by Michael Bibring and Katherine Miller
The introduction of the uniform business rate (“UBR”) with its consequent revaluation of rateable values may have important consequences for a tenant entitled to compensation when the court refuses to grant a renewal of a business tenancy under the Landlord and Tenant Act 1954 (“the Act”).
Readers will of course be aware that the Act confers security of tenure on business tenants. Under section 37 of the Act a tenant is entitled to compensation if the court refuses to order a new lease in certain circumstances where the landlord has either served a notice under section 25 objecting to the grant of a new lease to the tenant or served a notice under section 26(6) of the Act opposing a tenant’s application for a new lease.
A landlord may oppose an application for a new lease on one of several grounds set out in section 30 of the Act. Circumstances where compensation might be payable arise where the grounds of opposition are one of the following:
(1)The tenant’s interest was originally a sublease and the landlord wishes to relet the building as a whole in circumstances where it would achieve a higher rent than if it were to aggregate the rents which it could obtain on separate lettings.
(2)The landlord intends to demolish or reconstruct and requires possession of the premises to do so.
(3)The landlord intends to reoccupy the premises itself.
The basis of compensation under section 37 of the Act has always been geared to the rateable value of the relevant premises.
Originally, when the Act was passed in 1954, compensation equalled the amount of the rateable value. The exception to this was that where a tenant had been in occupation for 14 years immediately preceding the termination of the tenancy, a figure of twice the rateable value was to be taken.
The same exception applied where the tenant who was in occupation was the successor of a business that had occupied the premises for 14 years or more. The intention of this exception (section 37(2)(a) of the Act) is to reward longstanding tenants with double compensation where their business tenancy is terminated on one of the grounds specified above. Until the introduction of the UBR, rateable values had been constant since April 1 1973. With the introduction of the UBR there was a revaluation of rateable values as at April 1 1988.
Bearing in mind that there had been no such revaluation between 1973 and 1988 compensation geared to rateable value (or twice rateable value) continually lost value in real terms. Legislation was therefore passed to introduce a multiplier to the rateable value. Immediately before the introduction of UBR the multiplier was 3. Accordingly, a tenant who had been in occupation of premises for less than 14 years would be entitled to compensation equal to three times the rateable value of the premises. A longer-established tenant would be entitled to three times twice the rateable value (ie six times the rateable value of the holding).
With the introduction of the UBR and the substantial revaluation of rateable values the reason for the multiplier disappeared.
The date for determination of the rateable value for the purpose of assessing compensation under the Act is the date of the landlord’s section 25 or section 26(6) notice. A combination of the Landlord and Tenant Act 1954 (Appropriate Multiplier) Order 1990 and Schedule 7 to the Local Government and Housing Act 1989 (“the 1989 Act”) affects this situation by focusing attention on the date of the service of the section 25 or section 26(6) notice. This in turn determines whether the compensation is to be based on new or old rateable values. There are three possibilities:
(1)Where the date for the determination of the rateable value (ie the date on which the landlord’s section 25 or section 26(6) notice is served) is on or before March 31 1990, then (subject to the transitional case set out below) the multiplier will be 3. Accordingly, the compensation available will be either three times the rateable value of the holding or three times twice the rateable value as the case may be. Of course this is entirely logical since the rateable value in these circumstances is that at March 31 1990 (ie unaltered and in need of the multiplier to bring it in line with inflation). For example, a tenant of a shop with a rateable value of, say, £5,000 would be entitled to compensation of £15,000. If that tenant had been in occupation for 14 years then the compensation would double to £30,000.
(2)Where the date for determination of the rateable value (ie the date on which the landlord’s section 25 or section 26(6) notice is served) is on or after April 1 1990 (subject to the transitional case set out below) the multiplier is 1. The compensation will therefore be equal to the new rateable value after the introduction of the UBR (or twice the said rateable value as the case may be). Again, this is logical since one is computing compensation by using the new and updated rateable value.
(3)Transitional provisions apply where four conditions are met and in this case the date for determination of the rateable value will be March 31 1990 rather than the date after April 1 1990 when the landlord’s section 25 or section 26(6) notice is served. The four conditions are:
(i)The lease in question was entered into before April 1 1990 or was entered into on or after that date, by virtue of a contract made before that date.
(ii)The notice given under section 25 or section 26(6) is given before April 1 2000.
(iii)The tenant must give notice to the landlord that he wants the special basis of compensation to apply. This notice must be given not less than two nor more than four months after the landlord’s notice is served.
(iv)There must actually have been a rateable value shown in the valuation list on March 31 1990. An assessment of rateable value at that date as contemplated by section 37(5)(c) of the Act is not sufficient.
If all the conditions are satisfied the multiplier will be 8, but the rateable value is that which subsisted on March 31 1990. Accordingly, the compensation which would be payable to a business tenant would be eight times the rateable value as at March 31 1990. If in fact the tenant had occupied the premises for 14 years or had succeeded to a business which had commenced trading from the premises in excess of 14 years prior to the termination of the tenancy then the compensation would be 16 times the rateable value as at March 31 1990.
Accordingly, where there is a situation where compensation under the Act is payable landlords and tenants should compare the compensation which would be payable by multiplying the old rateable value (or twice the rateable value for longstanding tenants) by a multiplier of 8 with the compensation which would be payable by simply taking the new rateable value after the introduction of UBR (or twice the new rateable value).
If the compensation yielded is greater when the transitional relief is applied, then clearly the tenant should take care that the appropriate notice is given to the landlord stating that he wishes this special basis of compensation to apply. Landlords will no doubt wish to bear in mind the possibility of such a notice being served if the effect would be such as to increase compensation payable. Clearly if a tenant had shop premises with a rateable value on March 31 1990 of, say, £5,000 and that rateable value were increased to, say, £30,000 he would be better off electing for the transitional provisions to apply. In those circumstances compensation would be £40,000 (8 x £5,000) as opposed to £30,000 (1 x £30,000).
Clearly the position will vary both in different property sectors and different areas of the country. For example, rateable values of prime shops in the South East of England have rocketed and a tenant of such premises is unlikely to be best served by seeking to rely on the transitional provisions. The position may be very different in, say, industrial premises in the North of England. In some such cases the rateable value will in fact have fallen and a tenant would benefit from the transitional provisions in these cases or indeed in any other situation where the new rateable value of the relevant holding is less than eight times the rateable value subsisting on March 31 1990 (ie before the introduction of the UBR).
The multiplier of 8 was chosen (following the consultation correspondence by the Department of the Environment with certain bodies, including the Law Society, the RICS and the ISVA) because rateable values were expected to increase on average by eight times. Since this is an average figure and there are huge divergencies in different areas of the country and with different types of property, it may not be the most equitable basis for compensation and an indexation might have been a more sensible basis for keeping the compensation payments in line with inflation.
The notice opposing renewal must be given before April 1 2000. Although the point is not one which needs to be addressed now, landlords may find that if the transitional relief would yield a higher level of compensation it may be in their interest to defer service of a section 25 notice to beyond the trigger date in 2000. A tenant mindful of this ploy may wish to serve a section 26 notice. The matter will have to be considered when the time comes and, of course, against the general background of whether it is in the parties’ interests for other reasons to serve the appropriate notices.
There may be interim rent consequences or indeed the parties may not be ready to serve their notice for any number of reasons.
It should be emphasised that the notice to be served by the tenant stating that it requires a special basis of compensation to apply must be served within a stipulated time-limit. Readers will no doubt be aware that the courts have taken a very strict view of the time-limits in relation to other aspects of the Act and if the tenant requires compensation to be assessed on the transitional basis then it must ensure that its notice is served during the statutory period.
Accordingly, when a tenant receives a section 25 notice opposing the renewal of a tenancy under any of the grounds referred to in section 30(1)(e) (f) or (g) of the Act it should compute whether it would be better off under the transitional provisions and if so it should serve its notice clearly within the prescribed time-limits.
There are three other points which should be borne in mind:
(1)When granting leases landlords should consider whether to exclude the compensation provisions of the Act. Clearly, where the lease is not yet in being (and assuming there is no agreement for a lease which was entered into before April 1 1990) a landlord need not worry about the transitional provisions. However, the substantial compensation which might be payable on a multiplier of one or two of the new rateable values might in itself give rise to considerable compensation payments and the landlord should consider carefully whether to exclude the compensation provisions. This is of course a matter to be negotiated at arm’s length between landlord and tenant but, in addition, section 38 of the Act prohibits agreements purporting to exclude or reduce compensation in the circumstances provided in section 38(2) of the Act. Broadly speaking these arise where a business tenant has occupied premises during the whole of the five-year period immediately preceding the date on which the tenant is to quit the premises. If that is the case (or if during those five years the only change in occupation arises as a result of a succession to the business carried on from the premises) then an agreement purporting to exclude or reduce compensation is void. Landlords may find that tenants of leases of longer than five years do not themselves resist clauses which exclude compensation under section 37 of the Act since the original tenant cannot itself suffer from such exclusion. If the lease cannot be brought to an end for a period of five years from the date it was granted then the original tenant will always be entitled to compensation under section 37 notwithstanding an exclusion. Clearly, unless it is a term of the transaction that compensation be excluded, the original tenant should still seek to avoid such exclusion clauses because they will prejudice assignees towards the end of the term of a lease and thus might affect the capital value of the leasehold interest.
(2)In view of the fact that section 37 of the Act provides double compensation for the tenant who has occupied premises for business purposes for 14 years, prospective purchasers of leasehold premises should consider whether they are able not only to buy the lease but also the business carried on from the leasehold premises. If that can legitimately be done then the assignee may be able to add the assignor’s period of occupation to his own at the end of the term and perhaps double the compensation which he might be able to obtain if he is unable to renew his lease as a result of an opposition by the landlord under section 30(1)(e) (f) or (g) of the Act. There may be little real goodwill in the business which would be acquired, but if there are no adverse consequences of acquiring the business certainly the assignee ought to consider this possibility.
(3)It is worth stating that compensation payable under section 37 of the Act is free of capital gains tax. Generally, of course, a tenant disposing of his lease would be liable to capital gains tax (or corporation tax on chargeable gains) on the receipt. Drummond v Austin Brown [3] STC 506 is clear authority for the proposition that the compensation derives from statute and does not give rise to a change to capital gains tax. Whether the principle established by the Chancery Division in Drummond would apply where compensation was excluded but none the less a figure for compensation was paid by the landlord to the tenant is doubtful. The writers believe that it would not. This should none the less be distinguished from a situation where statutory compensation is payable but notwithstanding this (and the clear mechanism for computing it) the landlord and tenant subsequently agree some other amount or basis of compensation. This position is contemplated by section 38(2) of the Act and for that reason we believe that the compensation would still derive from statute and on the principle of Drummond be tax free.
One ought to say that it is arguable that the transitional provisions introduced by Schedule 7 to the 1989 Act apply only to domestic property. Indeed, the wording of paras 3 and 4 of Schedule 7 is somewhat unfortunate. It is submitted, however, that the effect of the provisions of Schedule 7 to the Act clearly make the transitional provisions relate to both wholly commercial property and mixed commercial and domestic property. Our view has been supported by a spokesman for the DOE.
The 1989 Act does, however, insert various subsections at the beginning of section 37(2) of the Act, which deal only with situations where the property includes domestic property. The amendments do not apply where the date for determining the rateable value precedes April 1 1990 (other than pursuant to the transitional provisions referred to above).
