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Rates revaluation and compensation on lease renewal

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Home Perspectives Rates revaluation and compensation on lease renewal
If a commercial lease renewal is opposed by a landlord on one of the grounds set out in the 1954 Act, (most often because it intends to redevelop the property) and the tenant ultimately leaves the property, it becomes entitled to statutory compensation on quitting. This is based on the rateable value of the premises or (if the tenant has been in occupation for more than 14 years at the date of termination), twice the rateable value, calculated at the date of the landlord’s notice (or counter-notice following a tenant’s notice).

From 1 April 2023 rateable values for commercial property will change. It has been 6 years since the last revaluation and the latest has been based on a valuation taken at 1 April 2021, specifically in order to reflect the impact of the pandemic on rental values during the period.

Sectors have of course been affected differently by the pandemic, with some showing an increase in rental values and others a decrease. Broadly, hotels showed the biggest decrease at around 28%, with shops at 10%. In contrast, storage, distribution and industrial saw increases of between 20% and 32% according to the Valuation Office Agency. Offices saw a general increase of 10%, although the lowest increase was seen in the London office market, hit hardest by the pandemic.

What does this have to do with lease renewals?

So, if you are a landlord of a lease that has already contractually expired or is shortly to do so and you have plans that require the property back from the tenant, it may well be worth considering whether to serve that hostile notice now or wait until after 1 April, if the level of compensation payable is likely to be materially affected by the revaluation.

Client Alert 2023-028