What impact will the business rates revaluation have on statutory compensation?
On 1 April 2017, rateable values will be re-valued in England and Wales for the first time since 2010. The timing of statutory notices served to terminate or to renew a tenancy may have a direct impact on the level of statutory compensation that a landlord pays to its tenant when recovering possession.
Business rates revaluation
Business rates are calculated by reference to the rateable value of the property. The first revaluation of rateable values in seven years will come into effect in England and Wales on 1 April 2017. The changes to rateable values will mean that some occupiers will secure a reduction in their business rates bills but others, in particular retailers in central London, are likely to see significant increases.
When is statutory compensation payable?
Under the Landlord and Tenant Act 1954 (the 1954 Act), landlords can oppose the grant of a new tenancy if they can rely on one of the 'no fault' grounds, which include where a landlord intends to redevelop the premises or to occupy them itself. If a landlord successfully relies upon a 'no fault' ground it is obliged to pay its tenant statutory compensation.
The amount of statutory compensation payable under the 1954 Act is calculated by reference to the rateable value of the premises. Where the tenant (or its predecessor in business) has been in occupation for 14 years or more, the landlord will be required to pay statutory compensation at twice the rateable value of the premises. Where the tenant has occupied for less than 14 years, the statutory compensation will be the rateable value of the premises.
How will the rates revaluation impact upon the amount of statutory compensation?
The rateable value used to calculate the statutory compensation due to a tenant is based on the valuation list in force as at the date that the landlord serves either of the following:
(1) a "hostile" Section 25 Notice terminating the tenant's lease opposing renewal on a "no fault" ground; or
(2) a 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 are served on or after 1 April 2017, compensation will be calculated by reference to the 2017 revaluation list. Conversely, if either of these notices are served before 1 April 2017, the rateable values contained in the 2010 valuation list will apply.
Time of the essence
The timing of service of these notices will therefore be crucial in determining the level of statutory compensation payable.
Both the landlord's Section 25 Notice and the tenant's Section 26 Request cannot be served before the final year of the contractual term of the tenant's lease. If the landlord intends to oppose renewal, it must serve its counter-notice no later than two months after it receives the tenant's Section 26 Request.
Landlords and tenants should therefore review their real estate portfolios to establish whether the terms of their leases are due to expire within the next 12 months. They should also check whether the rateable value of the premises in question will increase or decrease from 1 April 2017.
The advice to landlords and tenants is dependent on whether the rateable value is set to increase or decrease.
(A) Rateable values increasing on 1 April 2017
Landlords: If you are planning to oppose the renewal of a business tenancy, you should consider serving by no later than 31 March 2017 a Section 25 Notice to terminate your tenant's lease so that a lower rate of statutory compensation is payable. If you receive a Section 26 Request and you intend to oppose the renewal, you should serve your counter-notice within the two month deadline and by 31 March 2017 to ensure that you are only liable to pay statutory compensation by reference to the 2010 valuation list.
Tenants: If you are planning to serve a Section 26 Request for a new tenancy, you should consider waiting until after 1 April 2017 so that you receive a higher level of statutory compensation in the event that the landlord opposes renewal.
(B) Rateable values decreasing on 1 April 2017
Conversely, if the rateable value is set to decrease, a landlord should consider serving its Section 25 Notice on or after 1 April 2017, whilst a tenant should serve its Section 26 Request by 31 January 2017 at the latest in order to ensure that its landlord is compelled to serve any counter-notice before 1 April 2017.