Business rates in 2023 to shake up statutory compensation in UK lease renewals

Business rates are set to be a big concern in 2023, as a pending revaluation, anticipated recession and regulatory changes potentially impact rates liability. The recent Autumn Statement and the subsequent publication of the first draft list for six years for the 2023 revaluation has set things in motion, with the Valuation Office confirming the new rateable values come into effect on 1 April 2023.

These new rateable values will affect the statutory compensation payable if a landlord wishes to terminate a Landlord and Tenant Act 1954 protected lease on "no fault" grounds. The level of statutory compensation depends on the rateable value of the property at the date a section 25 notice or section 26 counternotice is served (and the length of the tenant's occupation) and so the new figures effective from April 2023 have far-reaching implications for landlords and tenants.

Statutory compensation

The act is primarily intended to provide business tenants with the right to renew their lease on the expiry of the contractual term (predominantly on the same terms subject to an open market rent review); however, a landlord can oppose this renewal on certain specified grounds.

Under section 37 of the act, the tenant is entitled to statutory financial compensation for the disturbance to their security of tenure rights where the landlord relies on one or more of the no-fault grounds of opposition including:

• Ground (e) – where the landlord requires possession of the holding for the purpose of letting or otherwise disposing of the property as a whole.
• Ground (f) – where the landlord intends to demolish or reconstruct the premises comprised in the holding, or a substantial part of them, or to carry out substantial work of construction.
• Ground (g) – where the landlord intends to occupy the holding for the purposes, or partly for the purposes of, a business to be carried on by him, or as his residence.

The statutory compensation is paid upon the tenant vacating the property (voluntarily or following a court order) but the amount payable depends on the rateable value of the property and the length of time the tenant (and any predecessor in title carrying on the same business) has been in occupation of the property. If it is less than 14 years, compensation is payable at 1x the rateable value of the property. If it is 14 years or more, the compensation is 2x the rateable value.

Business rates changes

The date that a landlord serves its opposed section 25 notice or serves a counternotice to a section 26 request (opposing renewal) fixes the date on which the rateable value is determined for calculating statutory compensation. Therefore, if a landlord serves its notice relying on a no-fault ground on or after 1 April 2023, it could be liable for a drastically different compensation figure than if it serves the notice before that date.

Any landlords considering opposing leases that expire within the next 12 months should check the current and new rateable values for the property in question to assess whether to serve notice before or after the rate change to minimise the compensation payable.

Likewise, any tenants who think their landlord may have redevelopment plans should review the rate changes to assess when to serve their section 26 request (bearing in mind a landlord has two months in which to serve a counternotice) in order to maximise the compensation they receive.

Osborne Clarke comment

The draft list for the 2023 revaluation has revealed that the largest increase in rates bills will be for warehouses and other logistics and distribution spaces, with the industrial sector overall showing an average 27.1% increase in rateable values. Conversely the retail sector will see, on average, a 10% decrease in rateable values, and with large reductions for the UK's largest department stores such as Harrods, down by 45%, and Selfridges, down by 50%. The retail sector is the only sector to show an average decrease in the draft list, which combined with the announcement in the Autumn Statement of the abolition of "downwards transition" relief caps and freezing the multiplier (at 51.2p and 49.9 for 2023/2024), means many retailers can look forward to an immediate reduction in their rates bills in April.

With these major changes in rateable values across all sectors, the statutory compensation payments payable to tenants will be markedly different. It should therefore be an important consideration for both landlords and tenants when considering the timing of their notices opposing renewal under the act over the coming months before April.