Landlords who are in a position to oppose lease renewals may want to take action now, ahead of business rates revaluation - and time could be of the essence for tenants too. Emma Humphreys explains who could be affected and why.
Much has been written about the business rates revaluation coming into force on 1 April 2017. However, some landlords and tenants may be able to take advantage of these changes when it comes to triggering the lease renewal process under the Landlord and Tenant Act 1954 (“the 1954 Act”). This particularly applies to any landlord intending to oppose the renewal of a business tenancy on the basis of a “no fault” ground under the 1954 Act. Similarly, any tenant intending to serve notice to request a new tenancy should consider the potential implications of the change in rates on 1 April.
The common “no fault” grounds on which landlords tend to refuse to renew a business tenancy arise under section 30(1)(f) and (g) of the 1954 Act, which relate to redevelopment and the landlord’s intention to occupy the premises respectively. There is also a “no fault” ground under section 30(1)(e) where the current tenancy was created by a subletting of part, the landlord wants to let or dispose of the property as a whole and the rent reasonably obtainable for the whole premises would be more than the rents reasonably obtainable on separate lettings.
Where a landlord successfully opposes the renewal of a business tenancy based on these “no fault” grounds, it will be required to pay statutory compensation in return for the tenant’s vacation of the premises. The amount of compensation payable under section 37 of the 1954 Act is based on the rateable value of the premises and is generally equivalent to it. Where the tenant (or its predecessor) has occupied the premises for 14 years or more, the statutory compensation will be twice the rateable value of the premises.
The rateable values used to calculate the statutory compensation payable under the 1954 Act are based on the valuation list in force at the date when the landlord either serves notice to end the tenancy under section 25 or serves a counter-notice to the tenant’s section 26 request for a new tenancy. The termination date for the tenancy arising as a result of the section 25 notice or section 26 request is irrelevant to the question of the relevant rateable value for calculating compensation (although this date may affect a tenant’s entitlement to double compensation – see Bacchiocchi v Academic Agency Ltd  3 EGLR 157).
This means that a landlord who waits until after 1 April 2017 to serve its opposing notice or counter-notice could find itself with a higher bill for statutory compensation than might otherwise be the case. It would therefore be sensible for landlords who are intending to refuse to renew a business tenancy on the basis of a “no fault” ground (ie grounds (e), (f) and/or (g) referred to above) to explore the extent to which they might benefit from serving their notice or counter-notice on or before 31 March 2017.
Of course, notices under section 25 cannot be served more than 12 months before the date of termination for the tenancy which they specify. So, a section 25 notice can only be served to take advantage of the current rating list if the lease term ends on or before 31 March 2018. If a tenancy does not expire under the lease until 1 April 2018 or thereafter, then neither party will be able to accelerate the liability for statutory compensation so as to take advantage of the current list, which remains in force up to and including 31 March 2017.
For tenants, it may be sensible to wait until after 1 April 2017 to serve any request for a new tenancy under section 26 of the 1954 Act so that, if the landlord opposes the renewal on the basis of a “no fault” ground, a higher rate of statutory compensation could be payable using the new list of rateable values.
Of course, the proposed change in the rateable value of a particular business premises needs to be checked before any strategy is decided since some rates are due to decrease. In those circumstances, tenants may want to press on with serving a section 26 request whereas landlords will want to delay serving any “no fault” opposing section 25 notice or counter-notice to a tenant’s section 26 request until on or after 1 April 2017.
Parties will also want to bear in mind other circumstances which could become relevant to their position if they press forward with undue haste or delay their plans. For example, a landlord wishing to oppose the renewal of a tenancy on the basis of redevelopment plans will need to consider before it serves notice whether its evidence will be ready in time to prove at trial that it has the intention and ability to undertake its plans within a reasonable time after the termination of the tenancy (see “Planning to use it yourself?”, EG, 21 January 2017, p69). Parties may also want to consider the implications for interim rent if notice is delayed. However, those for whom the appropriate circumstances arise may well achieve a financial benefit.
This article first appeared in Estates Gazette on February 14th.