On April 1st 2017 the new Rating List for business rates comes into force. This has major implications for landlords who intend to undertake improvements, develop or reoccupy a property and, therefore, do not wish to renew a tenant’s lease on expiry which is protected under the Landlord and Tenant Act 1954.
Both landlords and tenants need to think strategically about the date they serve their Section 25 or Section 26 notice.
In such circumstances, where a landlord does not wish to renew a tenant’s lease on expiry, statutory compensation is payable to the tenant. Compensation is based on the rateable value and, with these rising in London and falling elsewhere, the timing of notices for terminating leases becomes a significant factor; the compensation payment may vary considerably dependent on the timing of the notice i.e. before or after the 1st April 2017.
What is the Landlord and Tenant Act 1954?
The Landlord and Tenant Act 1954 governs the rights and obligations of landlords and tenants of business premises. If the existing lease is for a fixed term of one year or more, the lease continues indefinitely on the same terms until either the landlord or tenant serves a formal notice to end.
The landlord serves notice to terminate a lease under Section 25 of the Act and the tenant serves notice under Section 26 when requesting a new lease.
There are strict time limits on the notice’s issue date – it cannot be more than 12 months or less than six months before the date you wish the lease to expire.
Know your rights
The notice needs to state whether a landlord is opposed or unopposed to the granting of a new lease. Under the Act, a tenant has a statutory right to renew a lease; however, there are certain circumstances where a renewal can be denied. These are set out in Section 30 (1) of the Act. Compensation is due to the tenant where, on certain grounds, a lease renewal is opposed, the most common being on grounds of redevelopment.
If, for example, a landlord can demonstrate a firm intention to demolish or reconstruct the premises or a substantial part, then the landlord can end the lease and not offer a renewal. In such circumstances, the tenant becomes eligible for compensation for the inconvenience and cost of moving.
It is important to note that, if a dispute with a tenant ends up in court, documentary evidence is essential for landlords to prove their opposition grounds are genuine. For example, for redevelopment this could be tenders for the work with contractors, architect’s drawings, planning permission, evidence of funding, etc.
The calculation of statutory compensation is based on a multiple of the rateable value of the premises occupied by the tenant. If the tenant has been in occupation for more than 14 years by the date it needs to vacate the premises, the compensation multiplier is twice the rateable value – but it is half that if occupation has been less than 14 years.
This is where the timing of a Section 25 or 26 notice gets critical; the compensation is based upon the rateable value in force at the date of the notice. With rateable values due to rise dramatically in London and many other places around the country in April, the notice date may have a major impact on compensation levels. Both landlords and tenants need to think strategically about the date they serve their Section 25 or Section 26 notice as getting on the wrong side of the 1st April 2017 could cause a landlord to pay significantly more compensation to a tenant. Conversely, should the tenant overlook this critical date, they may miss out on a larger compensation sum.
So, whether you are a landlord or a tenant, we would recommend you take professional advice as soon as possible before the 1st April 2017.