If your property is currently occupied by a business tenant and you want the space back at the end of the lease, you may have to pay compensation to the tenant.  The amount of this compensation may be higher if the business rates for the property increase in the forthcoming business rates revaluation, taking effect on 1 April.

How do you know whether you have to pay compensation?

Firstly you should check whether the business tenant has a right under the Landlord and Tenant Act 1954 to stay in the property and apply for a new lease. In many cases it will if it occupies for business purposes, unless the lease was formally “contracted out”. If the tenant has a legal right to apply for a new lease,you should consider with your legal advisers the basis on which you can get the property back.  There are specific legal grounds a landlord can use to prevent a tenant getting a new lease of its business premises. If you can successfully oppose a new lease on a ground involving tenant fault, such as disrepair or persistent delay in paying the rent on time, you will not have to pay compensation.

However, if you successfully oppose the tenant’s request for a new lease solely on grounds that do not involve tenant fault you may have to pay compensation. There are three “no fault” grounds, including that the landlord intends to redevelop or to occupy the property itself for business purposes or as a residence.

If you will have to rely solely on “no tenant fault” grounds, you should look to seewhether the parties agreed (for example in the lease) that the landlord does not have to pay compensation.  However, sometimes these agreements are not valid, so you should check with your legal advisor.

Where you do have to pay compensation, this is the same amount as the rateable value of the premises, but is twice that where the tenant has been in occupation for 14 years or more.  Compensation is based on the rateable value of the property on the date of service of either yourlegal notice seeking to end the lease and oppose a new lease, or your counter-notice to the tenant’s request for a new lease. 

The rates revaluation

Rateable values are changing on 1 April 2017.  While the rateable value of some properties is reducing, others face a significant increase. You can check the draft rateable values by clicking here.

Tactics

If the rateable value of the premises is increasing on 1 April, a landlord should consider serving by 31 March its notice seeking to end the lease and oppose a renewal,so compensation is based on the lower rateable value.  Alternatively, a landlord receiving before 1 April a tenant’s request for a new leasemight have to pay less compensation if it serves its counter-notice within the legaltwo month deadline, and before 1 April. However, if the rateable value is reducing, the landlord may have to pay less compensation if it serves its notice or counter-notice after 31 March.

Commercial considerations and technical requirements

Compensation is one of many commercial considerations wherea business tenant exercises a legal right to apply for a new lease that the landlord does not want to grant.  Opposing a new lease is a complex processes, therefore it is highly recommended that you seek early legal advice.It is important to take advice well before the dates mentioned above to allow time to draft and serve the required notices and/or respond to any notices served.

Alex Watt is a partner in the real estate department at Stevens & Bolton LLP.