or the land. As Article 7(1) of Regulation No 857/84 shows, the milk-quota system is based on the assumption that reference quantities ‘attach’ to the land. Reference quantities should not be freely traded in and, above all, it should not be possible for them to become the subject of speculative operations. It is the intention of the Community legislature that they should attach to the land used for milk production and therefore in the event of sale, lease or transfer by inheritance they are transferred to the purchaser, tenant or heir. The introduction of an exception in favour of lessees who are not entitled to an extension of their lease and who may encounter economic and social problems upon the expiry of the lease (see Article 7(4) of Regulation No 857/84, as amended by Regulation No 590/85) merely confirms the principle that reference quantities attach to the land. The rules which the Community legislature has adopted in relation to the allocation of reference quantities in the case of leases must also be referred to when Article 12(d) of Regulation No 857/84 is interpreted. Since those rules show, on the one hand, that reference quantities attach to the land and, on the other, that it is necessary to take account of the lessee's interests, it is necessary, in order to respect the relationship between rule and exception, to give preponderance to the immovable production units belonging to the lessor when the term ‘milk-producing holding’ comes to be defined. The lessee's interests may be taken into account only exceptionally, possibly where the lessee has made milk production on the leased holding possible in the first place through his own investment (for example by building cattle sheds or cultivating waste land). The fact that it is primarily the existence of immovable production units which determines whether a milk-producing holding exists may be deduced from the wording of Article 12(d) of Regulation No 857/84. That provision refers to production units ‘located’ within the territory of the Community and thus apparently means only immovable property like land and buildings but not movable things such as cows and milking plant.

2. The second question

All the parties to the proceedings which have submitted observations are agreed that the second question should be answered in the affirmative.

a) The Bundesamt für Ernährung und Forstwirtschaft submits that Article 7(1) of Regulation No 857/84 and Article 5 of Regulation No 1371/84 show that, in the event of the transfer of the holding or of parts of the holding, the reference quantity passes with the holding and the land and that in the event of the surrender of the use and benefit of the land used for milk production, that is to say the land Operated' by the producer, the reference quantity passes to the transferee. Article 5(1) of Regulation No 1371/84, which provides that in the event of the transfer of the holding the reference quantity attached to it is to be transferred in full, also applies to the surrender of leased property. The letting of property necessarily involves the obligation on the part of the lessee to restore the leased property so that this provision applies not only to the transfer of the leased property at the beginning of the lease but also to its surrender. As far as the provisions concerning surrender are concerned, it is immaterial whether, or from which date, milk was produced on the holding; the decisive factor is solely whether a holding has a reference quantity. In any event, Article 5(1), in conjunction with Article 5(3) of Regulation No 857/84, also applies to the surrender of an agricultural holding, or of parts of a holding, by the lessee to the lessor. Such a surrender constitutes a transfer, which, under both Community law and German law, has comparable legal consequences for a producer as the transfer of an agricultural holding by the lessor to the lessee. In both cases, the essential legal consequence is that land is transferred. Community law has regard only to that transfer; the reason for the transfer of the land is immaterial. The fact that the surrender of the leased property is also covered by the transfer provision is also shown by the fact that, according to Article 7(1) of Regulation No 857/84 and Article 5(1) and (3) of Regulation No 1371/84, the lessor's reference quantity is transferred to the lessee upon the transfer of the leased property pursuant to the law. Therefore, for reasons of equal treatment, there must be a transfer of the reference quantity from the lessee to the lessor when the leased property is surrendered. Moreover, only such a view takes account of the aim of attaching reference quantities to the land in the context of the rules relating to guaranteed milk quantities. For the overwhelming proportion of holdings milk production is an important production component. However, at the moment when a holding is transferred, the position is the same for the lessee as for the lessor. If, therefore, the corresponding reference quantity were not transferred, many holdings could no longer be operated by a successor since without a reference quantity no milk could be profitably produced and in many cases there would be no production alternatives. Furthermore, the lessee is not deprived of the fruits of his labour if the reference quantity is transferred upon the surrender of the leased property. Under the lease the lessee is entitled to the profits from the holding; he regularly keeps those profits. If a lessee operates a holding as a dairy-cow holding, the profit which he derives from it is ultimately the financial reward which he receives from a purchaser for supplies of milk. That remuneration and not the reference quantity, which is only the legal result of his activity, is to be regarded as the fruits of his labour.

b) The United Kingdom takes the view that the surrender of a lease has comparable legal effects to the creation of a lease and that this does not lead to a conflict with constitutional principles or other superior rules of law. The reference quantities created by Regulation No 856/84 are not to be regarded as intangible assets which may be freely bought and sold. They represent a market mechanism to reestablish a balance in the milk sector. It follows that the continuing value of a reference quantity lies only in that it enables a person to produce milk for sale free from levy liability. However, a reference quantity confers no actual benefit on a person who does not produce milk for sale. Thus it is appropriate that whoever is entitled to farm the land by reference to which the reference quantity has been allocated should be entitled to the benefit of the reference quantity. Just as the granting of a lease deprives the landlord of the use of his land in return for rent, so the surrender of the lease deprives the lessee of the use of the land in return for freedom from the obligation to pay rent. Both cases involve the giving up of a legal right in favour of another person. A producer who does not own land and who has surrendered his lease will consequently have to ensure that he leases land in respect of which a reference quantity is available. It therefore seems appropriate to regard neither the surrender of the land nor the surrender with it of the reference quantity allocated in respect of that land as infringing fundamental rights guaranteed by Community law.

c) In the Commission's view, the principle obligation to transfer the reference quantity to the lessor at the same time as the surrender of leased property follows quite clearly from Article 7(1) of Regulation No 857/84 without any need to refer to Article 5(3) of Regulation No 1371/84. The obligation to surrender is in fact the outcome of the ‘attachment to the land’ of the reference quantities and, as an actus contrarius, is subject to the same rules as the creation of the lease itself. As in the case of the first preliminary question, however, the relevant point is whether the lessee has leased a milk-producing holding, that is to say whether, having regard to the structure of its land and buildings, the leased holding was suitable for milk production. The question of constitutional rights raised by the national court would arise only if the plaintiff had converted the holding in question into a milk-producing holding through significant investment of his own. The introduction of dairy cows and equipment essential for the production of milk do not by themselves represent investment of an exceptional kind warranting special protection since at the end of the lease the lessee remains the owner of the cows and equipment. It also appears inappropriate to speak of the lessee's ‘acquired rights’ or of a milk quota obtained through the lessee's own efforts the surrender of which would amount to expropriation without compensation. According to the declared intention of the draftsmen of Regulation No 857/84, the milk quota is attached to a holding or a piece of agricultural land and is not the fruit of the milk producer's labour. Milk producers are not therefore to be granted an independently exercisable subjective right to a levy-free reference quantity. Nor can the lessee of a holding that is suitable for milk production be given the right in the normal situation to renounce definitively the reference quantity allocated to him. According to Article 4(2) of Regulation No 857/84, the reference quantities freed under national compensation rules are to be added to the reserve which each Member State must constitute in accordance with Article 5 of that regulation for the purpose of the allocation of reference quantities in special cases. A renunciation therefore binds the lessee not only personally. Since the lessee's renunciation would thus make it impossible for the leased farm to be used for milk production for an unforeseeable period, it may not be considered inappropriate a priori for national laws adopted pursuant to Article 4(l)(a) of Regulation No 857/84 to make the payment of compensation to the lessee dependent on the lessor's consent.

M. Zuleeg

Judge-Rapporteur

1 Language of lhe case: German.