The question of compensation for disturbance on termination of a business tenancy has become more important in recent times as tenants look to maximise their return for loss of goodwill on a property they have occupied for some time. As market conditions improve and landlords look to redevelop their existing portfolio, this question is likely to become even more important as tenants reluctant to relocate look to achieve the maximum possible compensation for loss of their tenancy.
Under s. 37 Landlord and Tenant Act 1954 (the “Act”), tenants who are denied the grant of a new lease on the following grounds can claim compensation from the landlord for disturbance:-
- Where the tenant is a subtenant of part and the landlord can achieve a higher rent by re-letting the whole; or
- Where the landlord intends to demolish or reconstruct the premises; or
- Where the landlord intends to occupy the premises for his own business.
One of the aims of the compensation is to compensate for the goodwill that has been built up by trading from particular premises once the lease of that premises terminates, through no fault of the tenant.
Under the Act, if a tenant has been in occupation of the premises during the whole of the fourteen years immediately preceding the termination of the current tenancy, the tenant can claim compensation from the landlord at twice the rateable value of the property. If the tenant has been in occupation for less than fourteen years, then the compensation is an amount equivalent to the rateable value of the property.
However, if the tenant has not been in occupation for fourteen years prior to the termination of the tenancy, there are several ways of “extending” the period of occupation for the purposes of s. 37 of the Act to ensure that the fourteen year threshold is reached and double compensation is payable.
- If another group company of the tenant was in occupation prior to or following the tenant this may well count as occupation by the tenant for the purposes of calculating compensation.
- Case law suggests that a break in the period of occupation which is only for a short time and in the ordinary course of business, for example fitting out, will not break the chain of occupation for the purpose of assessing compensation.
- If the tenant previously owned the freehold of the property and subsequently entered into a sale and leaseback arrangement with the landlord then it may be that the period during which the tenant owned the freehold of the property can count towards the fourteen years.
- If the landlord does not serve a notice to determine the continuing tenancy, then the tenant may decide not to request a new tenancy. Until such time as one or other party serves a notice, the tenant will hold over on the terms of the expired lease and any period of holding over will also count as occupation for the purposes of the Act and may get the period of occupation up to the magic fourteen years.
Compensation for disturbance for a tenant who is not granted a new tenancy may in some cases prove scant consolation for the goodwill accumulated over the period of occupation. However, a tenant may be able to achieve a better financial result by being alive to the possibilities of how the period can potentially be “extended” to increase its compensation entitlement.