Statutory compensation for business tenancies

On 1 April 2023, the Valuation Office Agency ("VOA") is updating the rateable values of all business and non-domestic properties in England and Wales. The updated list of rates will be in effect for three years until 31 March 2026.

The change in rateable values affects how much statutory compensation can be claimed under the Landlord and Tenant Act 1954 ("1954 Act"). Landlords and tenants should be aware of this effect when considering the timing of requests and notices under the 1954 Act.

How does statutory compensation work?

Under the 1954 Act, businesses with a qualifying tenancy have a statutory right to apply for a lease renewal at the end of the contractual term by the service of a "section 26 request". Landlords have the right to issue a counter-notice to a section 26 request opposing the lease renewal. Alternatively, landlords can issue a "section 25 notice" terminating the business tenancy before the tenant has issued a section 26 request. Both the tenant's request and the landlord's notice cannot be served before the final year of the term of the lease.

The 1954 Act sets out grounds for opposing renewal, one or more of which the landlord must set out in either the counter-notice or section 25 notice. Some of those grounds are deemed "no fault" grounds, as follows (by way of overview summary):

• The tenant was granted a sublease of part of the property, and the landlord intends to re-let the whole property for substantially more rent than the aggregate of the rent obtainable on re-lettings of the parts of the property (ground (e))
• The landlord intends to demolish or reconstruct the property (ground (f))
• The landlord intends to occupy the property themselves (ground (g)).

Statutory compensation will be payable when a court refuses to grant a renewal lease on solely no fault grounds that may have been inserted in either counternotice or section 25 notice. Alternatively, statutory compensation may be payable even where neither party has applied to the court but the landlord nevertheless opposes the lease renewal on no fault grounds, and the tenant chooses to vacate.

The statutory compensation a tenant is entitled to is calculated by reference to the rateable value of the property at the date of service of either the Landlord's counter-notice or section 25 notice. If the tenant has been in occupation for less than 14 years, the statutory compensation will be that rateable value. If the tenant has been in occupation for 14 years or more, then the statutory compensation will be twice that rateable value.

What impact does the change to business rates have?

The last date of the current rates in force is 31 March 2023. The new list of rateable values has been published by the VOA. A property's future rates can be checked here. As the amount of Statutory Compensation depends on the valuation list in force when the landlord's notice or counter-notice is served, the timing of service will have an impact on the amount of statutory compensation payable. A notice served before the new rates come into force on 1 April 2023 may lead to more or less statutory compensation being payable than a notice served after, depending on whether the revaluation increases or decreases the rateable value of the property in question.

The strategy for landlords and tenants naturally differs as landlords will want to pay less statutory compensation and tenants want to receive more. Consult the chart below to see what strategy is applicable in any particular circumstance: