Property Special Report: Blind rates
It would be safe to say that it is irrational for any landowner to purposely keep property empty instead of using it to generate a rent. The Government, however, believes that landowners are motivated to keep properties ‘void’ while giving no credible explanation of what that motivation might be. And its reaction to this false impression is to impose empty rates on a landowner’s failure to find tenants.
Generously, one might say that imposing empty rates highlights the Government’s misunderstanding of commercial property market dynamics. Less generously, empty rates may have more to do with raising yet more revenue from landowners.
Background
Properties entered into local rating lists are liable for business rates. Where property is let, rates are imposed on the tenant. But where property is empty, the landlord is liable. Prior to 1 April 2008, empty industrial property attracted no business rates liability. Empty office and retail premises attracted rates at 50 per cent of the normal rate, and then only after a three-month exemption period.
The effect of the Ratings (Empty Properties) Act 2007 is that, with effect from 1 April 2008, rates are payable in full on empty industrial property following a six-month exemption period. The same holds for retail and office premises, except that the exemption period is three months.
Somewhat spitefully, any empty period prior to 1 April 2008 counts towards the ;relevant exemption period.
There are various restricted exemptions. For example, empty listed buildings are not liable, nor are companies in administration.
The impact
Speculative development. Empty rates are a disincentive to development, as developers seek pre-lets before redevelopment. A developer would be irrational to build speculatively when it will be liable for empty rates until it finds a tenant.
Speculative schemes feed the supply chain. Fewer (or delayed) schemes mean lack of supply; less supply means higher rents. This cannot be what was intended.
Unviable developments. Profit margins have been eroded and some schemes have been rendered unviable. Evans Easyspace, for example, has postponed plans for the £6m development of two sites in Staffordshire, citing as the cause the adverse impact of empty rates on its serviced accommodation business model, meaning that 400 new jobs will not be created.
Changed behaviour. Landlords act rationally to pass on costs to tenants:
• Landlords are less willing to agree lease surrenders. Landlords might decide to retain a non-paying tenant rather than forfeit the lease and trigger liability to empty rates. This is not increasing the supply.
• For short leases, landlords are requiring higher premiums or rents to cover the risk of empty space and so an empty rates liability. This means increased costs in terms of time and legal fees in negotiating and writing those terms.
Reducing short-term supply. To avoid empty rates, properties suitable for short-term lets have been demolished. One landlord, O&H Q7, demolished parts of its Alexandra Business Park in Sunderland. Landlords have brought forward demolition programmes in order to avoid empty rates, but with adverse cashflow consequences, thereby further eroding margins.
Impact on values. Yields have shifted out (and so capital values have fallen), particularly on industrial properties where the risk of voids is high (towards the end of a lease, for example). This is a rational response to empty rates.
Mitigation
Taking buildings out of the local rating list. Where there is no building capable of beneficial occupation, there are no empty rates. Buildings are being demolished or left to decay to avoid empty rates. Dangerous structures or buildings contaminated by asbestos are not being made safe or decontaminated, and so are not capable of beneficial occupation – all to reduce empty rates liabilities.
Building completions are being delayed. There is anecdotal evidence that buildings are being ‘constructively vandalised’. Whatever the truth of that, these are purely rational decisions – weighing up the cost of empty rates against the continuing cost of keeping buildings in a decent state of repair.
Temporary occupation. Short-term lettings turn back the clock on the
relevant exemption periods. Judicious use of genuine short-term lettings programmes can defer empty rates liabilities indefinitely.
What next?
The Government may create anti-avoidance rules where ‘unacceptable’ planning occurs. We await developments here.
The Government is supporting ratings officers issuing ‘completion notices’ for new, partly constructed buildings. This creates the fiction that a building is complete, thus allowing empty rates to be charged.
On the other hand, at the recent Labour party conference Communities Secretary Hazel Blears hinted that the Government was again looking at the question of empty rates. We need clarity on the point – and direction. We all need to lobby hard to get the result we want. Where regeneration should be taking place, we now have blighted lunar landscapes with half-finished buildings – all created by empty rates.
The Government must recognise the unintended consequences of its empty rates reform, admit its mistake and reinstate this essential relief.
Lee Nuttall is a real estate partner at Wragge & Co
