Compensation for Tenant’s Improvements

The Landlord and Tenant Act 1927 (“the LTA 1927”) contains numerous provisions that relate to improvements and alterations carried out by tenants – including a right for a tenant (under certain circumstances) to receive compensation from its landlord for improvements that the tenant carries out – the particular focus of this brief note.

The entitlement is limited to the tenants of business leases (it does not apply to certain agricultural or residential leases), and the right to compensation arises only at the end of the tenancy – the improvements must remain at the property at the end of the term for the tenant to receive any compensation.

In order to qualify for compensation, the tenant must have served a valid notice on the landlord (called “a section 3 notice”) and, either if the landlord has not objected within three months of receipt of the notice or (if the landlord has objected), the tenant went to the First  Tier Tribunal and obtained authorisation from it AND the tenant has carried out the works in accordance with the section 3 notice or in accordance with any tribunal authorisation (if one was obtained). Above, of course, the works must be in place at the property at the end of the term.

The total amount of compensation that can be claimed is the smaller of the amount of the increase in the value of the property (not including VAT) or the (reasonable) cost of making the improvement.

The landlord and tenant cannot contract out the compensation provisions of the LTA 1927, although there are several ways that the obligation to pay compensation is commonly avoided.   First, of course, for the LTA 1927 compensation provisions to apply, the tenant must have followed the steps briefly outlined above. In addition, if the lease requires the tenant to remove its alterations, etc., at the end of the term (which most leases do), then there will be no alterations at the property at the end of the term, which would increase the value of the property.  Having said that, a well-advised purchaser of commercial property will check to see whether any works at the property qualify under the LTA 1927 and a well-advised landlord will immediately seek further, detailed legal advice immediately if it receives a section 3 notice.