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Rates uplift may have compensations

Posted on 1 February 2017

Rates uplift may have compensations

On 1 April 2017, rateable values are changing. In London, they are set to increase by around 22%. Beyond the fact that occupiers' overheads will increase in general, these changes are important for compensation calculations under the Landlord and Tenant Act 1954.

1954 Act compensation

In order to terminate a lease that is protected by the 1954 Act, a landlord must prove one of the grounds specified in the 1954 Act. Some of these grounds trigger an obligation for the landlord to pay compensation to the tenant having to move out.

The compensation payable is normally the existing rateable value of the premises. But it is twice the rateable value if the tenant (and any predecessor) has occupied the premises for the purposes of the same business for at least 14 years.

The changes in rateable values could have a big effect. For example, 13 Dover Street, London W1, has a current rateable value of £89,500. A tenant entitled to double compensation would receive £179,000 at the moment, howeverfrom 1 April 2017, the property's rateable value will increase to £305,000. A landlord would therefore have to pay £610,000 for double compensation, an increase of 240%.

How can a landlord limit its exposure?

  1. Consider whether you can establish one of the "fault grounds" for terminating the lease.  These do not trigger an obligation to pay compensation. 
  2. Consider whether to serve your "hostile" section 25 notice before 1 April 2017. The applicable rateable value is the one in force on the date the notice is served.
  3. Review your portfolio – not all rateable values are increasing.  For example, the current rateable value for 36-37 High Street, Newport in South Wales is £39,250. From 1 April 2017, it will be more than halved to £16,000.
  4. Correct the rateable value. If you think the new rateable value is based on property details which are incorrect, you should inform the Valuation Office Agency before 31 March 2017.

How can a tenant maximise its compensation?

If your rateable value is set to increase:

  1. Consider whether to hold off serving your section 26 request until on or after 1 April 2017 (but think twice if your premises are in Newport).
  2. Prevent your landlord establishing one of the "fault grounds" in the 1954 Act by remedying any breaches of your lease, where possible.
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