The government argues that scrapping the rate relief will encourage vacant shops, offices and industrial buildings back into use. However, opposition to this reform, which is expected to raise £900m a year for the Treasury, is being voiced by business bodies, politicians, property professionals and media groups across the UK. Opponents of the plans, including property groups across the Midlands, have also taken their fight to the Prime Minster, with thousands signing an industry-wide petition on the 10 Downing Street website to overturn the legislation.

Currently, empty industrial buildings receive 100 per cent rate relief until they are occupied, while vacant office and retail premises receive 100 per cent relief for three months and 50 per cent relief thereafter. However, from next April industrial premises will only receive 100 per cent relief for six months, and empty office and retail premises will only receive three months relief whereupon all vacant premises will incur the full rates charge.

Ian Pitt, partner and head of client services in Birmingham insists the plans will have wide-reaching effects and not necessarily in the way the Government is hoping. Ian explains:”The government claims that these changes will encourage higher occupancy of commercial property by discouraging landlords from leaving premises lying vacant – but it will have the opposite effect.

Indeed, initial claims that owners would resort to removing roofs and other forms of constructive vandalism to ensure buildings are taken out of the rating system have resulted in the government already introducing a new clause in the recent Rating (Empty Properties) Bill which will prevent any benefit being gained from such activity. Under the new bill, rates will be charged on the value of the building prior to any constructive vandalism being carried out. This is not only a fundamental change to how buildings are valued for rating purposes but a further attempt by the government to ensure it receives the maximum revenue from properties lying empty.”
“The reality is that properties are not left vacant deliberately; many remain empty due to the lengthy planning process or market sector performance which is outside the control of the landlord. Developers are reluctant to demolish existing buildings until planning consent has been granted for new premises but the prolonged planning system means buildings can lie empty for long periods of time.”
“Empty rates relief has helped the flow of speculative development but these cuts are likely to deter new schemes being brought forward, particularly in deprived areas where securing an occupier is more difficult. Incurring a rate charge on a building that is not occupied will be a major financial burden and landlords will be unwilling or unable to absorb this additional cost before a tenant is secured. The current system of rate relief provides a cushion to find a suitable tenant, allowing landlords a certain level of control as to what rental value they are willing to accept.”

Avtar Gill, partner and head of investment at Bruton Knowles explains how the investment market will be affected: “The changes will hit industrial estates the hardest and the cost of holding vacant properties will increase. When the rates relief is scrapped next year, landlords may suddenly have to cope with a sharp hike in costs if tenants can not be lined up. The potential risk of owning industrial properties will therefore increase and investors are likely to adjust their yields accordingly.” 

“With less than a year to go before the restrictions are likely to come into force, developers and investors need to consider their portfolios to ensure action is taken to mitigate the cost of these rule changes. Currently, landlords of industrial premises can ignore the rates liability as they are levied against the occupying tenant. However, landlords embarking on new lettings or lease renewals within the next twelve months need to ensure that the lease has provision for the landlord to recover any rate relief the tenant may have received prior to the lease expiry. It would also be prudent for landlords to ensure they have the right to appeal the rating assessment during the lease.”

Ian Pitt concludes: “We are keen to raise the prominence of this proposed new legislation and keep it at the forefront of the minds of developers, investors and occupiers. If Gordon Brown does not back track altogether and scrap the proposals, the least he can do is to offer some concession, like restoring empty rates relief for industrial property for two years and for shops and offices for one year. Alternatively, he could look at halving rates for empty industrial property indefinitely. Either of these measures would offset some of the huge financial and logistical burden likely to be faced by developers and investors.”
 
For more information on this issue please contact Ian Pitt on 0121 200 1100.