Business rates are changing across the UK with effect from 1 April 2023. As well as having a potentially significant impact on occupiers and landlords with empty properties, it will also affect any statutory compensation payable if a landlord of commercial property in England or Wales wishes to terminate a lease that is protected by the Landlord and Tenant Act 1954 (the "1954 Act") on certain grounds.
As a recap, if a lease is protected by the 1954 Act, the tenant will have the right to a new lease of the property unless the landlord can make out one of seven statutory grounds. These grounds include if a landlord wishes to occupy the property itself ("ground (g)"), if a landlord wishes to redevelop the property and cannot do so with the tenant in situ ("ground (f)") and if a tenant has a sublease of part and the landlord wishes to re-let the whole ("ground (e)"). If a landlord can only rely on one of these three grounds and not any of the other grounds (such as persistent delay in paying rent or if an offer of suitable alternative accommodation is made to the tenant), then it will be obliged to pay the tenant "statutory compensation" when the tenant leaves the property. The amount of compensation will be equal to the rateable value of the premises if the tenant has occupied for fewer than 14 years and twice the rateable value if the tenant has occupied for 14 years or more (occupation can be aggregated with a previous tenant in certain circumstances, essentially where a tenant takes over the business of a previous tenant).
The Valuation Office has already published the increases that will come into effect on 1 April 2023 and these can easily be checked online. Data published by the Valuation Office reveals a marked difference in the treatment of different asset classes. For example, industrial (storage and distribution) premises will see an increase in rateable value by an average of 32% whereas hotels and boarding houses have decreased by an average of 28%. A landlord of, for example, a large industrial warehouse with a sitting tenant who has been in occupation for 15 years could therefore face a very material increase in compensation payment.
Importantly, it is the rateable value on the date that a landlord serves a s.25 notice or serves a counter-notice to a tenant's s.26 request that sets the date on which the rateable value is ascertained for calculating statutory compensation. A landlord serving a s.25 notice relying on grounds (e), (f) or (g) could therefore be faced with a markedly different statutory compensation liability if it served its notice on 1 April 2023 to if it served its notice on 30 March 2023. Likewise, a protected tenant who believes that its landlord may wish to terminate on grounds (e), (f) or (g) and is minded to serve a s.26 request, should bear this in mind.
There are clearly a range of factors which will dictate the appropriate time for service for service of a s.25 notice or s.26 requests: the contractual term of the lease; how advanced a landlord's redevelopment or occupation plans are; any negotiations with the other party etc. Those will generally be more important that the value of the compensation payment. However, the possibility of an increase or decrease in statutory compensation is something that both landlords and tenants should be aware of if approaching the lease termination process under the 1954 Act in the coming months.
The lease termination process under the 1954 Act is complicated, with a range of factors to consider and traps in which to fall. If you are a landlord or a tenant of commercial property in England and Wales, our real estates disputes team is well placed to steer you through the minefield and ensure you achieve the best result possible.
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