Currently empty industrial buildings receive 100 per cent rate relief while empty office and retail premises receive 100 per cent relief for three months and 50 per cent relief after that. From April next year, industrial buildings would only receive 100 per cent relief for six months and office and retail premises would still receive three months relief but incur the full amount thereafter.

The government claims to be trying to stimulate the redevelopment of buildings that currently lie empty. However with the Treasury set to recoup £950 million in the 2008 tax year and £900 million the year after, this looks more like a revenue raising exercise and one which could backfire as property owners look to find ways of negating the tax. In the 1970s, a penal surcharge was introduced for empty buildings which resulted in property owners deliberately damaging their buildings to remove them from the ratings list. 

This ‘constructive vandalism’ is a very real concern for the government, so much so that they have just concluded a consultation on a raft of secondary legislation for the act, which details how they intend to tackle avoidance.  The intention is to ensure that property damaged by circumstances beyond an owners control will not be caught by any new anti-avoidance regulations, whilst damage caused by avoidance measures like soft stripping would now be disregarded when the valuation officer is calculating the rateable value. 

At the moment premises are valued on the assumption that they are in a reasonable state of repair (having regard to such factors as the location of the building, the age and use of the building).  Following the decision in the case Benjamin (VO) v Anston Properties ltd, the Local Government Finance Act 1988 was amended through the introduction of the Rating (Valuation) Act 1999, which assumes that the property is in a good state of repair, although “excluding from this assumption any repairs which a reasonable landlord would consider to be uneconomic”.  Therefore if premises are damaged the valuation officer must decide whether it would be cost effective for the landlord to make repairs.  If it is then the premises must be valued as though they are in good repair.  Consequently new anti-avoidance proposals will require a new assumption when valuing property.

Three options were put forward in the consultation which would value the asset assuming a) that the property is in the same state as when it was last occupied, b) that the property is in the same state as it was when it was last valued or c) ignoring any acts or omissions by or on behalf of the owner that change the state of the premises.

With the first two options any alterations since the relevant date could be reflected in the valuation if they resulted from accidental or criminal damage out of the owner’s control, natural disasters, demolitions permitted under the Town and Country Planning General Development Order 1988 or work undertaken to redevelop the property for which planning consent had been secured.  With the third option you would have to question whether any changes made were done so by the owner or a person connected with them, allowing the valuation to still take account of accidental or criminal damage or that caused by natural disasters.

Each of these proposals will mean that the valuation officer will have to value the asset on the basis of a physical state that may vary from the actual state at the present time.  A much more difficult proposition to deal with and could trigger many more appeal cases, cases which would also be more difficult to determine.
It is disappointing that the government has ploughed on with this legislation without reflecting the views of the majority of the property industry. In reality very few properties are left vacant deliberately; many remain empty due to the lengthy planning process. 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. Tenants who have moved to new premises will also be affected if the property they leave behind remains vacant and the lease has not expired. In this situation, the empty property rate charge will fall to them so they will be liable for the rates on both their previous and current premises.
With less than six months 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.