by Tim Smithers
The provisions of section 37 of the Landlord and Tenant Act 1954 (which relate to disturbance compensation payable to tenants whose landlords successfully oppose lease renewal on “no fault” grounds) have been amended by the Local Government and Housing Act 1989 (“LGHA 1989”).
LGHA 1989 received Royal Assent on November 16 1989 and the amendments to section 37 of the 1954 Act have come into force. Regulations prescribing a new multiplier or multipliers (which will no doubt reflect the general increase in rateable values in the 1990 revaluation) have yet to be made or published.
The basic principles
A tenant is entitled to disturbance compensation where his landlord successfully opposes his application for a new tenancy on any of the following grounds (but no others) under section 30(1) of the 1954 Act:
(e) superior landlord seeking possession from subtenant of part on the basis that a higher rent would be obtainable by letting the premises as a whole;
(f) landlord intending to demolish/reconstruct;
(g) landlord intending to occupy.
The amount of compensation is currently calculated by multiplying the rateable value (or in some cases twice the rateable value) of the “holding” by the appropriate multiplier(1). The “holding” for this purpose essentially means all the property comprised in the tenancy except any part which is not occupied by the tenant or his employees(2). Although there must be sufficient business use for the 1954 Act to apply, the definition of the “holding” does not require part of the property to be ignored simply because it is occupied for non-business purposes. Thus, where a tenant resides in the flat above his shop, both the flat and the shop will comprise the “holding”.
The “twice rateable value” formula is used only where the premises have been used for business purposes throughout the preceding 14 years by the occupier or any predecessor of his in the same business. The current multiplier is three(3), so that compensation is either 3 x rateable value or 6 x rateable value depending on whether the 14-year rule is satisfied. The period of occupation is calculated up to the date specified in the landlord’s section 25 notice or the tenant’s section 26 request(4).
The lease may contain an agreement excluding the landlord’s liability to pay disturbance compensation. Such an agreement will be effective only where the business has been carried on at the premises for less than five years preceding the date on which the tenant quits(5).
Calculation of rateable value under the 1954 Act
Section 37(5) of the 1954 Act contains detailed provisions for assessing the rateable value of the holding for the purposes of disturbance compensation. In summary:
(1) The rateable value is the annual value of the holding shown in the valuation list current on the date on which the landlord gives his section 25 notice or his reply to the tenant’s section 26 request. (“Annual value” for this purpose means rateable value or (if rateable value differs from net annual value) net annual value.)
(2) If there is no annual value available for the particular holding, but figures exist for the constituent parts of the holding or for larger premises of which the holding forms part, the rateable value may be calculated by aggregating or apportioning such figures.
(3) If the rateable value cannot be ascertained, it is taken as the value which (apart from any exemption from assessment to rates) would on a proper assessment be the value to be entered in the valuation list as the annual value of the holding.
(4) Any disputes in relation to determination of rateable value are referred to the Inland Revenue valuation officer.
Timing of assessment of compensation
The importance of establishing the time at which compensation should be assessed was illustrated in Cardshops Ltd v John Lewis Properties Ltd(6). The landlord served a section 25 notice on January 3 1980 terminating the tenancy on December 25 1980. In March/April 1980 the tenant served his counternotice and made his court application. Judgment was given for the landlord on February 18 1981.
The tenancy terminated on June 29 1981 and the tenant actually quit on July 7 1981. During the course of the renewal procedure, the Local Government, Planning and Land Act 1980 (with its enabling provision for “multiplier regulations”) received Royal Assent (November 13 1980); the 1981 multiplier regulations were made (January 21 1981) and came into operation (March 25 1981).
The landlord argued that since the rateable value was determined by reference to the date of the landlord’s section 25 notice (section 37(5)), that was also the relevant date for the purposes of assessing compensation. However, by a majority decision, the Court of Appeal held that as the tenant was entitled to compensation only on quitting the holding and not before, his entitlement should therefore be assessed in accordance with the law at the date of quitting (or, if he wrongfully stayed on, the date on which he should have quit).
The new non-domestic rating legislation
The detailed provisions of the legislation have already been examined in this journal(7). However, the following is a reminder of the principal dates:
- April 1 1988 — the antecedent valuation date
- December 31 1989 — publication of the draft valuation list
- April 1 1990 — new valuation list comes into force
- September 30 1990 — time-limit expires for making proposals to amend rateable value list without need for showing a material change in circumstances
The Government has indicated that new multiplier regulations reflecting increased rateable values will be introduced to take effect from April 1 1990. The order is due to be published and laid before Parliament early this year, but at the time of writing it is not available.
Landlords faced with a potentially higher compensation claim under the new figures will be concerned by the fact that the person entitled to make proposals to amend rateable value figures is restricted to owners and occupiers. Section 65(1) of the Local Government Finance Act 1988 defines “owner” as the person entitled to possession. It is unclear whether the freehold owner of property subject to a lease is necessarily the person entitled to possession. Many landlords may be prevented from making a proposal to amend the list and may be forced to accept a compensation claim based on an unduly high rateable value figure.
The Local Government and Housing Act 1989
Section 149(6) of and Schedule 7 to the LGHA 1989 make significant amendments to the provisions of section 37 of the 1954 Act where the premises comprise mixed business and residential uses. The new provisions make reference to “domestic property”(1) which is broadly defined as property used wholly for the purposes of living accommodation (or a yard, garden or outhouse enjoyed with such property) or a private garage or private storage premises(8). Living accommodation is accommodation which is used for sleeping, eating and related purposes.
However, property is not domestic property if it is wholly or mainly used in the course of a business for the provision of accommodation to individuals whose sole or main residence is elsewhere. This clearly includes hotels and holiday flats, but not second homes. Between the two there is a range of properties which might be non-domestic or domestic. The Government has indicated that it will treat most of the properties in this range as non-domestic. However, the regulations dealing with this point are still awaited.
As a broad generalisation, it is possible to say that, for the purposes of the new rules on compensation under the 1954 Act, no element of the holding will be treated as domestic property unless it is used as living accommodation by a person who does not have a residence elsewhere, or if he or she does then that person is not occupying part of the holding for residential purposes on a short-term commercial let.
The new provision may be summarised as follows:
(1) With effect from April 1 1990, any part of the “holding” which comprises “domestic property” is to be disregarded in determining the rateable value of the holding for the purposes of section 37(5) (see above). However, the tenant will be entitled instead to a “sum equal to his reasonable expenses in removing from the domestic property”, provided that he occupied the whole or any part of the domestic property on the date the landlord gave his section 25 notice or his reply to the tenant’s section 26 request. Any dispute over the amount of removal expenses is to be determined by the court.
(2) The tenant is given the benefit of a 10-year transitional arrangement. In any case where:
(a) the tenancy was entered into before April 1 1990 or was entered into on or after that date in pursuance of a pre -April 1 1990 contract; and
(b) the landlord’s section 25 notice or reply to the tenant’s section 26 request is given before April 1 2000,
the tenant may by notice to the landlord within a set time-scale elect that the provisions referred to in para (1) above shall not apply. The effect is that the compensation will be assessed for the entire holding on the old section 37 basis, but with the date for determining rateable value set at March 31 1990.
It is not clear why the landlord is not allowed to take the benefit of these transitional arrangements.
(3) The current multiplier applicable to all premises covered by the 1954 Act is three(2). The LGHA 1989 empowers the Secretary of State to prescribe different multipliers in relation to “different cases”. The legislation gives no clue as to the likely categories envisaged by “different cases”, but it is possibly intended to cover the position where the tenant elects to take March 31 1990 as his base for determining rateable value (see above).
Conclusions
(1) The LGHA 1989 is aimed primarily at leases comprising mixed business/residential premises, and its impact will be limited to those cases where “the holding”, as defined in section 23(3) of the 1954 Act, includes “domestic property” as defined in section 66 of the Local Government Finance Act 1988.
(2) Notwithstanding the publication of the draft valuation list on December 31 1989, there will be no change in the current compensation provisions until April 1 1990.
(3) The new valuation list will apply where the landlord’s section 25 notice or his reply to the tenant’s section 26 request is given on or after April 1 1990 (subject only to LGHA 1989). Otherwise the old list will apply.
(4) There is one area where urgent clarification is required. There will be cases similar to the Cardshops case, where premises are assessed with new rateable values and new multipliers are introduced during the renewal procedure. As we have seen, the time at which to establish the rateable value is clearly laid down in section 37(5).
However, on the strength of the International Military Services and Cardshops cases the court must apply the multiplier current at the date when the tenant quits. On the assumption that higher rateable valuations will mean lower multipliers, tenants to whom old rateable values apply may, by the effect of a lower multiplier, lose significant sums of compensation.
The answer may possibly be found in the amendment to section 37 by LGHA 1989 whereby the Secretary of State may prescribe different multipliers in “different cases”. However, that can hardly have been the intention of the 1989 Act, which deals solely with the problem of mixed-use premises.
(5) Landlords, tenants and their advisers will have some strategic thinking to do in any cases where a compensation claim is envisaged. The starting point must be to check the draft valuation list for the proposed new rateable values.
Without details of the proposed new multipliers, the picture is incomplete and it is impossible to give any dogmatic advice. However, the following points are tentatively suggested.
Advice to landlords
(1) A landlord who envisages that the current rateable values will result in a smaller liability should serve a section 25 notice or reply to a tenant’s section 26 request before April 1 1990. This will set the rateable value on the basis of the current list. The multiplier is unlikely to be higher than the current three.
(2) If time is not critical for the landlord, it may be preferable for him to await the proposed new multipliers and make a totally informed decision. There is, of course, always a danger that delay by the landlord in serving his section 25 notice may provoke a tenant (who is prepared to give up possession but requires a few more months in the premises at the old rent) to serve a section 26 request(9).
(3) Consider making a proposal to amend the rateable value if possible.
Advice to tenants
(1) A tenant who expects that he will be better off under the new regime should not serve a section 26 request until after April 1 1990.
(2) Consider the most appropriate time at which to quit the premises. In the light of the Cardshops decision the tenant should avoid the potential trap of a lower multiplier being applied to current rateable values.
(3) Consider making a proposal to amend the rateable value.
(4) If the premises include “domestic property” consider the possibility of an election under the LGHA 1989.
References
(1) ie as prescribed by the Secretary of State; Local Government, Planning and Land Act 1980 section 193 and Schedule 33 para 4(2).
(2) Section 23 (3) 1954 Act; Woodfall’s Law of Landlord and Tenant 28th ed para 2 — 0644.
(3) Landlord and Tenant Act 1954 (Appropriate Multiplier) Regulations 1984 (SI 1984 no 1932).
(4) Edicron Ltd v William Whiteley Ltd [4] 1 All ER 219, CA.
(5) Section 38(2) 1954 Act.
(6) Cardshops Ltd v John Lewis Properties Ltd [2] 3 All ER 746, CA. See also International Military Services Ltd v Capital & Counties plc [1982] 2 All ER 20, Ch D.
(7) [9] 09 EG 24; [1989] 28 EG 26; [1989] 33 EG 31.
(8) See section 66 of the Local Government Finance Act 1988 for complete definition.
(9) By serving a section 26 request a tenant may cause the existing tenancy to continue for up to a further 12 months.
