Legal questions: revaluation and statutory compensation

5 May 2017

Markus Klempa and Louise Kellaway look at a tenant's right to compensation under the Landlord and Tenant Act 1954 when the landlord is planning a redevelopment

I own a central London building let to a retail tenant on a lease protected under the Landlord and Tenant Act 1954 that expires soon. Although the tenant wants to renew the lease, I intend to redevelop the whole of the building, including the part let to the tenant. Could the forthcoming rates revaluation affect the amount of statutory compensation I may have to pay the tenant?

If the tenant enjoys protection under the 1954 act, including the right to apply for a new lease, it may be entitled to statutory compensation from you on leaving. The right arises only if the ground(s) on which you successfully oppose a new lease request do(es) not depend on tenant fault. There are 3 "no fault" grounds, including "ground (f)": redevelopment.

However, if you can successfully oppose a new tenancy on one of the grounds involving tenant fault, you will not have to pay statutory compensation. These grounds include:

• persistent delay by the tenant in paying rent on time,
• disrepair,
• other substantial breach of tenant covenants, or
• situations where you have offered suitable alternative accommodation.

"No fault" ground

If it looks as though you will only be able to oppose a renewal on a "no fault" ground, you should check whether the tenant has agreed, for example in the lease, that the landlord does not have to pay such compensation. Such agreements, however, tend only to be valid if the tenant has been in continuous occupation for the purpose of its business for less than 5 years at the date it quits. Occupation by the tenant's predecessors can be taken into account if the same business has been carried on, that is, if one business has been acquired by another.

Ultimately, compensation is one of many commercial factors that needs to be considered when planning a redevelopment

Broadly speaking, a tenant is entitled to the property's rateable value in compensation, unless it and any predecessor has been in occupation for 14 years or more, in which case compensation is twice the rateable value. The 14-year period is calculated backwards from the termination date specified in the landlord's section 25 notice, or the tenant's section 26 request. You can check the draft rateable values taking effect on 1 April 2017 online at the Valuation Office Agency’s website to see whether the value for the property in question is due to change.

The first step if you want to terminate the tenancy and oppose the grant of a new lease is to serve a valid notice pursuant to section 25 of the 1954 act. The notice must state your ground(s) of opposition and specify a lease termination date that can be the contractual expiry date or later, but must be no more than 12 months, and not less than 6 months after the date of service of the notice.

If the tenant has already served on you a section 26 request for a new tenancy, then you cannot serve a section 25 notice, but must instead serve a valid counter-notice on the tenant no more than 2 months after service of its section 26 request. The counter-notice must also specify the ground(s) on which you oppose its request.

Rateable value

Compensation is based on the rateable value in effect on the date of service of either your notice under section 25 of the 1954 act or counter-notice to the tenant’s section 26 request for a new tenancy. Therefore, if the date of service of one of these notices is on or after 1 April and the rateable value of the property is higher in the new valuation list, you may have to pay more compensation to the tenant when it leaves the property if its lease is not renewed.

If, as seems likely, the rateable value of your property will increase on 1 April, you should consider serving your section 25 notice on or before 31 March. Alternatively, if you receive a section 26 request before 1 April, you should serve your counter-notice within the 2-month deadline and on or before 31 March for compensation to be based on the pre-April valuation list.

If instead the rateable value of the property will fall on 1 April, you may have to pay less compensation if you serve your section 25 notice or counter-notice to a tenant's section 26 request on or after 1 April.

Ultimately, compensation is one of many commercial factors that needs to be considered when planning a redevelopment. Opposing a tenant’s right to a new lease is a complex process, and it is therefore recommended that you seek legal advice at an early stage.

Markus Klempa is a senior associate and Louise Kellaway is a professional support lawyer in the Real Estate Department of Stevens & Bolton LLP

Further information

Related competencies include: Leases/letting

This feature was taken from the RICS Property journal (March/April 2017)