Possession at any rate?

Landlords intending to recover possession of commercial property using the Landlord and Tenant Act 1954 need to act quickly to avoid a potential increase in compensation payable to their tenants.

The Valuation Office Agency (VOA) has updated the rateable values of non-domestic property in England and Wales. The change will take effect from 1 April 2023. This is the first revaluation since 2017 and will be based on property values as of 1 April 2021.

Rateable values determine the statutory compensation payable if a landlord wishes to terminate a lease by using one of the ‘no fault’ grounds for possession contained within the Landlord and Tenant Act 1954 (LTA 1954).

To recap:

• A commercial tenant has a statutory right to renew its lease at the end of the contractual term, if the qualifying statutory conditions for a business tenancy are met and the tenant has not ‘contracted out’ of the protections offered by the statute.
• A landlord can oppose the tenant's statutory right to a lease renewal on any of the grounds set out in Section 30( 1) of the LTA 1954.
• The relevant ground should be set out in a notice served on the tenant under Section 25 of the LTA (Section 25 Notice). Or, it can be specified in a counter-notice to a request for a new tenancy made by the tenant under Section 26 of the LTA 1954 (Section 26 Counternotice).
• If the landlord opposes the renewal of the existing lease on a ‘no fault ground’, then the tenant may be entitled to statutory compensation when it vacates the premises. The ‘no-fault’ grounds are as follows:
  • Section 30 (1)(e): uneconomic subletting (rarely used)
  • Section 30 (1)(f): the landlord intends to demolish or reconstruct the property and
  • Section 30 (1)(g): the landlord intends to occupy the property for business purposes or as a residence.

Comment

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.

In cases where the rateable value of the premises is set to decrease (typically retail premises but the VOA list should be checked in each individual case), landlords may prefer to wait until after 1 April 2023 before serving a Section 25 Notice or Section 26 Counternotice (note – the landlord must serve a Section 26 Counternotice within two months’ of the tenant’s Section 26 request if it wants to oppose renewal) to take advantage of the new rateable value and thus pay less compensation.

But in cases where the rateable value of the premises is set to increase, landlords will want to serve Section 25 Notices or Section 26 Counternotices before 1 April 2023, to ensure that any statutory compensation is calculated by reference to the current (lower) rateable values.