by Patrick McLoughlin
Many professionals managing property are aware that the basis for calculating compensation for disturbance of business tenants was altered on April 1 1990. However, the amending provisions are complex and include transitional rules and rules relevant to composite business and domestic property, which have caused some difficulty. In particular the opportunity for existing tenants to opt for an alternative basis of compensation has been much neglected or misunderstood.
The basic position is that business tenants whose leases are protected by the Landlord and Tenant Act 1954 (“the 1954 Act”) normally have a right to a new lease unless the landlord can prove one of the statutory grounds for possession in the Act. There are two main categories of statutory grounds. Some are based upon tenant’s fault (eg rent arrears or breach of covenant) others are based upon the landlord’s needs (eg redevelopment or occupation). If a landlord opposes a new tenancy and the tenant is not entitled to a new tenancy on a ground within the second category only (whether due to a court order, withdrawal by the tenant or failure by the tenant to apply to court) the tenant is normally entitled to statutory compensation for disturbance.
Compensation before April 1 1990
Prior to April 1 1990 the measure of the tenant’s compensation was the product of the appropriate multiplier (then 3) and the rateable value. If the business had been carried on for 14 years or more (whether by the tenant alone or by the tenant and any predecessor in title) the measure was the product of the appropriate multiplier and twice the rateable value (section 37(2) and (3) of the 1954 Act).
Thus immediately prior to April 1 tenants received compensation at three times rateable value or six times rateable value. The rateable value used was the rateable value of the “holding” which included both business and residential portions (but not portions sublet to a stranger to the tenant’s business). If they were separately valued then the aggregate rateable value was used (section 37(5)(b) of the 1954 Act).
In the case of existing tenancies where the notice to terminate the tenancy was served before April 1 1990 the level of compensation remains at three times rateable value or six times rateable value (at the time of service of the notice). It might have been thought that the level would be determined by reference to the rateable value at the date of the landlord’s section 25 notice (applying Plessey Co Ltd v Eagle Pension Funds Ltd [9] EGCS 149) and the multiplier at the date of vacation (following Cardshops Ltd v John Lewis Properties Ltd (1982) 263 EG 791). Since the multiplier, as explained below, has been reduced to 1 this would have had the harsh effect of producing low compensation at one times the old rateable value. For this reason SI 1990, no 363 (“the statutory instrument”) provides that the old multiplier of 3 is to be used in such cases.
Compensation after March 31 1990
On April 1 1990 two changes occurred which have affected the calculation of compensation First, the rating revaluation of commercial property came into effect resulting in an average increase in rateable values of eight times. To coincide with this change the multiplier used to compute compensation was reduced from 3 to 1 (by the statutory instrument). The net effect compared with the position where notice to determine the tenancy was given prior to April 1 is that compensation payable to tenants in respect of business accommodation is increased by 166% on average, taking into account the fact that the average increase in rateable values is by a factor of eight and that the previous level of compensation was three times rateable value.
There have, of course, been wild deviations from the mean so that a tenant in a prime southeast pitch, where, for example, the rateable value has increased by, say, 15 times, would see an increase of 400% upon the previous basis. The justification for such sharp increases is that compensation under the 1954 Act has not kept pace with inflation, owing to the fact that rateable values were not regularly updated and owing partly to a similar lack of updating of the appropriate multiplier.
The second change affecting compensation was the abolition of domestic rates which were replaced by the community charge. This affects compensation where domestic premises are involved since there will be no updated rateable value on which to base compensation. The current rules are explained below.
Tenants’ option to take compensation at 8 x rateable value on March 31 1990
Existing tenants and landlords should take account of the transitional provisions (in Schedule 7 to the Local Government and Housing Act 1989 (“the 1989 Act”) and the statutory instrument) which give such tenants the option to require compensation at eight (or 16) times the rateable value on March 31 1990 instead of one (or two) times current rateable value.
Increases in rateable values have not been uniform and the effect of the provisions is to ensure that where the increase in rateable value is by less than a factor of eight the tenant has the option to take compensation as if there had been an eight-fold increase.
In order for the alternative basis of compensation to apply three conditions must be satisfied:
(a) the tenancy (or the contract for the tenancy) was entered into before April 1 1990;
(b) the landlord’s statutory notice to end the tenancy or the tenant’s request for a new tenancy must have been served after April 1 1990 but before April 1 2000; and
(c) within the two- to four-month period following the landlord’s notice or tenant’s request the tenant must give notice to the landlord that he wants the special basis of compensation to apply.
The option applies whether the premises are used wholly for business purposes or whether there is a domestic content. It is not limited, as some commentators have contended, to domestic premises only.
The argument that the option applies only where domestic premises are involved is based upon the wording of Schedule 7 to the 1989 Act. Para 2 makes amendments to section 37(5) of the 1954 Act, necessary in relation to property comprising domestic premises following the abolition of domestic rates. Para 4(1) states the conditions for the alternative basis of compensation to apply and ends with the words “the amendments made by paragraph 2 above shall not have effect and section 37 shall, instead, have effect with the modification specified in subparagraph (2) below”. Subpara (2) states that the date for determining rateable value will be March 31 1990 and SI no 363 then provides that the multiplier will be 8.
Howell Lewis (New Law Journal, July 13 1990 at p 1005) argues that the wording that the alternative basis is to apply “instead” of the amendments relating to domestic property indicates by implication that the option is limited to domestic property. However, the opening words of para 4(1) indicate that the option may be exercised “in any case” and if exercised the closing words provide that section 37 (and not just section 37(5) relating to domestic premises) shall have effect as if unamended, but with the modification that the date for determining rateable value is March 31 1990.
In other words the option is available in the case of all protected business tenancies whether or not domestic premises are involved, but since the date for assessing compensation will be March 31 1990 the rules for determining rateable value are those in section 37 of the 1954 Act without the need for amendments designed to assist in calculating compensation after March 31 1990.
Mixed business and residential premises after March 31 1990
In the case of premises which partly comprise residential accommodation the rules have had to be altered to adapt to the fact that domestic rating has been abolished. The domestic property is disregarded in determining the rateable value used in assessing compensation, and the tenant will normally receive compensation equal to the rateable value of the business accommodation plus “a sum equal to his reasonable expenses in removing from the domestic property”.
The 1989 Act does not define “reasonable expenses”. It is unclear, for example, whether legal conveyancing costs would be included, although it is submitted that these would be reasonable expenses. The 1989 Act does, however, in default of agreement provide that the sum should be determined by the court, although it must be doubted whether the amounts involved would in practice justify the cost of making an application to court.
These rules apply where the date for determining the rateable value for the purpose of the 1954 Act is on or after April 1 1990, ie where the landlord’s notice or the tenant’s request was served after April 1 1990. However, if the tenant serves a notice asking for the alternative basis of compensation, as explained above, the rule does not apply and the tenant is entitled to compensation at eight times the aggregate rateable value of the business and residential parts on March 31 1990.
Domestic property
In rare cases the entire holding will comprise domestic property. If, for example, the tenant is carrying on a business of providing residential accommodation the tenant may be regarded as occupying for the purposes of its business if it is exercising a sufficient degree of control over the property (see Lee-Verhulst (Investments) Ltd v Harwood Trust [3] 1 QB 204) and the tenancy will be protected by the 1954 Act. In this type of case there would be a problem in reckoning compensation if there is no rateable value listed for the property. Whether a rateable value is listed will depend upon whether the property is domestic or non-domestic property.
Advisers attempting to establish the proper category will need to follow a statutory paperchase, not only through the 1954 Act, the 1989 Act and the statutory instrument but also through section 66 of the Local Government Finance Act 1988 (as amended by the 1989 Act) and a statutory instrument amending section 66, for the definition of domestic property.
A property is normally domestic if it is used wholly for the purposes of living accommodation, but the property is not domestic, and should therefore appear on a rating list, if it is used wholly or mainly in the course of a business for the provision of short-stay accommodation (which is not self-contained, self-catering accommodation provided commercially). It will also be non-domestic if it is available for letting commercially as self-catering accommodation for periods of 140 days or more. Assuming that the property is within the definition of domestic property section 37 (5)(c) of the 1954 Act (inserted by the 1989 Act) provides that the rateable value of the holding shall be taken to be an amount equal to the rent at which it is estimated that the holding might reasonably be expected to be let from year to year with the tenant bearing the cost of repairs and taxes. Again the tenant may opt to take compensation at eight times the old rateable value.
Conclusion
Compensation for disturbance is something of a lottery. It is assessed by reference to the rateable value of the property, which in turn is linked to rental value. It does not necessarily bear direct relevance to the actual loss suffered by a vacating tenant, and the basis of assessment quickly becomes out of date in periods of inflation unless the rateable value or the multiplier is adjusted. The problem of obsolescence should be mitigated if rateable values are updated more regularly, as is now intended.
Meanwhile, in most cases, compensation payable to business tenants after March 31 1990 has increased substantially and a landlord should be aware of the full cost before seeking possession of business premises. Even where rateable values have not increased in line with the average, landlords may pay substantially increased compensation as a result of the right of existing tenants to opt to take the alternative basis of compensation.
