Business rates change and opposed lease renewals: Tips and tactics for landlords and tenants

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The Landlord and Tenant Act 1954 (the 1954 Act) offers security of tenure protection for tenants in occupation of premises for business purposes so that, unless the landlord can oppose on one or more of a few, limited, statutory grounds for recovering possession, a tenant is entitled to be granted a renewal lease at the end of its tenancy.  Furthermore, the 1954 Act can require statutory compensation to be paid to the tenant in the event that the landlord opposes a renewal lease solely on one of the ‘non-tenant-fault’ grounds (for example, if the landlord wishes to redevelop or to occupy the premises itself).  The amount of statutory compensation payable is calculated by reference to the rateable value of the premises.  On 1 April 2017 business rates are changing for the first time in seven years, and this could have a significant impact where landlords oppose 1954 Act lease renewals.

Calculation of statutory compensation

A landlord wishing to oppose the grant of a renewal lease must state its ground(s) of opposition either when serving a landlord’s section 25 notice to terminate the existing tenancy, or when serving its counter-notice to a tenant’s section 26 request for a renewal lease. If the landlord opposes the grant of a renewal lease only on non-tenant-fault grounds it will be liable to pay to the departing tenant statutory compensation at twice the rateable value of the premises where the tenant (or its predecessor) has been in business occupation for 14 years or more; or at the rateable value where the occupation has been for a period less than 14 years.

Revised ratings: Effect on statutory compensation

New business rates will come into force on 1 April 2017. (Draft revised rateable values were published on 30 September 2016 and business ratepayers can now go online to check for accuracy and to ascertain whether the rating of their properties will increase or decrease.)  Rateable values currently in effect are based on 2008 valuations, but the market has changed considerably since then and many properties are expected to see a significant increase in values.

The rateable value used to calculate any statutory compensation payable is that which is in force at the date of service of the landlord’s termination notice or counter-notice. That means that, if the rateable value increases on 1 April 2017 and the landlord’s notice/counter-notice is not served by that date, compensation will be calculated by reference to the new, higher amount.

Tips and tactics

  • Landlords and tenants alike should check the draft revised rateable values for their properties and arrange valuation inspections so as to determine the accuracy of (or indeed any obvious errors in) the new ratings. The new ratings will come into effect on 1 April 2017 and any appeals can be lodged from that date.
  • Landlords and tenants should establish whether the rateable value of any property let on a 1954 Act-protected tenancy is increasing or decreasing and should factor that into their lease termination/lease renewal strategic review.
  • In particular, where the rateable value is increasing and the landlord wishes to oppose a lease renewal, it will be in the landlord’s interests to serve its section 25 termination notice or its counter-notice to a tenant’s section 26 request for a new tenancy before 1 April 2017.
  • Where a rateable value is increasing it will be in the tenant’s interests to wait until after 1 April 2017 before requesting a new tenancy so that, if the landlord does oppose, a higher compensatory sum will become payable.
  • (Where a rateable value is decreasing, the advice for landlords is to serve their notices/counter-notices after 1 April 2017 and the advice for tenants is to serve their renewal requests as soon as possible, and in any event by no later than 31 January 2017, to require the landlord’s response while the existing, higher rating remains in effect.)