Deep dive: 1954 Act Consultation - Compensation for tenants when a protected tenancy ends

A business tenant with security of tenure may be entitled to compensation if it is denied a new tenancy because the landlord proves one or more of the “compensation grounds”: Grounds (e), (f) and/or (g). These are broadly “no-fault” grounds, where the landlord has a qualifying reason to recover possession rather than relying on tenant default. Compensation is therefore a statutory acknowledgment that the tenant is being displaced despite the 1954 Act’s protective scheme.

Entitlement to compensation

Compensation is payable where:

• the tenant applies for a new tenancy and the landlord defeats it on a compensation ground;
• the landlord applies to terminate and proves a compensation ground; or
• the landlord relies on a compensation ground in a section 25 notice or section 26 counter-notice and the tenancy ends without renewal proceedings being concluded.

If the landlord succeeds only on a non-compensation ground, no compensation is payable.

Amount of compensation 

There are currently two levels of compensation:

• standard rate: occupation of less than 14 years → 1 x rateable value;
• higher rate: occupation of 14 years or more → 2 x rateable value.
• Although the legislation refers to an “appropriate multiplier” set by secondary legislation, the multiplier is currently one.
• Rateable value is the valuation used for business rates. It is straightforward, but can be a poor proxy for real-world loss, particularly where values are historic, rents have moved significantly, or the tenant’s relocation loss bears little relation to the rateable value.

To qualify for higher-rate compensation, the tenant must have occupied the premises continuously for the purposes of the same business throughout the 14 years immediately before termination. Predecessors in title can count. The relevant date is the termination date in the section 25 notice or section 26 request, which can create practical issues where tenants want to leave earlier but preserve entitlement to the higher rate.

Excluding compensation for non-renewal

For occupations of less than five years, the parties may agree to exclude or modify compensation. The Law Commission questions whether this remains appropriate.

The main criticism of rateable value is that it bears no clear relationship to relocation costs, disruption or goodwill. It also does not reflect any gain to the landlord, may be based on historic values and is often seen as too low. If compensation is perceived as nominal, tenants may be more willing to fight renewal proceedings simply to improve their commercial position.

The Commission does not favour a bespoke assessment of “actual loss” or “landlord’s gain” model. That would be evidence-heavy, costly and likely to generate disputes. It could also encourage more contracting out of the 1954 Act. Instead, it asks whether current rent under the tenancy should replace rateable value. That would retain a fixed formula while aligning compensation more closely with current market conditions.

That said, “current rent” is not always simple. Problems may arise where the lease includes turnover rent, stepped rent, concessionary rents, side letters or other non-rack-rent arrangements. Any move away from rateable value would therefore need clear rules on the relevant figure.

Landlords may favour retaining rateable value for certainty and ease of application. Tenants are more likely to support current rent as closer to commercial reality. The choice is between retaining a blunt but predictable formula or accepting some additional complexity in return for greater relevance.

Our view on Question 40: there is a strong case for replacing rateable value with current rent, provided the legislation clearly addresses non-standard rental structures. That would modernise the formula without moving to a bespoke loss-based regime.

The consultation also asks whether the 14-year threshold for higher-rate compensation remains appropriate. In a market dominated by five to ten-year leases, fewer tenants now qualify. Supporters of change say the threshold is out of step with modern occupation patterns. Opponents argue that higher-rate compensation should remain reserved for genuinely long-term occupation and that the fact fewer tenants qualify does not, by itself, justify reform.

Thresholds for different levels of occupation

The Commission also asks whether a stepped system would be preferable to the current cliff edge. At present, a tenant with 13 years’ occupation receives the same compensation as one with six years, while a tenant who reaches 14 years immediately doubles its entitlement. A staged system could better reflect length of occupation and reduce cliff-edge outcomes.

The difficulty is that a stepped model may introduce more thresholds and therefore more scope for disputes about continuity of occupation, succession and whether the same business has been carried on throughout. A more nuanced regime may be fairer in theory, but less simple in practice.

Stepped multipliers

The Commission further asks whether the multipliers themselves should change: is 1 x too low for standard-rate compensation, and is 2 x too high or too low for the higher rate? This depends in part on what compensation is meant to do. If it is simply a statutory recognition payment, there may be less need to increase the figures materially. If it is meant to provide meaningful financial protection when renewal rights are lost, there is a stronger case for review.

Should the compensation formula be in secondary legislation?

The formula for higher rate compensation is currently structured on a hybrid basis. While the entitlement to compensation based on “2 x rateable value” is set out in primary legislation, the “appropriate multiplier” is prescribed in secondary legislation.

The Commission asks whether formulas and multipliers should continue to be adjustable through secondary legislation. That would make future updating easier, although some may say that core aspects of tenant protection should not be left to ministerial amendment.

Our view on Questions 41–44: there is a respectable case for revisiting the 14-year threshold in light of shorter modern lease terms, but reform should preserve as much simplicity as possible. A stepped system may be attractive but would need careful design to avoid disproportionate evidential disputes.

Historically, exclusion supported short, protected lettings where landlords were concerned about compensation exposure. The Commission questions whether that rationale still survives, given that landlords can now contract out of security of tenure entirely, five years is no longer obviously a short occupation, and exclusion may simply strip out an important statutory protection.

Landlords may nevertheless argue that exclusion still serves a legitimate purpose. It may encourage short, protected lettings by preserving some flexibility and maintaining a middle ground between full protection and full contracting out. The difficulty is that, if compensation becomes too costly or uncertain, landlords may respond by contracting out of the 1954 Act altogether.

Changes in the commercial leasehold market 

If exclusion remains, the Commission asks whether five years is still the right threshold or whether exclusion should be confined to genuinely short occupations. While a 5-year tenancy may have been considered to be short-term in 1954, that no longer holds true in the 21st century.

Tenants’ knowledge of the right to compensation being excluded

A related issue is transparency. The Commission’s provisional view is that, if compensation can be excluded, that should be made explicit. Unlike contracting out of security of tenure, there is currently no equivalent warning process. Tenants, especially smaller or unrepresented ones, may not realise that compensation has been removed by standard drafting.

Our view on Questions 45–46: the immediate priority is transparency. If compensation is to remain capable of exclusion, the tenant should be clearly warned. Whether exclusion should survive at all needs to be considered alongside the risk that abolition would simply encourage more widespread contracting out of the 1954 Act.

A bespoke “actual loss” model would be likely to introduce valuation complexity, evidence disputes and higher costs, and might encourage more contracting out of the 1954 Act. The realistic debate is therefore between retaining rateable value, moving to current rent, and adjusting thresholds and multipliers to reflect modern occupation.

On balance:

• there is a strong case for basing compensation on current rent, with clear rules for non-standard rental models;
• there is a respectable case for revisiting the 14-year threshold in light of shorter lease terms; and

any stepped multiplier system would need careful design to avoid disproportionate disputes.

On exclusion, transparency should come first. If compensation can still be excluded, tenants should be clearly warned that this protection is being removed.

Compensation for non-renewal may be less visible than some other parts of the 1954 Act consultation, but it is practically significant. It marks the point at which security of tenure ends, balancing a tenant’s expectation of continuity against the landlord’s right, in defined circumstances, to recover possession.

The current regime prioritises certainty over precision. The Law Commission is now asking whether that balance remains appropriate in a market of shorter leases and more complex rent structures. Questions 40–46 may not change the architecture of security of tenure, but they could materially affect the level of protection tenants receive when renewal rights fall away.