Compensation For Business Tenants - An Overview

There are various areas in which business tenants are entitled to compensation from their landlord. This article will review the obligation to pay/right to receive compensation for disturbance, improvement and misrepresentation.


Under the Landlord and Tenant Act 1954 (LTA 1954) a business tenant has a statutory right to renew its lease provided that it is in occupation for the purpose of its business at the relevant time and provided the lease falls within the 1954 Act renewal provisions.

A landlord can only oppose renewal in certain circumstances set out in section 30(1) LTA 1954 and categorised as ‘fault’ and ‘no fault’ grounds. This distinction is important. If the lease renewal is opposed on ‘fault’ grounds, no compensation is payable.

‘Fault’ grounds include failure to pay rent and failure to repair.

‘No fault’ grounds occur where the landlord has a reason for refusing the renewal such as:- 

  1. Where the tenant has a sublease of part and the landlord is the superior landlord of the whole and the landlord intends to re-let the whole for substantially more than the aggregate of the rent obtainable on re-lettings of part;
  2. If the landlord has a firm and settled intention and a reasonable prospect of achieving that intention to reconstruct, redevelop or demolish the premises. If the landlord proves that intention, the court has no discretion and they must refuse to grant a new tenancy. This can only be satisfied if the landlord requires possession of the premises to carry out the Works. (Section 30(1)(f)).
  3. If the landlord intends to occupy the premises itself. The landlord can only rely on this if it has owned the premises for more than 5 years (Section 30(1)(g)).

If the landlord opposes the grant of a new tenancy on ‘no-fault’ grounds then Section 37 of the LTA 1954 requires the tenant to be compensated for losing the value of its business premises.

Compensation is calculated by applying a multiplier to the rateable value of the premises. This multiplier is currently 1 but it is doubled where the tenant has been in occupation for the purpose of the same business for 14 years or more or where the identity of the tenant has changed but the tenant and its predecessors have been in occupation for 14 years or more carrying on the same business. To qualify as carrying on the same business, there must have been a transfer of goodwill between the different entities.

The tenant receives the compensation when it gives vacant possession to the landlord.

If the tenant is using the 14 year double multiplier, the 14 year period must be satisfied at the termination date specified in the 1954 Act notice which can be later than the contractual expiry date (business tenants hold over until such time as formal notice is served).

If the tenant has been in occupation for less than 5 years, compensation will not be payable.


Section 1 of the Landlord and Tenant Act 1927 (1927 Act) provides that compensation arises at the end of the Lease and on the tenant quitting the holding- this is separate from the 1954 Act compensation provisions.

The person entitled to the compensation is the tenant in possession.

Improvements which carry the entitlement to compensation are those which ‘add to the letting value of the holding’. Improvements which do not come within this definition include the tenant’s own fixtures, improvements made pursuant to an obligation for which the tenant received valuable consideration. A claim for compensation will only arise where the tenant (or its predecessors) served a valid notice of its intention to carry out improvements in accordance with section 3 of the 1927 Act and either no objection was raised by the landlord or if there has been an objection by the landlord, court authorisation was obtained. Then the tenant must carry out the improvement in accordance with the notice of court authorisation.

The claim for compensation must follow the procedural requirements within the time limits and the prescribed manner. The claim must include the amount claimed.

The maximum amount of compensation will be the net addition to the value of the holding as a whole or a direct result of the improvement or the reasonable cost of carrying out the improvement at the termination of the tenancy whichever is the lesser sum.

Parties cannot contract out of the compensation provisions. Compensation rarely arises in business leases because most leases have an obligation for the tenant to yield up the premises in the same condition as at the start of the tenancy.


Where there is misrepresentation or a concealment of material facts by the landlord which leads either to the landlord obtaining an order for termination of the tenancy without the court ordering the grant of a new lease or the tenant quitting the premises after not making or withdrawing an application for a new tenancy, then section 37A of the 1954 Act provides for compensation. The Court will order the amount of compensation which is sufficient to compensate the tenant for loss or damage sustained as a result of the order for a new lease being refused or for the tenant quitting the premises.

Any agreement to exclude or reduce the payment of compensation is void unless:- 

  1. The property has been occupied by the tenant (or a predecessor to the tenant’s business) for the purpose of its business for less than 5 years before the tenancy is terminated;
  2. The agreement is made after the right to compensation has accrued.

Posted on 07/05/2016 by Ortolan

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