Commercial landlords - Act now to avoid statutory compensation pitfalls

A major change to business rates is about to take effect. From April 1st 2026, the rateable values that underpin business rates will be reevaluated. These values are also important when considering the amount of statutory compensation that may be owed when a commercial lease ends (under the Landlord and Tenant Act 1954). In light of these changes, landlords and tenants should act strategically to avoid financial traps. 

In this article, we’ll explain everything you need to know about statutory compensation, the key times for change, and the implications of the revaluation. Let’s get started.

When does statutory compensation apply?

If a business tenant occupies commercial property protected by the Landlord and Tenant Act 1954, they have the right to apply for a new lease when their existing one ends. The landlord can dispute the renewal on several specific grounds.

Some grounds are classified as ‘no-fault’. These include:

• Letting the whole property at a higher rent than parts could achieve separately

• Demolishing or renovating the property to an extent that would require possession

• The landlord wants to occupy the property for their own business or residence

There are also ‘fault’ grounds, where the tenant has seriously breached covenants, such as persistent late rent payments or failure to maintain the premises.

Compensation only applies if the landlord opposes renewal solely on no-fault grounds. If the landlord cites fault grounds (alone or in conjunction with no-fault), compensation will not typically be payable.

How do you serve notice?

To serve notice to a tenant to leave a commercial property, the landlord can either use:

• A Section 25 notice to end the tenancy, stating the grounds for opposition

• Section 25 notices must be served at least 6 months and no more than 12 months before termination. Landlords can serve a Section 25 before or after the end of the contract

• A counter-notice in response to the tenant’s Section 26 request for a new lease

• A tenant can serve a Section 26 request no more than 12 months and no less than 6 months before the new lease is proposed to start. The notice can be served before or after the end of the lease, as long as the tenant remains in occupation of the property

• If a tenant has already served a Section 26 request, the landlord must respond with a counter-notice within 2 months

How is statutory compensation calculated? 

Statutory compensation is based on the rateable value of the property at the date the relevant notice is served. 

There are two levels of compensation, depending on how long the tenant has occupied the property:

• Standard – The payment equals the rateable value

• Long occupation – Where the tenant (or a predecessor in the same business) has been in place for 14 years or more, compensation equals twice the rateable value.

Some leases attempt to exclude statutory compensation, but such clauses are only legal in limited circumstances. If you see something like this in your lease, legal advice is essential.

What’s changing?

Currently, we’re working to rateable values that took effect on April 1st 2023, based on values from April 1st 2021. On April 1st 2026, we’ll be using values that originate from April 1st 2024. Some properties will see their rateable values rise, others will fall.

Because compensation is based on the rateable value on the date of the notices, it makes a difference whether the notices are served before or after April 1st 2026. One day either side could dramatically affect the amount of compensation payable.

For landlords, if rateable values are expected to rise after April 2026, you’re better off serving the notice before April 1st, as the applicable compensation will be lower. On the other hand, if the rateable values are likely to fall, waiting until after April 1st can reduce the compensation.

For tenants, if values are rising, you should submit your Section 26 request after April 1st so your compensation is calculated on the new values. If values are falling, you can lock in higher compensation by serving before April. Bear in mind the 14-year occupation rule if it applies to you.

Act now

Whether you’re a landlord or a tenant in this situation, the key to getting the best outcome is to formulate a strategy as soon as possible. 

Get legal advice now with an experienced commercial property solicitor. They’ll be able to talk you through the changes and how they apply to you, then advise you on how to serve notice correctly for the optimal result.

At Couchman Hanson, our solicitors genuinely care about getting the best outcome for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits with our values of integrity, honesty and authenticity.

Call 01428 774756 or visit couchmanhanson.co.uk.