Section 25 notices & partial redevelopment (Part 2: Statutory Compensation)

This two-part blog examines issues that might arise when serving a section 25 notice where the landlord wishes to redevelop part of the property.  In our scenario, a tenant occupies the ground and first floors under a lease, with the first floor being let to a subtenant on an assured shorthold tenancy (AST).  The landlord has served an unopposed section 25 notice which, due to proposed redevelopment, includes a new lease for the ground floor only.
The first part of this blog dealt with the requirement for vacant possession.  In this second part, we discuss the issue of statutory compensation.  That is, if the tenant is happy to give up possession of the first floor, is he still entitled to statutory compensation in respect of that part?
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What is included in the tenant’s ‘holding’?

The tenant’s ‘holding’, for the purposes of ss 23(3) and 32 of the Landlord and Tenant Act 1954 (LTA 1954), includes all the property comprised in the tenancy but excluding any part not occupied by the tenant or an employee for business purposes.  The tenant has no right to a new lease for any part that doesn’t fall within this.

Given that the first floor is sublet, is the holding then limited to the ground floor only?  If so, then the landlord need only offer a new lease of the ground floor and no compensation would be payable for the first floor.

Where the landlord opposes the grant of a new tenancy of the whole

If, however, the holding does include the first floor, then the landlord’s notice will likely be invalid for failing to offer a new tenancy of the whole.  The landlord should instead have served an opposed section 25 notice, opposing the grant of a new tenancy in its entirety and setting out its reasons.  Here, they would be relying on their intention to redevelop the holding or part of it (as further explained in our Practice Note Grounds of opposition: ground (f) – demolition, construction, reconstruction and substantial works).  If such notice was served, the landlord can apply to the court for an order to terminate without granting a new tenancy (see our Practice Note Section 29(2) – order for the termination of a tenancy).  Where a new tenancy is denied on the grounds of redevelopment, this then triggers the right for compensation subject to one of the three ‘compensation cases’ set out in s 37.

Where the tenant accepts an economically severable part of the holding

The LTA 1954 doesn’t appear to make provision for the landlord to oppose a new tenancy being granted for just one part of the holding not affected by the redevelopment.  However, if the landlord opposes the grant of a new tenancy on the above ground, the tenant may defeat the opposition if s 31A applies (see our Practice Note Business tenancies – s 31A).  That is, the court may grant a new tenancy of only part of the holding where the landlord is able to carry out the proposed redevelopment without possession of the other part, and where the tenant is willing to accept such economically severable part of the holding.  In this case though, no compensation would be payable to the tenant where they were then granted a lease of just that part.

Further reading

For a more general overview of this topic, see our Practice Notes Bringing a business lease to an end and Summary of landlord’s grounds of opposition, our overview on Redevelopment, and associated precedents.  These issues are also considered in a LexisPSL Q&A.

 

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