February 21, 2017
Business rates are a substantial overhead for many businesses, and therefore those occupying a property need to be aware of the impact of the 1 April rates revaluation and the forthcoming changes to the rates valuation appeals process. The revaluation may affect the level of compensation payable to some business tenants seeking to renew their leases. Current business rateable values took effect in England and Wales on 1 April 2010, based on rateable values on 1 April 2008. However, the Valuation Office Agency (VOA) is revising rateable values on 1 April 2017. While the rateable value of some properties is reducing, others (for example many London retail and restaurant premises) face a significant increase. You can check the draft values on the VOA website to see whether your property is due to change.
If you think the new rateable value for your property is too high, you might consider appealing. You should be aware though that the government is planning to implement in England in April 2017 a new three stage business rates appeals process called Check, Challenge, Appeal. The government states that the reforms are aimed at making the system easier to navigate, especially for small businesses. However, it is proposed that appeals will only be allowed where the valuation is beyond reasonable professional judgement. This has raised concerns that it may be harder in practice for businesses to successfully appeal their rates valuation. Moreover it looks as though the new process may involve businesses putting in more time and effort into the early Check and Challenge stages of querying their business rates valuation. Although the new appeals process is due to come into effect very soon, the government is still consulting on the rules to implement these changes so it is not clear yet exactly how the new process will work.
The effect of the revaluation on lease renewals and compensation
If you are a business tenant, a landlord wanting the space back at the end of the lease may have to pay you compensation. The amount of this compensation may be higher if the business rates for the property increase in the forthcoming business rates revaluation.
How do you know whether the landlord has to pay compensation?
Firstly you should check whether your business has a right under the Landlord and Tenant Act 1954 to stay in the property when the lease ends and apply for a new lease. In many cases it will if it occupies for business purposes, unless the lease was formally “contracted out”. If the business has a legal right to apply for a new lease, then you should check whether the parties agreed (for example in the lease) that the landlord does not have to pay compensation if the lease is not renewed. Even if they did, the business may still be entitled to compensation as such agreements are only valid when the tenant has been in continuous business occupation for less than five years when it leaves the property.
If there is not a valid agreement that no compensation is payable, a landlord successfully opposing a business lease renewal solely on no tenant fault grounds (such as redeveloping the property or intending to occupy the premises itself) will have to pay statutory compensation to the tenant. However, if the landlord can successfully oppose the lease renewal on a ground involving tenant fault, such as disrepair or persistent delay in paying the rent on time it will not have to pay compensation.
Where the landlord must pay compensation, this is the same amount as the rateable value of the premises, but is twice the rateable value where the tenant has been in occupation for 14 years or more. Compensation is based on the rateable value on the date of service of either the landlord’s notice seeking to end the lease and oppose a renewal, or the landlord’s counter-notice to the tenant’s request for a new tenancy.
Tactics for tenants
Where the rateable value is increasing, a tenant may achieve higher compensation if it serves a valid request for a new tenancy on or after 1 April.
Commercial considerations and technical requirements
Compensation is one of many commercial considerations where a business tenant exercises a legal right to apply for a new lease that the landlord does not want to grant. Seeking a new lease using the statutory process is complex, therefore it is highly recommended that you seek legal advice. It is vital to take early advice to allow time to draft and serve the required notices and/or respond to any notices served.
Note: This information is necessarily brief and is not intended to be an exhaustive statement of the law. It is essential that professional advice is sought before any decision is taken.
Alex Watt is Partner in the Real Estate Department at Stevens & Bolton LLP