Compensating business tenantsLandlord and tenantAlexandra Lethbridge and Rachel Day review the statutoryrights a business tenant has to compensation on termination of its tenancy

here are a variety of situations inwhich a business tenant can obtaincompensation from its landlord whenit vacates its property at the end of a

tenancy. Compensation may be payableunder statutory provisions for disturbance,improvements and misrepresentation,although in certain limited circumstancesrights to statutory compensation can beexcluded by agreement between theparties.

Compensation for disturbanceUnder the Landlord and Tenant Act 1854(the 1954 Act) a tenant has a statutoryright to renew its lease provided that it is inoccupation for the purposes of its businessat the relevant time and provided that thelease falls within the 1954 ?ict renewal ,provisions.A landlord can oppose such a renewal,

but only in certain circumstances. Thesecan be found in section 30(1) of the 1854Act and are categorised either as "fault"grounds or "no-fault" grounds. Thedistinction is important in establishing

whether a tenant has a right tocompensation, as if a lease renewal issuccessfully opposed on a fault ground, nocompensation is payable. Fault groundsinclude a failure on the part of the tenantto repair or to pay the rent.No-fault grounds arise in situations

where the landlord wishes to refuse thegrant of a new lease for strategic reasons.A landlord can refuse the grant of a new

lease if it has a firm and settled intention toreconstruct, redevelop, or demolish thepremises. This is commonly referred to as"ground ~"because it derives fromsection 30(1)(f) of the 1854 Act.Demonstrating the necessary intention,and that there is a reasonable prospect ofachieving that intention, is not an easyburden to discharge, but once the intentionis shown, the court has no discretion - itmust refuse to grant a new tenancy.A landlord can also refuse the grant of a

new lease where it intends to occupy thepremises itself (commonly referred to as"ground (g)'~. Again, a firm and settledintention needs to be demonstrated but alandlord cannot rely on this ground if ithas owned its interest in the premises forless than five years.Where a landlord successfully opposes

the grant of a new lease on a no-faultground, section 37 of the 1954 Act requiresthe tenant to be compensated for losing thevalue of its business premises.Compensation is calculated by applying amultiplier to the rateable value of theproperty. The multiplier can be specified bystatutory instrument, and is currently setat one, but is doubled to two, where thetenant has been in occupation for thepurposes of the same business for 14 yearsor more. This doubling will also beavailable where the identity of the tenanthas changed but the tenant and itspredecessors have been in cecupation formore than 14 years, carrying out the same

business. To qualify as the same business,there must be at least some transfer ofgoodwill between the different entities. Atenant will be entitled to receive thepayment when it gives vacant possession tothe landlord.

If the 14-year period of occupation isrelevant for the calculation ofcompensation using the double multiplier,that 14-year period has to be satisfied as atthe termination date specified in the 1954Act notices. This could be later than thecontractual expiry date. There areconflicting decisions on the effect of thetenant ceasing to occupy either mid-termor at the end of the lease. In Depa~~ment ofEnzriranment v Rayallnsurance [1887] 1EGLR, 83, the 14-year time period wasstrictly applied -13 years and 363 dayswas held to be insufficient to qualify for thehigher multiplier. In Baccltiocclti vAcademicAge~zcyLtd [1998] 3 EGLR 157,it was held that whenever businesspremises are empty for a short time, itshould not be held that business occupancydoes not east, as long as during therelevant period there is no alternativeoccupier ornon-business usage.Compensation will not be available

where the tenant has been in occupationfor less than five years: the length ofoccupation can, however, be aggregatedwith that of a predecessor carrying out thesame business.The parties can only contract out of the

compensation provisions in narrowcircumstances set out in section 38 of the1954 Act. The parties can agree thatcompensation will not be paid after theright to that compensation has arisen, ieonce the tenant has already given vacantpossession.Where the term of a lease is for five years

or less, or where the tenant exercises abreak right in order to leave before the endof five yeaxs, an exclusion clause can be

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relied on to remove the right tocompensation. Any agreementoverstepping the exceptions describedabove will be void. If a lease does not have1,954 Act renewal rights, thencompensation will not be available.

Compensation for improvementsUnder section 1 of the Landlord andTenant Act 1827 (fie 192'7 Act) there ispotential for a tenant with a lease ofbusiness premises to obtain compensationfor improvements. The compensationarises at the end of the lease and on thetenant "quitting the holding ; but is entirelyseparate from the 1954 Act compensationprovisions. The person entitled tocompensation is the tenant in possession: atenant who has sublet the whole of itsproperty caiuiot claim this compensationbut there is doubt as to a tenant'sentitlement where it has sublet only part ofits property.Improvements that potentially carry an

entitlement to compensation are thosewhich "add to the letting value of theholding': Certain types of alterations willnot come within the definition ofimprovements, such as the tenant's ownfixtures, or improvements made pursuantto an obligation for which the tenantreceived valuable consideration, whetherfrom the landlord or the tenant's ownundertenant. A claim for compensationwill only arise where a tenant (or itspredecessor) served a valid notice of itsintention to carry out the improvements inaccordance with section 3 of the 1927 Act,and either no objection was raised by thelandlord, or in the case of an objection by-the landlord, court authorisation wasobtained. The tenant must then havecarried out the improvements inaccordance with the notice or any courtauthorisation.If a potential entitlement to

compensation arises, the claim forcompensation must then follow proceduralrequirements: within prescribed timelimits and in the prescribed manner. Theclaim must include the amount claimed.The maximum amount of compensation

available will be the net addition to thevalue of the holding as a whole as a direct

THE WEEK EG LiFE

result of the improvement, or thereasonable cost of caxcying out theimprovement at the termination of thetenancy, whichever is the lesser sum.

Parties cannot contract out of thecompensation provisions, but they canagree in advance the amount payable.There is nothing to stop this being anominal sum. In reality, this point rarelyarises, because a majority of commercialleases include provisions requiring thetenant to yield up the premises in the samecondition as at the start of the tenancy. Aspart of this the tenant has to remove anyalterations, and in consequence there isnothing left to count as an improvement tothe value of the property. It is generallyaccepted that this does not amount tocontracting out of the statute, but it doesmean that the question of section 2'7compensation rarely arises.

Compensation for misrepresentationWhere misrepresentation orconcealmentof material facts by a landlord leads eitherto a court being induced to refuse an orderfor a new tenancy, or to a tenant quittingthe premises after not making, orwithdrawing, an application for a newtenancy, section 37A of the 1954 Actprovides for compensation to be paid.Compensation will be an amount orderedby the court as being sufficient tocompensate the tenant for the loss ordamage sustained as the result of the orderbeing refused or the tenant quitting thepremises.In Inclusive Techndogy v WZlliamson

[200g] EWCA Civ'718; [200g] 3 EGLR,4g, the landlord refused to grant the tenantanew lease because it intended toredevelop the property. The landlordsubsequently decided not to proceed withits plans owing to a change in marketconditions and an increase in the projectedcosts of the project, however it did not tellthe tenant of the change in its plans. Thetenant continued to believe that thelandlord would be able to satisfy ground~. Extra compensation was awarded inthe light of the landlord's unfair dealing.

Alexandra Lethbridge is a partner andRachel Day is a Crainee atBristara~s LLP

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