1 April 2017: new rateable values will impact on statutory compensation payable to commercial tenants

Most if not all commercial landlords and tenants will be aware that on 1 April 2017, new rateable values for business premises will come into force.  Whilst the new rateable values will form the basis of future business rates calculations, the new rateable values will also affect the statutory compensation payable to commercial tenants in circumstances where a landlord opposes the grant of a new lease.  

By way of brief reminder, where a commercial lease does not expressly exclude the application of the provisions of Part II Landlord & Tenant Act 1954, at the end of the contractual term of the lease the tenant is entitled to remain in occupation of the property and also apply for a new commercial lease of those parts of the property that it continues to occupy.

In such circumstances, either a landlord or a tenant can serve a notice (the landlord's notice is called a "Section 25 notice" and the tenant's notice is called a "Section 26 Notice") on the other terminating the existing lease on a date not less than 6 months and not more than 12 months in the future (that date cannot be before the expiry of the contractual term of the lease) and proposing terms for a new lease. This tends to be done when a party wishes to secure more favourable terms, usually in relation to rent.

A landlord can also serve a notice upon the tenant that it opposes the grant of a new lease.  This can be done by way of a "hostile" section 25 notice (the same time periods referred to above apply) or by way of a counter-notice served upon a tenant within 2 months of the landlord being served with a tenant's section 26 notice in which the tenant seeks a new lease.

Where a landlord wishes to oppose the grant of a new lease, it must rely upon one or more of a number of grounds set out in section 30(1) Landlord and Tenant Act 1954. These grounds  comprise "fault" grounds - where a Landlord relies upon an act or failure of the tenant e.g. non-payment of rent or a breach of the terms of the lease - and "non-fault grounds" - where a landlord opposes the grant of a new lease due to reasons that are not related to any act or omission of the tenant e.g. the landlord intends to demolish the property or intends to occupy the property for the purposes of its own business.

In circumstances where a landlord opposes the grant of a new lease on non-fault grounds and the tenant then vacates the property, whether on its own volition or after a determination by the Court that the tenant is not entitled to a new lease, the landlord is required to pay statutory compensation to the tenant when the tenant vacates the property.

The compensation is calculated as 1 x the rateable value of the property or, where the tenant or its predecessor in business has been in occupation of the premises for more than 14 years, the compensation is increased to 2x rateable value.

The rateable value to be applied in both cases is the rateable value that is in force as at the date of either the landlord's section 25 notice informing the tenant that it opposed the grant of a new tenancy, or the date of the landlord's counter-notice to a tenant's section 26 notice.  As new rateable values are coming into force on 1 April 2017, the compensation that would be payable on 31 March 2017 could be significantly different to the compensation that would be payable on 1 April 2017.

Therefore, any landlord that is either

  • planning to serve a section 25 notice upon a tenant ending the tenancy in the next 12 months and opposing the grant of a new lease; or
  • considering serving a counter-notice opposing a tenant's request for a new lease that has been received within the last 2 months 

on the basis of a non-fault ground should, as a matter of urgency, establish whether the rateable value for the property is going to increase or decrease when the new rateable values come into force on 1 April 2017. 

If the rateable value is going to increase, serious consideration should be given to serving to serving a section 25 notice or counter-notice to a tenant's section 26 notice before the end of 31 March to avoid a liability for increased compensation.

If,  on the other hand, the rateable value for the property is going to decrease on 1 April 2017, then, provided that the landlord is not prejudiced by doing so e.g. delaying would take the landlord out of the 2 month period for serving a counter-notice, consideration should be given to waiting until at least 1 April 2017 before serving a section 25 notice/counter notice to a tenant's section 26 notice.

If you have any queries arising from this article, would like to suggest a topic for a future article or wish to discuss a contentious property issue, contact Chris Drinkall, Head of Rollits' Property Dispute Resolution Team, on 01482 337367 or christopher.drinkall@rollits.com

Posted on: 28/03/2017

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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