How will the recent changes to rateable values impact the amount of statutory compensation landlords are liable to pay tenants and is timing of the essence?

The 2017 rating revaluation follows a volatile period for the property market and many property owners are likely to see sizable increases in rental values as a result. The timing of statutory notices to determine or to renew a tenancy will be critical to the amount of statutory compensation payable by a property owner wanting to regain possession.

When is statutory compensation payable?

If a landlord is able to oppose the renewal of a business lease under the Landlord and Tenant Act 1954 (the Act) by relying on a 'no-fault' ground (eg it wishes to redevelop the premises or occupy the property itself) then it is generally liable to pay statutory compensation to the tenant.

Statutory compensation is calculated by reference to the rateable value of the property. Where the tenant (or its predecessor) has been in occupation for 14 years or more, the landlord will be liable to pay statutory compensation equal to twice the rateable value of the property. Where the tenant's occupation has been for a shorter period, compensation will be payable at the rateable value.

Changes to rateable value

The rateable value of a property is assessed by the Valuation Office Agency based on the annual open market rent for the property. The last revaluation took place in 2010 and that was based on 2008 valuations. The property market has changed markedly since then and rental levels now bear little resemblance to the rateable values that have been in place since then and which continue to apply. However draft revisions have just been published. These are due to come into force on 1 April 2017 with the effect that rateable values are set to change considerably.

Some businesses may, as a result, get relief after years of overpayment but many face the prospect of a marked increase in rating liability.

Effect on Statutory Compensation Payments

The rateable value which should be used to calculate the statutory compensation due to a tenant will be based on the valuation list in force at the date that either of the following is served:

  • the landlord's section 25 notice terminating the tenant's tenancy opposing renewal on a no fault ground; or
  • The landlord's counter notice to a tenant's section 26 request for a new tenancy, opposing renewal on a no fault ground.

If either of these notices is served on or after 1 April 2017, compensation will be calculated by reference to the 2017 list. Conversely, if either of these notices are served before 1 April 2017, the rateable values detailed in the 2010 list will apply.

The timing of service of these notices will be crucial in determining the level of statutory compensation that might be payable by landlords to tenants pursuant to the Act.

Practical Tips

  • Landlords and tenants should review the draft rateable values to assess whether it is likely that the rateable value of the subject property will increase or decrease from 1 April 2017.
  • The proposed revised values should then be borne in mind if the landlord or tenant is considering serving a section 25 notice or section 26 request and renewal is likely to be opposed on a no fault ground.
  • If the rateable value is likely to increase then, in order to minimise their liability, landlords should consider serving a section 25 notice before 1 April 2017 to ensure that the rate of statutory compensation is based on the 2010 list. In this scenario, tenants should consider waiting until 1 April 2017 to serve a section 26 request so that they will receive higher statutory compensation in the event that the landlord opposes renewal or, if there is any ground to do so, contest the validity of a section 25 notice served before April.
  • If the rateable value is likely to be reduced, landlords should consider serving their section 25 notice on or after 1 April 2017, whilst tenants should serve their section 26 request by 31 January 2017 at the latest, to ensure the landlord is compelled to serve its counter notice (if any) before 1 April 2017.