The legislation, which came into force on 1 April, imposes full business rates on industrial properties that have been vacant for more than six months and on other commercial properties vacant for more than three months. Before April, industrial buildings received 100 per cent rate relief for the whole period that they remained vacant, while other commercial premises received 100 per cent relief for three months and 50 per cent relief after that. 

The move was originally designed to promote short-term lets by encouraging landlords to lease space in properties awaiting development, thereby stimulating growth. But in many cases, it has had the opposite effect and some businesses have even taken the drastic step of demolishing offices, warehouses and shops in order to avoid paying tax on vacant properties. Before the changes to empty rates legislation, landlords would hold on to buildings scheduled for redevelopment in case they could be let cheaply to short-term tenants in the meantime. Now, faced with having to pay full rates should the building fall empty, the risk is too great and it has become a commercial necessity for companies to go down the demolition route.  

There is evidence of many regeneration and development projects being dropped, reflecting developers’ concerns over forecasted costs of their new buildings being unoccupied before they are sold. This is having a negative knock-on effect on the secondary market and limits supply in the long term, exacerbating the problem even further.

Mike Mitchell, rating valuer in Bruton Knowles’ professional team, comments on the impact of the tax: “Owners of empty premises will need to budget for the increased cost of ownership and consider options for reducing their rates liability. Where possible, they should look at offering incentives to attract tenants, such as dropping the rent, or offering reverse premiums, extended rent-free periods or capital contributions. They could also consider letting out the property for a period as short as six weeks – so long as it is genuine – as this will enable the owner to enter a new period of relief when the property once again falls vacant.“

However, with a growing number of reports from the VOA (Valuation Office Agency) of constructive vandalism and demolition of many older properties in order to render them ‘incapable of beneficial occupation’, the government is monitoring any measures that landlords undertake for anti-avoidance. Anti-avoidance regulations are being considered but are only likely to be put in place if it is deemed that the system is being abused. Furthermore, the VOA has warned the industry that any future legislation might be retrospective.

There have been urgent pleas from various organisations, such as the BPF (British Property Federation) for the government to back down now and repeal the tax because of the widespread consequences over the last six months.  Not only is the tax hitting businesses, says the BPF, but it will halt development and see a wave of existing buildings demolished. 

One glimmer of hope rests on one of the measures in the legislation which allows for the relief to be partially reintroduced at up to 50%, giving the government flexibility to react to the changing economic conditions. In this struggling property market, the argument for repealing the tax, or at least reducing the liability, could not be stronger.  So far, 35 MPs have signed an Early Day Motion (EDM) to reintroduce rate relief for empty properties.  The EDM calls for “the Government to reintroduce empty property rate relief in response to the economic downturn and worsening conditions in the property market”. It also notes that “rate relief stimulates investment and that the withdrawal of the relief has unintended consequences”.

Mike concludes: “This is an important issue to take professional advice over to help alleviate the cost burden of holding empty properties. Landlords and owners not only need ratings advice but also help with identifying opportunities relating to alternative use values, whether this is cost effective demolition of properties, remediation of land and development options. Taking no action will be costly but equally taking the wrong action could be very damaging.”