When can a business tenant claim Landlord and Tenant Act 1954 compensation

When you decide to oppose the renewal of a commercial lease, the cost of recovering possession may involve more than legal fees and planned works. Depending on the ground you rely on, the tenant may also be entitled to statutory compensation.

However, Landlord and Tenant Act 1954 compensation is not payable every time a landlord refuses to grant a new tenancy. It will generally only apply where renewal is refused on one of three specific “no-fault” grounds under Section 30(1): grounds (e), (f) or (g). (gov.uk)

These grounds broadly cover certain sublettings of part of a larger property, redevelopment and the landlord’s intention to occupy the premises. The Section 37 Landlord and Tenant Act 1954 compensation rules determine when payment is due and how much the tenant may receive.

Here, we’ll explain when compensation may be payable, how it is calculated and why the possible cost should be considered before you serve an opposing notice. If you are new to letting business premises, understanding the basics of your responsibilities as a commercial landlord will help you prepare for the wider lease-renewal process. (gov.uk)

Why Might a Commercial Tenant Receive Compensation?

Many business tenancies in England and Wales are protected by Part II of the Landlord and Tenant Act 1954, commonly known as security of tenure. Where the Act applies, the tenant may remain in occupation and request a new lease after the contractual term expires.

A landlord can oppose renewal only on the grounds listed in Section 30(1), so the commercial property rights available to tenants should be considered before possession is pursued. Landlord and Tenant Act 1954 compensation protects certain tenants who must leave through no fault of their own, which is why it applies to only three of those grounds. (gov.uk)

When Is Landlord and Tenant Act 1954 Compensation Payable?

The three compensation grounds are:

Ground (e): Certain tenancies involving the subletting of part of a larger property.

Ground (f): The landlord intends to demolish, reconstruct or carry out substantial construction work.

Ground (g): The landlord intends to occupy the premises for their own business or, where relevant, as a residence.

If a new tenancy is refused on one of these grounds and the other statutory conditions are met, the tenant may be entitled to Section 37 Landlord and Tenant Act 1954 compensation when they leave.

The common feature is that the tenant has not necessarily breached the lease. You are recovering possession because of the structure of the property interest or your plans for the premises. (gov.uk)

Which Grounds Do Not Trigger Compensation?

Compensation is not normally payable where renewal is refused because of the tenant’s conduct.

This means there is generally no statutory payment where a landlord successfully relies on:

Ground (a): The tenant has failed to meet their repairing obligations.

Ground (b): The tenant has persistently delayed paying rent.

Ground (c): The tenant has committed other substantial lease breaches.

Ground (d): The landlord has offered suitable alternative accommodation.

It is important not to confuse ground (d) with ground (e). Suitable alternative accommodation falls under ground (d) and does not usually trigger Section 37 compensation. Ground (e) concerns specific circumstances involving the subletting of part of a larger property. (gov.uk)

Our guide on when a landlord can refuse to renew a commercial lease explains all seven Section 30 grounds in more detail.

Ground (e): Subletting Part of a Larger Property

Ground (e) applies in a relatively narrow set of circumstances. It can arise where the tenant occupies part of a larger property under a subtenancy, and the landlord requires possession so that the property can be let or otherwise dealt with as a whole.

The landlord may need to show that separate lettings would produce substantially less rent than dealing with the property as one unit. If renewal is refused on this ground, the tenant may be able to claim Landlord and Tenant Act 1954 compensation. Specialist legal and valuation advice will usually be needed. (gov.uk)

Ground (f): Redevelopment or Substantial Works

Ground (f) is one of the most commonly used no-fault grounds. It may apply where you intend to demolish or reconstruct the premises, or carry out substantial construction work that cannot reasonably be completed while the tenant remains in occupation.

A general idea that you may redevelop the property in the future is unlikely to be enough. Your intention should be genuine, firm, and supported by a sufficiently developed scheme.

Useful evidence may include detailed plans, planning documents, contractor estimates, a realistic work programme, professional reports, funding evidence, and written business decisions.

If you successfully oppose renewal under ground (f), Section 37 Landlord and Tenant Act 1954, compensation should be included in the redevelopment budget alongside professional fees, construction costs, and the cost of obtaining vacant possession. (gov.uk)

Ground (g): The Landlord Intends to Occupy

Ground (g) may apply where you genuinely intend to occupy the premises for your own business or, where appropriate, as your residence.

You should be able to explain how the property will be used, when occupation will begin, and how the plan will be funded, supported by documents such as a business plan, company resolutions, and fit-out plans. Restrictions may also apply where the landlord acquired their interest shortly before the tenancy ends, so check the ownership history first.

Where renewal is refused on ground (g), the departing tenant may qualify for Landlord and Tenant Act 1954 compensation. The likely payment should be calculated before you decide whether taking the property back for your own use remains commercially worthwhile. (gov.uk)

Does the Tenant Need to Go to Court?

A tenant does not always need to complete a contested court case before becoming entitled to compensation.

The right may arise where a court refuses the new tenancy on grounds (e), (f) or (g). It can also arise without a final hearing where the landlord’s notice relies only on compensation grounds and no application is made, or an application is withdrawn.

A commercial property notice to vacate should therefore state only the grounds that genuinely apply. Adding unnecessary grounds can complicate both the dispute and the compensation position.

How Is the Compensation Calculated?

The amount of Section 37 Landlord and Tenant Act 1954 compensation is generally based on the rateable value of the holding.

In most cases, the tenant will receive:

The rateable value of the holding; or

Twice the rateable value where the longer business-occupation conditions are met.

For example, if the relevant rateable value is £25,000, the standard compensation payment would usually be £25,000. If the tenant qualifies for the higher amount, it would usually be £50,000.

The calculation is not based on the rent paid by the tenant, the market value of the property, the cost of moving the business or the tenant’s estimated loss of profit.

When Can the Tenant Receive Twice the Rateable Value?

The higher payment may apply where the premises have been occupied for business purposes throughout the 14 years immediately before the current tenancy ends.

Occupation does not need to have been under one lease. Successive tenancies or a qualifying succession to the business may preserve continuity. If only part of the holding meets the 14-year condition, the calculation may need to be split.

Review earlier leases, assignments, and business succession before budgeting for Section 37 Landlord and Tenant Act 1954 compensation. Relying only on the commencement date shown in the current lease could result in the potential payment being underestimated.

Which Rateable Value Is Used?

The calculation will generally use the rateable value shown in the relevant valuation list when the landlord serves the Section 25 notice or the counter-notice responding to the tenant’s Section 26 request.

Where the tenant occupies only part of a larger rated property, the rateable value may need to be apportioned. A surveyor can confirm the appropriate figure before notice is served or negotiations begin.

Can the Parties Agree on a Different Payment?

The statutory amount is not necessarily the only sum that may be paid.

You and the tenant can negotiate an additional payment as part of an agreed surrender or relocation arrangement, particularly where earlier possession would avoid delay or proceedings.

The agreement should distinguish statutory compensation from surrender payments, relocation contributions, and the settlement of rent or dilapidations, as these may have different legal, accounting, and tax consequences.

Factoring Compensation Into Your Renewal Strategy

The possible cost of Landlord and Tenant Act 1954 compensation should be assessed before you serve a hostile Section 25 notice or oppose a tenant’s Section 26 request.

Check:

Whether the tenancy is protected by the Act.

Which Section 30 ground do you intend to rely on?

Whether that ground carries a right to compensation.

The rateable value of the holding.

Whether the 14-year occupation condition may be met.

Whether only part of the premises qualifies for the higher payment.

Whether an agreed surrender would offer better value.

Whether redevelopment or occupation remains financially viable after compensation is included.

For larger premises, twice the rateable value can be a significant expense and may affect project funding, returns, and negotiations.

Prepare Before Opposing Renewal

Landlord and Tenant Act 1954 compensation is not an automatic payment whenever a protected business tenancy ends. It generally applies only where renewal is refused on grounds (e), (f), or (g) and the statutory requirements are satisfied.

Before serving notice, confirm the ground you intend to rely on, obtain reliable rateable-value information, and investigate the tenant’s occupation history. It is also worth considering whether a negotiated surrender would be quicker or more cost-effective than contested proceedings.

This guide provides a practical introduction to Section 37 Landlord and Tenant Act 1954 compensation, but it is not a substitute for legal or valuation advice. Speak to a commercial property solicitor and, where necessary, a qualified surveyor before finalising your notice, compensation budget, or possession strategy.

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