2 November 2016

Asset Management Q&A

Asset Management Q&A: What impact might the business rates revaluation have on my lease renewal strategies? Rosalind Cullis answers your questions

The revaluation of business rates from 1 April 2017 could have a very significant effect upon landlords and tenants where an opposed renewal under the Landlord and Tenant Act 1954 ("the 1954 Act") is likely.    In some cases, both landlords and tenants could make significant financial savings/gains if they consider strategy now.

Statutory compensation

  • Under the 1954 Act, landlords can oppose the grant of a new tenancy if they can rely on one of the so called 'no fault' grounds, which include where a landlord intends to redevelop the property or occupy for its own business use or to live in.  
  • If a landlord successfully relies on a 'no fault' ground they are obliged under Section 37 of the 1954 Act to pay the tenant statutory compensation.  
  • The level of compensation is calculated by applying a multiplier to the rateable value of the property. The multiplier is set by statutory instrument.  It is currently fixed at 1 but is doubled if the tenant is able to show that it has been in occupation for the purposes of the same business for 14 years or more.

Valuation date
However, parties are not always aware that the multiplier is applied to the rateable value of the property as at the date of service by a landlord of either a Section 25 notice or a counter notice opposing renewal, the latter of which must be done within 2 months of a tenant's Section 26 request. These are the notices which need to be served to commence the renewal process under the 1954 Act. 

It should also be noted that, perhaps harshly, a landlord cannot benefit from any retrospective amendment that is made to the ratings list following a successful challenge by a tenant.   Some might say that tenants are having their cake and eating it too by being able to secure both statutory compensation based on the higher rates valuation and a refund of any overpayment of rates at the same time.

Timing is everything
The relevance of this is that landlords, and indeed tenants, should start considering now the timing of service of Section 25 notice or Section 26 requests, where a 'no fault' ground of opposition might be relied upon. According to the draft rateable values published by the VOA, London will be subject to the highest increases in business rates with increases for premises on Bond Street and  Regent Street quoted at around 80%-90%.  However, in some other parts of the country, reductions will be applied so  property location will need to be taken into account, as will other strategic considerations such as whether service of the relevant notice will start the renewal process pre-emptively as the necessary evidence may not be in place to prove the ground of opposition. 

In summary, where premises will be subject to business rates increases, landlords should be serving Section 25 notices before 1 April 2017 (and tenants will want to think about forcing the landlord to serve a counter-notice after this date). Where rates reductions will be applied, landlords should hold off serving such notices until after 1 April 2017 (with tenants conversely wanting to force service of a counter-notice before this date).

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