1954 Act Consultation – compensation

Compensation is based on the rateable value of the property. Where the tenant and any predecessor of the business has been in occupation for less than 14 years, the compensation is equivalent to 1 x rateable value of the area the tenant occupies, increasing to 2 x rateable value where the period of occupation by the tenant and any predecessor to the business is 14 years or more.

The Commission notes that rateable values do not reflect the tenant’s loss or the landlord’s gain and, as rateable values are based on out-of-date rental values, the compensation is often too low. This encourages tenants to litigation to get a more favourable outcome; and landlords to oppose renewal to benefit from the tenant’s goodwill. The Law Commission is in favour of a simple and certain compensation figure rather than a bespoke calculation for each individual tenant. One option is that compensation should be based on the rent payable under the existing tenancy. However, there are difficulties where, for instance, there is a turnover rent. An alternative may be to use the higher of the rateable value or current rent. Consultees are asked to consider:

• whether the basis for calculating compensation for non-renewal should change from being based on a multiple of rateable value to a multiple of the current rent; and 
• whether they foresee any particular challenges and/or unfairness in using the current rent in respect of particular rental models, for instance, turnover rent?

As the average duration of tenancies is becoming shorter, fewer will meet the 14-year threshold for double compensation. A single 14-year period is inappropriate because a tenant with 14 years and 1 month will receive double the compensation of a tenant with 13 years 11 months. The Commission considers whether stepped multipliers might result in fairer outcomes. For example:

1. There could be three steps, giving 1 x rateable value for occupation of up to 5 years, 1.5 x rateable value for 5-10 years, 2 x rateable value for 11-15 years and 2.5 x rateable value for over 15 years: or
2. Compensation could increase for each full year of occupation. Up to 5 years, it could be 1 x rateable value with the multiplier increasing by 0.1 for every year of occupation, up to 15 years when it would be 2 x rateable value.

The second option reflects the tenant’s period of occupation more accurately but opens the door to more disputes over the tenant’s exact period of occupation. The first option would lead to fewer disputes, with tenants only needing to demonstrate either 5, 10 or 15 years of occupation. The Commission seeks views on:

• Whether the calculation of compensation for non-renewal should be based on a system of stepped multipliers. If so, how should it work?
• Whether the stepped multipliers for standard rate compensation and for higher rate compensation should be increased or reduced. If so, why?

Given the changes in the market, consultees are asked to consider (if a single threshold is maintained) whether 14 years is still suitable? If not, what should it be and why?

The formula for compensation is partly in primary and partly secondary legislation, with the appropriate multiplier in secondary legislation. If the whole formula were in secondary legislation, it would allow the relevant Minister to react to changes in the market, although having part of the formula in primary legislation gives greater certainty. The Commission seeks views on whether the formula for higher rate compensation for non-renewal and any provisions for stepped multipliers should be set out in secondary legislation.

Consultees are asked to consider whether the ability to exclude compensation should be abolished so that all protected tenancies benefit from the right to compensation (on the basis that, if parties wish to avoid compensation, they can contract out of the 1954 Act). However, if it is retained:

• Should the threshold for exclusion remain at 5 years or change? 
• The Commission thinks that tenants should be informed about the exclusion by providing prescribed wording in the tenancy and seeks consultees’ views on this proposal. 

Relying on both a compensation ground and a non-compensation ground

A tenant is not entitled to compensation where a landlord successfully relies on both a compensation ground and a non-compensation ground. In practice, this can require a tenant to pursue court proceedings and defeat the non-compensation ground before becoming entitled to compensation, increasing both cost and delay. While landlords may use this tactically, there is a risk that an unsuccessful non-compensation ground will result in an adverse costs order. The Law Commission does not propose reform in this area, although consultees are invited to raise concerns through the wider consultation questions.

Delaying or offsetting the payment of compensation

The consultation also considers concerns around delayed payment of compensation and situations where landlords become insolvent, dispose of their interest or seek to offset compensation against other claims, such as dilapidations. The Law Commission's provisional view is that existing enforcement mechanisms are adequate and that legislative reform is not required. Again, there is no specific consultation question on this issue, but consultees are free to comment through the wider consultation questions.