A. Restricted Catchment

The reach of section 4 extended to tenancies of premises, “used wholly or partly for carrying on thereat any trade or business”.Footnote ⁵¹ Albeit these key terms were undefined in the 1927 Act, the understanding of what constitutes a “business” is more generic than a “trade”Footnote ⁵² and covers activities involving time, attention and labour, the incurring of liabilities to others and the purpose of making a livelihood or profit. The concept of a “trade” is much narrower and connotes buying and selling and includes such diverse commercial activities as the running of a guest house,Footnote ⁵³ manufacturingFootnote ⁵⁴ and the carrying on of a college.Footnote ⁵⁵ It was specified in section 17(3)(b) that the business of subletting residential flats, “shall not be deemed to be premises used for carrying on thereat a trade or business”. This exclusion, however, was unnecessary as such premises would not attract adherent goodwill and, once occupied as residential premises, marked the cessation of business user thereon.Footnote ⁵⁶ In contrast, the Act did not exclude the business use of subletting office space. While this distinction presumably was in recognition that some business user on the premises persisted, it would again be difficult to establish any adherent goodwill on the tenant's part that could trigger the statutory provisions.

The allusion to partial use for business purposes ensured that, in relation to mixed use premises, the entire property would fall within the statutory scheme.Footnote ⁵⁷ Conversely, if the tenant sublet only the non-commercial part, the business premises used by the tenant would remain protected. The term “tenant” was defined widely in section 25 to include both lessees and assignees entitled in possession and having derived title by contract or by operation of law.Footnote ⁵⁸ For example, the receiver of a tenant company could enforce the renewal rights on behalf of debenture holders.Footnote ⁵⁹ If a joint tenancy was in existence, it would follow that one joint tenant alone could initiate a claim under the 1927 Act.Footnote ⁶⁰ Section 17 did not, however, cater for all types of commercial tenant or business tenancy. Predictable exclusions included agricultural tenancies,Footnote ⁶¹ mining leasesFootnote ⁶² and lettings to a tenant as the holder of any office, appointment or employment from the landlord.Footnote ⁶³ Most controversially, section 17(3)(a) excluded a tenant who only carried on a profession from the premises from the goodwill and renewal provisions.Footnote ⁶⁴ Manufacturers, charities and trade associations also fell outside the statutory scheme because they could not generate goodwill. Lamentably, these exceptions overlooked the harsh reality that “no class of business activity is immune from the dangers of exploitation by landlords”Footnote ⁶⁵ and that for these tenants “the need for security of tenure … may be just as great”.Footnote ⁶⁶

An additional hurdle imposed by section 4(1) was that the tenant had to show that it or its predecessor in titleFootnote ⁶⁷ had carried on a trade or business at the premises for a period of at least five years. This period was chosen after much deliberation in the House of Commons and, in the light that there was a movement in the Lords to make the qualifying period 15 years, was a compromise measure.Footnote ⁶⁸ There was no requirement, however, that this user be continuous or that it continue until the end of the tenancy. The five years, moreover, did not have to be under one tenancy as a succession of short tenancies would suffice.Footnote ⁶⁹ Problems might, however, be faced by a tenant who had previously been granted a new lease under section 5. Following the expiry of the renewed term, and although the tenant was debarred from claiming a further renewal, he could still claim goodwill created during the renewal period. Nevertheless, this was subject to the five-year qualification period having to run afresh as the previous goodwill had become spent. The reference to a predecessor in title could, moreover, generate anomalous outcomes. It entailed that a tenant under a six-year lease who, say, sublet the premises for two years, but by agreement resumed possession before the end of that two-year period, fell outside the statutory scheme. The tenant was unable to treat the subtenant as a predecessor in title.Footnote ⁷⁰ Similarly, a freeholder was not the tenant's predecessor in title so any period of business use by the freeholder could not count for eligibility purposes.Footnote ⁷¹ A licensee, of course, could never be classified as the predecessor in title of the tenant.Footnote ⁷²

It was also possible for the parties to contract out entirely of the compensation and renewal provisions. Section 9 permitted this only when the agreement (whether written or parol) was made for adequate consideration. Such consideration might be found in the lease itself or lie outside the tenancy agreement. Most obviously, it could adopt the form of a diminution in rent or the relaxation of a user/alienation covenant. In Holt v Lord Cadogan,Footnote ⁷³ for example, the tenant was relieved from liability to paint the premises (saving £50) and given the right to make additions. This was assessed as being adequate for surrendering a compensation claim of £220. In Lewis v Watney Combe Reid & Co., however, the acceptance of a yearly tenancy in full satisfaction of the tenant's statutory rights was regarded as inadequate consideration.Footnote ⁷⁴ Although the consideration had to be provided when the contracting out agreement was reached, issues as to its adequacy could be determined only at the date of the tenant's claim when the extent of adherent goodwill was calculable. This might be many years after the consideration was provided. As under the present regime, such clauses were routinely imposed on a tenant with the landlord being prepared to wait and see whether it would be upheld. Unsurprisingly, section 9 was criticised as “failing in practice to afford any adequate restriction on contracting out”.Footnote ⁷⁵ It was denounced more vehemently by the Parliamentarian and solicitor, Mr. Leslie Hale, who claimed “That Act has always been a dead-letter because of its contracting out provisions. What is said about contracts negotiated freely … is a figment of a diseased brain, for it just does not exist”.Footnote ⁷⁶

B. The Profession Carve-out

While it has been said that “All professions are businesses but not all businesses are professions”,Footnote ⁷⁷ a profession was deemed by section 17(3)(a) to be neither a business nor a trade. There were three problems associated with this disqualification. First, the distinction between the carrying on of a business or trade and the undertaking of a profession was not clearly drawn. The term “profession” undoubtedly enjoys a scope less certain than either “business” or “trade” and the accepted wisdom remains that it is “an occupation requiring either purely intellectual skill or manual skill controlled as in painting, sculpture or surgery, by the intellectual skill of the operator”.Footnote ⁷⁸ While a profession embraces, for example, clergy, lawyers, doctors, surveyors, architects and even performers,Footnote ⁷⁹ in less obvious cases the court must resort to common sense and judicial pragmatism.Footnote ⁸⁰

Second, the pervading wisdom was that a profession could not generate residuum goodwill.Footnote ⁸¹ The strained logic was that the customer base would follow, say, a doctor to new premises.Footnote ⁸² Any goodwill, therefore, would be personal, not of appreciable value and peripatetic in nature.Footnote ⁸³ This is not, however, an unchallengeable proposition. While, as the Leasehold Committee acknowledged, this might be true with “fashionable surgeons and famous counsel”, the same could not be said of local doctors and dentists whose practices depended primarily upon community awareness that there was a surgery at the premises.Footnote ⁸⁴ In those circumstances, it was artificial to distinguish between the residuum goodwill of a grocer and the goodwill of a medical practitioner that adhered to the premises.Footnote ⁸⁵ As Lord Parmoor observed: “the goodwill of a doctor … is as much entitled to consideration as the goodwill of a man who is selling jam or fruit or anything else.”Footnote ⁸⁶

Third, and while it appears that the legislature did not contemplate that there could be both a trade and a profession carried on simultaneously at the premises, it was possible for this duality to occur.Footnote ⁸⁷ It was, however, still necessary for the tenant to establish residuum goodwill exclusive to the trade or business carried on.Footnote ⁸⁸ If this could not be done, the tenant had no right to compensation or renewal.Footnote ⁸⁹

C. Statutory Goodwill

The key shortcoming of the 1927 machinery was its total reliance upon the existence of tenants’ goodwill, which was “the crux, the solar plexus” of the scheme.Footnote ⁹⁰ According to its popular acceptation, goodwill is a type of property that distinguishes an established business from a new business.Footnote ⁹¹ It is “the benefit and advantage of a good name, reputation, and connection of business. It is the attractive force which brings in custom”.Footnote ⁹² Nevertheless, it is not always easy to attribute an accurate value to goodwill in this conventional sense because, as Lord Meston pointed out: “It is a snare and a delusion in the balance sheets of companies. It imports an illusory and often fictitious figure into the purchase price of going concerns – in other words, it is an undiluted nuisance.”Footnote ⁹³ This is not, however, the only style of goodwill that may existFootnote ⁹⁴ and significantly this was not the goodwill that the 1927 Act sought to protect.

Prior to the 1927 Act, the courts had tended to view the goodwill of a business as comprising one indivisible whole, with Lord Macnaghten observing that: “To analyse goodwill and split it up into its component parts … seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed.”Footnote ⁹⁵ Nevertheless, with the enactment of the Part I provisions this segregation became necessary. The major obstacle was that the concept of goodwill was “very easy to describe, very difficult to define”,Footnote ⁹⁶ with adherent goodwill appearing as “a sort of elusive will-o’-the wisp which you cannot grasp”.Footnote ⁹⁷ The grievous failure of the legislature to promote any working definition of this pared down goodwill was due to a lack of vision and persistence.Footnote ⁹⁸ It proved to be a task that “baffled the draftsmen and others who attempted it”.Footnote ⁹⁹ Hence, it was left to the judiciary to give meaning to this curtailed form of goodwill.

An attempt at deconstruction was undertaken by Scrutton L.J. in Whiteman Smith Motor Co. v Chaplin.Footnote ¹⁰⁰ With the 1927 Act in focus, he famously offered a zoological depiction of the types of goodwill by invoking a “cat, dog and rat” metaphor. The “cat” will stay in its old home even though the person who has kept the house leaves. As Scrutton L.J. explained: “The cat represents that part of the customers who continue to go to the old shop, though the old shopkeeper has gone; the probability of their custom may be regarded as an additional value given to the premises by the tenant's trading.”Footnote ¹⁰¹ Hence, “cat” goodwill is contained within the bricks and mortar on the site, remaining unaffected by a change of business name or style. It is with this type of goodwill that the 1927 Act was concerned. So-called “dog” goodwill attaches to the proprietor and not the premisesFootnote ¹⁰² and the “rat” concerns those customers who neither follow the place nor the person, but move their patronage elsewhere. These latter types of goodwill were untouched by the statutory scheme. The cat metaphor was, from the perspective of the 1927 legislation, inexact. The difficulty was that it also embraced site goodwill (the convenience of the situation of the premises), which was expressly excluded from the scope of the 1927 scheme. The absence of definiteness, combined with hindsight, provoked Evershed L.J. to comment that “if it is true that a cat has nine lives, we express the hope that in relation to the Landlord and Tenant Act it has lived the last of them and may now be decently interred”.Footnote ¹⁰³

The compensation provision focused exclusively upon goodwill that stayed with the premises when the tenant left, that is, akin to the so-called “cat” goodwill. This statutory goodwill was very different from goodwill as “understood either in law or in ordinary business parlance”.Footnote ¹⁰⁴ The tenant had to establish goodwill that was “attached to the premises as a permanent thing and not something evanescent”,Footnote ¹⁰⁵ which existed “as a quality of the premises”.Footnote ¹⁰⁶ The core notion, as Viscount Cave acknowledged, was simple: “if he leaves goodwill behind him he is to be entitled to compensation.”Footnote ¹⁰⁷ Understandably, the compensatory award was capped in amount to the additional value bestowedFootnote ¹⁰⁸ and represented what Maugham L.J. called “the goodwill rent”.Footnote ¹⁰⁹ Unfortunately, the determination of whether the goodwill asserted was indissolubly annexed to the premises or, instead, remained a separate asset gave rise to complicated factual issues and complex valuation assessments.Footnote ¹¹⁰ The isolation and evaluation of annexed goodwill was an extremely difficult and uncertain task. Inevitably, the Leasehold Committee concluded that the requirement to demonstrate adherent goodwill was “an almost insurmountable obstacle to the success of claims under the Act”.Footnote ¹¹¹

D. An Undue Process?

The tenant's entitlements were subject to a variety of procedural, temporal and lasting value conditions. In the case of a tenancy terminated by landlord's notice to quit, the tenant had to serve a notice of claim on the landlord within one month.Footnote ¹¹² Unsurprisingly, if it was the tenant who served the notice then that tenant would forego any potential claim. The pitfalls of requiring such a rapid response were not lost on the Leasehold Committee who concluded, particularly with weekly tenants in mind, that the period set was “scarcely appropriate” and that “a tenant holding at less than a month's notice may actually have been ejected before the end of the month from the date of the notice to quit”.Footnote ¹¹³ Many tenants, moreover, were “singularly ill-informed as to their rights”Footnote ¹¹⁴ and the landlord's notice to quit was not required to contain any information as to tenants’ rights or the workings of the statutory machinery. For those who were legally advised, the tendency was to claim immediately on receipt of the landlord's notice to quit.

In relation to tenancies not determinable by notice to quit, the claim notice had to be served no more than 36 nor less than 12 months before the termination of the tenancy. All time limits were strictly enforced.Footnote ¹¹⁵ The Leasehold Committee regretted that there was no warning given to the tenant and, whether through ignorance or imperfect knowledge as to entitlement, that the tenant might “fail to assert it until after the commencement of the last year of his lease, which is … fatal to his claim”.Footnote ¹¹⁶ Difficulties as to timing were evident in Allied Ironfounders Ltd. v John Smedley Ltd.,Footnote ¹¹⁷ where the court considered the distinction between “terminated” and “terminable”. The litigation focused upon a subtenancy and whether, for the purposes of the 1927 Act, it had been terminated by the landlord's more recent notice to quit or, instead, had fallen with the end of the head lease. The latter was regarded by Devlin J. as being the termination date. It followed that no valid claim notice had been served by the tenant within the statutory time frame and, hence, the court enjoyed no jurisdiction.

For the tenant who sought a new lease, the claim notice had to be served within the same time constraints as a compensation claim.Footnote ¹¹⁸ Although the Act employed the expression “in lieu of claiming such compensation”, it was permissible for the tenant to make a monetary claim and, in the alternative, a renewal claim within the same notice.Footnote ¹¹⁹ Curiously, an omission to state the amount of compensation otherwise payable was no bar to renewal.Footnote ¹²⁰ Instead, by virtue of section 5(1) the tenant had merely to allege that compensation, which would otherwise be payable, “would not compensate him for the loss of goodwill he will suffer if he removes to and carries on business in other premises”. Court proceedings for compensation could not be commenced until the expiration of two months from the date of service of the claim notice. This was to allow the landlord to make a renewal offer to the tenant. If within those two months, the landlord served a notice offering a new lease for a term not exceeding 14 years at a reasonable rent then the tenant could neither apply for compensation nor a new lease. If the tenant failed to accept the landlord's offer within one month of the offer notice, section 4(1)(b) deemed it to have been declined. As the Leasehold Committee noted, the tenant could lose its statutory rights by omission and this “places a further hazard in the way of an unwary tenant”.Footnote ¹²¹

As regards a claim for a new lease, under section 5(2) the proceedings were to be commenced not less than nine months before the termination of a fixed term lease or, if the tenancy was terminated by landlord's notice to quit, within two months after service of that notice. Once the tenant's notice was served, section 5(3) allowed either the tenant or the landlord (perhaps to expedite matters) to apply to the court for a new lease in lieu of compensation for goodwill. The court had no jurisdiction to extend these statutory time limits, but if renewal proceedings were incomplete before the termination of the original tenancy, an interim continuation could be ordered under section 5(13).Footnote ¹²²

It is a curious feature that section 6 provided that the tenant's claim to compensation or a new lease could be defeated by the landlord offering suitable alternative accommodation, which “would reasonably preserve to the tenant the goodwill of his business”. The landlord had to make this offer within one month of the tenant's notice. Within this tight timeframe, the burden rested with the landlord to demonstrate the offer was firm, genuine and capable of immediate acceptance. If the offer was unsuitable, understandably the tenant's compensation claim remained afoot. This proviso, however, sits uneasily with the concept of section 4 goodwill, which stays with the premises and cannot be transferred. If compensation would otherwise be payable for the rental gain to the landlord, there could be scant justification for depriving the tenant of financial recompense for the irretrievable loss of adherent goodwill.Footnote ¹²³ A possible caveat would be where the landlord owned a parade of shops and the tenant occupied one unit for business purposes. If the alternative accommodation offered was another unit in that parade section 6 might then operate to defeat the tenant's compensation claim. Beyond these narrow confines, however, the general rule was reinforced by section 4(1)(ii)(b), which allowed the landlord to defeat the tenant's compensation claim by offering a new lease on reasonable terms of the existing holding. Unlike with alternative premises, the tenant is then shielded from loss of residuum goodwill. As a means of defeating a claim to a new lease, however, section 6 enjoyed more legitimacy. The tenant had already chosen to forego financial recompense due to its inadequacy and to risk all if a renewal claim could not be made out. If goodwill in its conventional sense was reasonably preserved by the offer of other accommodation, the tenant had little of which to complain.

The interrelationship between the compensation provisions and renewal was more awkward than might first appear and embodied the potential for double jeopardy. This arose because the tenant who elected to claim a new lease under section 5 did so “in lieu” of compensation otherwise payable. This entailed that, if a tenant failed to prove a claim for renewal, he would also be deprived of financial recompense. This would arise where, for example, the tenant was unsuitable or could not establish that there was a disparity between the compensation payable and the loss sustained. As Hill & Phelps explained: “The tribunal is given no jurisdiction to award compensation in such circumstances.”Footnote ¹²⁴ Similarly, if a new lease was ordered on terms that were unfavourable to the tenant, no alternative claim for compensation remained available. A different approach was, however, adopted in circumstances where the tenant made out its case for renewal, but was defeated by the landlord relying on one of the “just exceptions” listed in section 5(3)(b)(i)–(iv).Footnote ¹²⁵ Even though by virtue of section 5(3) renewal would “not be deemed to be reasonable”, compensation would still be available for loss of adherent goodwill.Footnote ¹²⁶

E. The Valuation Exercise

Absent agreement between the parties, the valuer's task was an unenviable one.Footnote ¹²⁷ In outline, the valuer was to compare the rental value which a new tenant would pay on the alternative assumptions that there had been no previous business carried on there (i.e. the “normal rent” as detached from goodwill) or that the premises had already been the home of an established business (i.e. the “goodwill rent”). The valuer was then to make necessary deductions for any appreciation in value which arose irrespective of the tenant's trade.Footnote ¹²⁸ This explains why the matter was never determined simply by comparing the rental value of the premises at the commencement and at the end of the lease, as any increase in value “may be wholly independent of ‘the direct result of the carrying on of the trade or business’”.Footnote ¹²⁹ Similarly, the profitability of the business offered only “a very slight guide to the value of the adherent goodwill”.Footnote ¹³⁰ Such profits might instead be attributable to such extraneous factors as personal goodwill, the advantages of the site or improved trade conditions.

Once the goodwill that would be expected to accrue to a new tenant carrying on the same business was identified, the referee had to isolate the effect that such goodwill would exert over the rent that might be obtained by the landlord. This exercise necessarily entailed that “where there is no corresponding benefit to the landlord the tenant would get no compensation at all”.Footnote ¹³¹ In British & Argentine Meat Co. Ltd. v Randall, for example, the tenant's claim failed because another butcher would not be prepared to pay more for the premises than any other trader.Footnote ¹³² In such circumstances, there was nothing gained from the commercial endeavours of the previous tenant.Footnote ¹³³ Similarly, if a higher rent was obtained from a new tenant in a different business (e.g. a florist) to the outgoing tenant (e.g. a butcher) no compensation would be payable. Here, as the Leasehold Committee acknowledged: “no part of the landlord's gain in the shape of the increase in rent can be attributed to adherent goodwill.”Footnote ¹³⁴ Conversely, the tenant could not be deprived of compensation merely because the landlord chose to let at a lower rent to a new tenant in a different line of business.Footnote ¹³⁵ Even if the market was depressed, the tenant could still claim for compensation for loss of adherent goodwill provided the “gain” element was discernible.

Nevertheless, the general rule was that, if adherent goodwill existed, the premises “could be let at a higher rent”.Footnote ¹³⁶ The task of discriminating between the elements contributing to that added value was not, however, straightforward. As Sir David Maxwell Fyfe acknowledged: “It is one thing to say what the premises are worth, but it is very rarely possible to prove how much of that figure has been contributed by the tenant's business.”Footnote ¹³⁷ The process was made unduly elaborate by several negative directions and disregards. These were designed to ensure that, if the landlord could show that the premises were to be let at a higher rent for reasons wholly unconnected with the tenant's goodwill, compensation would not be forthcoming.Footnote ¹³⁸ First, section 4(1)(b) provided that, when the premises were to be demolished in whole or in part, this must impact on the residuum value of the goodwill to the landlord. If the demolition was total, then as Hill & Phelps commented: “it is unlikely in this event that that he will derive any benefit from the goodwill attached by the tenant to the premises.”Footnote ¹³⁹ If demolition was partial only, then the valuer would have to attribute value to the remaining part of the premises. By way of a safeguard against a post-hearing change of intention by the landlord, the court had the discretion under section 5(3) to impose a requirement that (if, say, the redevelopment or the occupation did not occur within a specified timeframe) the landlord was to compensate the tenant.Footnote ¹⁴⁰ For these purposes, the legislative spotlight shifted beyond the loss of adherent goodwill and focused upon the tenant's actual loss inflicted by having to move premises. It was, as Mustoe observed, “another kind of compensation”.Footnote ¹⁴¹

Second, section 4(1)(c) discounted all addition to the rental value of the premises attributable to the fact that the premises were licensed premises. While it is not to be doubted that “Premises which are licensed have an added value by reason of the mere fact that they are licensed”,Footnote ¹⁴² this value is not directly due to the tenant having plied his trade at the premises. Hence, this proviso added nothing as compensation would not, in any event, be payable for the license. Its inclusion, however, “caused considerable difficulty”Footnote ¹⁴³ and made it necessary to attach a “somewhat difficult to determine”Footnote ¹⁴⁴ value to an unnecessary exclusion. Scrutton L.J. criticised the “somewhat obscure words” of this licensing exclusion,Footnote ¹⁴⁵ recognising that it virtually negated compensation as regards licensed premises that exclusively sold alcohol.Footnote ¹⁴⁶ This did not mean that all licensed premises were entirely excluded from protection as it remained possible for the tenant to have goodwill over and above the value of the licence.Footnote ¹⁴⁷ As Du Parcq J. observed: “If the tenant loses his lease, he loses his customers, and they are very likely to remain attached to the old premises.”Footnote ¹⁴⁸ Hence, in Whitley v Stumbles the tenant ran a fishing hotel and was still able to demonstrate goodwill independent of the license to sell alcohol.Footnote ¹⁴⁹

Third, section 4(1)(d)(ii) disregarded all value which is attributable exclusively to the situation of the premises (i.e. site goodwill).Footnote ¹⁵⁰ This was appraised as another of those “adventitious and extraneous causes at work not in any way attributable to the carrying on by the tenant of his trade or business”.Footnote ¹⁵¹ Accordingly, increased goodwill arising from, for example, the beneficial site of the premises, the expansion of the neighbourhood, the increase in the use of motor-cars, better transport links and the landlord's foresight were to be ignored for compensation purposes. As Scott L.J. remarked: “the landlord shall not be called on to pay for any value in his hands, when possession passes to him, which is not solely and directly attributable to the efforts of the tenant.”Footnote ¹⁵² In Schooley v Nye,Footnote ¹⁵³ for example, the tenant had a lease of a garage adjacent to two large hotels. The landlord argued successfully that the goodwill which attached to the garage was due to its proximity to the hotels. As it was location-based goodwill, it was something on which the tenant could not rely. In less clear-cut instances, Merlin admitted that it was a difficult and perplexing task “to disintegrate what may be termed the ‘site value’ … from the ‘goodwill’ of the premises created or carried on there by the tenant”.Footnote ¹⁵⁴ He employed the example of a fruiterer's shop at the entrance of a railway station. At the end of the lease, it would become necessary to superimpose upon “station goodwill” further goodwill peculiar to that tenant. There can be no doubt that the identification of location-based goodwill involved a degree of intuitive guesswork.

Fourth, and by way of a safeguard for the landlord, section 4(1)(d)(i) required that regard be had to the intentions of the tenant as to its future trading and business activities. Consequently, the court was able to attach conditions that geographically limited where the tenant could continue to trade. The seemingly logical notion is that “if a tenant receives compensation for goodwill on quitting his premises he should not enjoy absolute liberty to set up a competitive trade or business at other premises in the immediate neighbourhood”.Footnote ¹⁵⁵ The provision, however, made no sense whatsoever in the context of a statutory scheme focused exclusively upon adherent goodwill that did not follow the tenant. It was, therefore, counterintuitive to contend that residuum goodwill could be diminished by the tenant continuing to operate his business in the locality.Footnote ¹⁵⁶

Finally, section 4(1)(e) specified that any value created or increased due to restrictions placed by the landlord upon the letting for a competitive business of other premises in the neighbourhood would negate or, at least, reduce an award. In such circumstances, the increase to the rental value of the premises would not be generated by the tenant. Instead, it would be a market generated in whole or in part by the restraints imposed in the lease. In other words, landlords could create or possess “adherent goodwill” as well as tenants.

A. Quantum

Undoubtedly, the major flaw with the extant provisions concerns how compensation is calculated. The tenant after quitting the holding is entitled under section 37(2) to flat-rate compensation based on the rateable value of the premises.Footnote ¹⁸⁹ The ultimate award is the product of the prescribed multiplier (since 1990 one) as judged at the date the tenant vacates the propertyFootnote ¹⁹⁰ and either the rateable value of the holding at the time of service of the renewal documentation or, when 14 years’ occupation can be established, twice that rateable value. As to the latter, Lord Silkin suggested that three or four times the rateable value “would not be unreasonable”.Footnote ¹⁹¹

Section 37(8) explicitly recognises that different multipliers can be prescribed for different cases, but offers no guidance. Except for early transitional adjustments, no variations of treatment have so far been made. Interestingly, it was argued unsuccessfully that, in connection with licensed premises, publicans should be entitled to “special” compensation gauged to a higher multiplier than other tenants.Footnote ¹⁹² The claim for preferential treatment was based upon the reality that rateable values are assessed differently for licensed premisesFootnote ¹⁹³ and the realisation that “the balance of power between the landlord and tenant in such cases is different from that in the ordinary run of cases under the 1954 Act”.Footnote ¹⁹⁴ The model employed in Northern Ireland has, however, much to commend it. This uses different multipliers according to years of occupation, that is, less than 5 years, exceeding 5 years and less than 10, exceeding 10 years and less than 15 and exceeding 15 years.Footnote ¹⁹⁵ Such gradation more fully reflects the entrenched sentiment that the longer the tenant has been in business, the greater the financial impact on quitting the premises.

The mechanism of rateable values appealed to the Government as it offered simplicity and certainty. As the Solicitor General enthused: “Both landlords and tenants know what sum the landlord will have to pay and the tenant will receive. Each can make his plan accordingly. They will not have to wait month after month until the result of lengthy litigation is known.”Footnote ¹⁹⁶ It was estimated that, driven by 1954 rateable values, the average compensation would work out at a meagre £75 or, in the case of a tenant who had occupied for 14 years, £150.Footnote ¹⁹⁷ As Lord Silkin bemoaned “it would be a very poor business where the profits did not exceed the rateable value”.Footnote ¹⁹⁸ The mooted alternatives of gauging compensation according either to the landlord's profit or the tenant's loss were rejected. The former signalled an unsatisfactory retreat to adherent goodwill whereas the latter “would be purely arbitrary and would work very hardly upon the landlord”.Footnote ¹⁹⁹ Compensation is not, therefore, designed to recompense a tenant for loss of goodwill and aims to offer a fair and reasonable contribution to the tenant's costs of setting up elsewhere. It gives rise to a statutory debt that is enforceable only after the tenant has quit the premises (and already incurred displacement costs) and while the landlord remains in funds. Most certainly, it is not to be viewed as compensation for the extinguishment of an interestFootnote ²⁰⁰ or a breach of contract.Footnote ²⁰¹

A timid, landlord-centric stance is discernible with the choice of rateable value and a multiplier. Clearly perturbed by the valuation debacle under the previous regime, Parliament opted for a solution that was unhitched from the notion of goodwill. It is, therefore, ironic that the spectre of goodwill still features large in the section 34 calculation of both the interim rent and the market rent payable on renewal. Within those confines, goodwill in its conventional form acts as a disregard from market rental values. As it must necessarily be assessed for it to be disapplied, there can be no reason why it could not readily factor into the calculation of compensation.

Much unnecessary complication occurs from a mystifying lack of symmetry between the timing and countback requirements that dictate the tenant's entitlement. First, the appropriate multiplier to employ is judged at the date of quitting the premises. Second, the relevant rateable value to adopt is that at the date of the service of the renewal documentation. Third, the entitlement to double rate compensation and the ability to contract out (the 14 years and the five years respectively) are both retrospectively computed from the termination date specified in the renewal documentation. The disorderly nature of these timelines serves only to undermine the certainty and simplicity that was heralded.

B. Rateable Values

Practical problems, complexity and widespread dissatisfaction are associated with the concept of rateable values. Non-domestic rating law, as Kerr J. acknowledged, “arouses high passions and stimulates serial litigation”.Footnote ²⁰² The Federation of Small Businesses views the existing system of non-domestic rates as being “out-dated, unfair and not related to the ability to pay, or changing economic circumstances”.Footnote ²⁰³ The Federation has made repeated calls for the business rates system to be fundamentally reformed and, as a result of its lobbying, major changes are on the horizon.Footnote ²⁰⁴ Even the Treasury Committee concluded that the present scheme was “broken” and added that “Businesses deserve a system that is reactive to changes in the modern economy and fit for purpose”.Footnote ²⁰⁵ Clearly, non-domestic rateable values offer no stable foundation for compensation purposes.

Rateable values are currently the product of the open market rental value of the property (as estimated by the Valuation Office Agency) and a multiplier. They are traditionally reassessed every five years, though this is likely to be reduced to three years. Changes to rating values will inevitably influence the compensation payable. Hence, if the appropriate rateable value increases then so will compensation. If it decreases, as occurred post-2017 in many regions in England and Wales,Footnote ²⁰⁶ this will diminish the financial entitlement of the tenant. Transitional relief whereby any increases are phased in gradually may also be problematic, with the timing of service of the notice/request under section 37(5) assuming potential significance. A further distortion might occur with the various forms of rates relief available that are “to some extent arbitrary, administered inconsistently and add complexity to a system that is already onerous”.Footnote ²⁰⁷ The tenant who pays discounted rates or no rates will still be entitled to compensation geared to the listed rateable value. This possibility simply reinforces the air of unreality surrounding the compensation process.

Difficulties also arise concerning the fundamental issue of what constitutes a hereditament for the purpose of rating legislation.Footnote ²⁰⁸ This might be problematic when there are two leases of separate suites, say in an office complex, granted by the same landlord to the same tenant. It is not always straightforward to determine whether each is to be regarded as a separate hereditament or, instead, whether they have merged into a single hereditament.Footnote ²⁰⁹ The latter option will bring with it a discount based on economy of scale (“quantum”) and impact on compensation payable for disturbance. Further complications may arise when no separate valuation is shown for the holding. In such a situation, an appropriate apportionment (where the holding is merely part of a rated hereditament) or aggregation (where the holding comprises of separately rated parts) needs to be made.Footnote ²¹⁰ Apportionment also assumes significance as regards split reversions, that is, where the ownership of the reversion has been divided subsequent to the grant of the lease. In this instance, section 37(3B) now provides that the owners of the parts are together to be treated as the landlord for renewal purposes and compensation apportioned between them according to the rateable value of their respective parts. If the rateable value still cannot be ascertained, it is taken to be the value which, apart from any exemption from assessment to rates, would have been entered in the valuation list as the annual value of the holding. As regards apportionment, aggregation and deemed rateable values, section 37(5) offers a right of appeal.Footnote ²¹¹

Section 37(5)(a) is mandatory in nature and stipulates that the rateable value “shall” be that as shown in the valuation list at the time of the service of the landlord's section 25 notice or the tenant's section 26 request for a new lease. This outwardly innocuous provision, however, has the potential to generate unfairness. Such was demonstrated in Plessey & Co. plc v Eagle Pension Funds.Footnote ²¹² The tenant's premises were damaged by fire in 1977 and a substantial reduction was made to the valuation list. The premises were reoccupied in 1978, but their rateable value was not upgraded until after the landlord had served its section 25 notice. It fell to the Lands Tribunal to determine what rateable value was applicable to premises. The landlord argued that the listed rateable value of £17 should be employed. The tenant countered that it should instead be computed according to the value that should have been attributed to the holding, which produced a rateable value of £21,097. It was held that the relevant rateable value was that as at the time the landlord's notice was served, that is the lower sum.Footnote ²¹³ The 1954 Act was precise as to the date the rateable value was to be gauged and a strict construction had to be adopted. This literal approach to statutory interpretation, as to the appropriate day that rateable values crystallise, is not confined to the 1954 Act and appears in other areas of landlord and tenant law, such as the Rent Act 1977Footnote ²¹⁴ and the Leasehold Reform Act 1967.Footnote ²¹⁵ The consistent message is that, even though the listed amount is incorrect, and excessively so, there will be no alteration made. The scope for hardship, therefore, extends beyond the Part II provisions and spotlights that the need for reform is urgent.

Additionally, and since the abolition of domestic rates in 1990, section 37(5A) provides that, in relation to mixed use properties, the value of the domestic premises is excluded from the calculation. These composite properties are valued for both business rates and Council Tax. Nevertheless, the 1954 Act contains a special provision that allows the amount of compensation to be increased by the court to equate with the tenant's reasonable expenses in moving from the domestic property. This demonstrates that, when rateable values offer inadequate redress, the focus can shift to losses actually incurred by the tenant. Parliament could adopt a similar tactic to ensure that the loss of goodwill (as defined in its conventional sense) is the subject of an additional award when statutory compensation is inadequate. As Ahlinder concludes: “For the protection to be efficient, the fundamental basis for calculation of any compensation should be the tenant's actual losses.”Footnote ²¹⁶

C. Double Rate Compensation

For the higher rate valuation to apply, section 37(3)(a) requires that, during the whole of the 14 years immediately preceding the termination of the current tenancy,Footnote ²¹⁷ the premises have been occupied for the purposes of a business carried on by the occupier or for those and other purposes.Footnote ²¹⁸ If the tenant has occupied only part of the current holding for the 14-year period, section 37(3A) now provides that there will be a separate calculation for the part that was occupied for the 14-year period and that which was not. Previously, it had been necessary to have occupied the entirety of the holding for 14 years.Footnote ²¹⁹ As demonstrated in Department of Environment v Royal Insurance plc,Footnote ²²⁰ the traditional understanding of what constituted 14 years’ business user was strict. There the High Court held that the claim for double rate compensation failed because the tenant under a 14-year lease had taken physical occupation one day after the term began. Somewhat harshly, Falconer J. concluded that this was not occupation for the full 14 years. Fortunately, a more flexible approach was taken by the Court of Appeal in Bacchiocchi v Academic Agency Ltd.,Footnote ²²¹ where the tenant had intended (albeit mistakenly) to quit on the proper date and to remain responsible under the tenancy until that time. The Royal Insurance case was declared to have been wrongly decided. Simon Brown L.J. acknowledged that the determination of whether business occupation had persisted for the appropriate period should cater for short periods, at the beginning, mid-term or end of the contractual lease, where the premises stand empty. In the absence of a rival claimant to the status of occupier, fitting out or closing down periods were properly to be included in the calculation. The tenant should not be expected to maintain occupation by storing goods on or making token visits to the premises simply to satisfy the statutory requirements. As Ward L.J. put it: “It is an affront to common sense to require a pot and pan to be left on the premises until the clock strikes midnight on the last day. Common sense surely dictates that there be an allowance for considerable leeway.”Footnote ²²²

If a change of occupier occurs during the 14-year period, and in order to maintain entitlement to double rate compensation, section 37(3)(b) requires that the new occupier must have succeeded to the business of its predecessor. Accordingly, the emphasis is on business continuity rather than the identity of the occupier.Footnote ²²³ Unlike with the 1927 Act, this suggests that, if the tenant takes over the business of the freeholder, the freeholder's period of occupation can be factored into the 14-year calculation.

D. Contracting Out

Although contracting out of the full protection afforded by the 1954 Act was not permissible until 1969, contracting out of section 37 has always been possible.Footnote ²²⁴ This is catered for in section 38(2)(a), which is unfortunately an inelegant and obtuse provision. It renders void certain agreements (whether contained in the lease or an extraneous document) that purport to exclude or reduce compensation for disturbance. The invalidating effect of section 38(2)(a) arises where, during the whole of the five years immediately preceding the date on which the tenant is to quit the holding, the premises have been occupied for the purposes of a business carried on by the occupier or for those and other purposes. The facility was appraised as “driving a hole through the scheme and then providing this lucky dip in place of compensation”.Footnote ²²⁵

Unlike the Landlord and Tenant Act 1927, which allowed contracting out by agreement only when supported by adequate consideration, no such requirement features in the 1954 scheme. Hence, there is nothing to protect the tenant from being induced unfairly to barter away its entitlement. It is to be recalled that the 1927 Act also required the tenant to establish five years’ business use before any entitlement arose. Although no such hurdle is to be found in the Part II code, a variation of the five-year rule is imposed by section 38(2)(a), which governs the ability to contract out of compensation. This was framed naively to allow a landlord, who intended to use the premises itself within the next five years, to let them in the intervening period without having to pay compensation. As Sir Lucas Tooth observed, “contracting out is appropriate only where the tenancy is intended to be temporary, and is in fact temporary”Footnote ²²⁶ and as Lord Mancroft emphasised, “[it] ensures that if, contrary to expectation, the tenancy proves not to be temporary, the tenant is entitled to compensation, despite the contracting out provision in the agreement”.Footnote ²²⁷ The five-year rule is seen by some to offer a safeguard for the tenant primarily because landlords, without the ability to contract out “obviously would insist on a higher rent”.Footnote ²²⁸ Not all, however, have shared this sentiment with one politician describing it as a “most dangerous feature”Footnote ²²⁹ and another exclaiming that “I entirely fail to see where this magic of five years comes in. I cannot see why the five-year period should suddenly change the entire status of the tenant”.Footnote ²³⁰

From a modern perspective, there is scant logic for maintaining this five-year rule or, indeed, any separate provision for the contracting out of compensation. The present irony is that, since the amendments of 2004, it is a more straightforward and incontestable measure to contract out of security of tenure than merely to contract out of the compensation provisions. Section 38A facilitates the exclusion of Part II protection by landlord's notice and tenant's declaration without the need for court approval and without any wait and see period. It follows that the bespoke facility concerning compensation will only be relied upon where the landlord has inadvertently failed to adhere to the timing or notice formalities of section 38A. Although there is no authority on point, it seems clear that an agreement that is void as regards excluding renewal could still be held valid in the context of compensation.

Further critical observations may be made concerning the ability to contract out of compensation. First, the short-termism of this approach is out of kilter with the reality that commercial leases were then most frequently granted for terms of seven, 14 and 21 years. The perceived danger was that section 38(2) “is giving landlords every possible inducement to grant tenancies for not more than five years … and insist upon a provision that the compensation provisions in this Act shall not apply”.Footnote ²³¹ Second, in a modern setting it is possible for compensation to be excluded in a lease of longer duration than five years. This is because the exclusion is not void ab initio, but will be rendered so only when, at the end of the lease, the five years' occupation can be established. Until that time, the agreement will be effective if the lease is prematurely terminated before the qualifying period is satisfied or there is a late change in the tenant and the nature of the business carried out on the holding.Footnote ²³² This tactic undeniably runs contrary to the underlying policy of the five-year restriction.

Third, the somewhat oblique language of section 38(2) has proved to be problematic and this is particularly so with the expressions “whole of five years” and “immediately preceding”. While these indicate, respectively, that continuous occupation is required and must continue up to the date of quitting the holding, the calculation of five years’ occupation for these purposes has not proved always to be a straightforward exercise. In London Baggage Co. (Charing Cross) Ltd. v Railtrack plc (No 2),Footnote ²³³ there was continuous physical use for five years and yet Pumfrey J. upheld the validity of the contracting out clause. Occupation itself was not the conclusive factor, rather the legal character of that occupation was decisive. If the tenant had quit at the termination date specified in the landlord's notice, the exclusion clause would have been effective. The tenant, however, remained in occupation as a tenant at will and it was this holding over that took the tenant over the five-year threshold. Pumfrey J. emphasised that the counting back exercise for the purposes of section 38(2) was to begin on the date that “the tenant under a tenancy to which this Part of the Act applies is to quit the holding”. Due to a tenancy at will falling beyond the reach of the 1954 machinery, at the end of that tenancy it had not been a tenancy to which the Act applied. Hence, the additional period of occupancy fell to be discounted from the computation. This outcome prevents a tenant holding over after the contractual tenancy simply to be able to claim compensation when the five-year period lapses.

Although Pumfrey J. believed that the same reasoning must apply when the tenancy at will arose prior to a tenancy subject to the Part II regime, this is less convincing. The reference is to a tenancy to which “this Part of the Act applies” and the requirement remains that the five years are to be counted back from the date the tenant “is to quit the holding”. Take the scenario where the landlord permits occupation under a contractual licence for 18 months and, at the lapse of the licence period, grants the former licensee a four-year tenancy, with a proviso that no compensation will be payable. On the expiry of that fixed term, the tenant seeks compensation for loss of renewal rights. According to Pumfrey J., the contracting out clause would remain valid. Nevertheless, this approach cannot be right as, in contrast with the facts of the London Baggage case, there is now a holding which the tenant is able to quit and prior to that time the tenant has held under a tenancy to which the Act applied. Hence, the earlier period of occupation should, indeed, be factored into the process.

Additional difficulties associated with the five-year rule faced the Court of Appeal in Bacchiocchi v Academic Agency Ltd. Footnote ²³⁴ The tenant held under a 20-year lease which was protected by the Part II provisions. The tenancy terminated on August 11, but the tenant mistakenly believed that it ended on 29 July and quit on that earlier date. The tenant sought double rate compensation, but the landlord relied upon a contracting out clause. The issue was whether, by moving out 12 days early, the tenant had preserved the validity of the contracting out. The appellate court rejected the landlord's submission and held that occupation could persist even though the premises were closed. The invalidating tendency of section 38(2) continued when a tenancy comes to an end, as here, during a period of closure. The tenant's conduct was viewed merely as an incident of winding down the business at the end of the tenancy.