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Graham Knight, rating director in Atisreal’s Birmingham office reports: “The ‘modernisation’ of Empty Property Relief, the effects of which bite on 1 April, is definitely a topic of great debate throughout the property market, unsurprisingly given the estimated cost to business of £950m in 08/09.
The changes in legislation dictate that properties (generally commercial and retail) previously eligible for a 50% reduction in business rates after three months lying vacant will now face 100% charges. Furthermore, industrial properties that were granted complete exemption from empty rates, will now be subject to a 100% charge.
As we get ever closer to the start date for the impending changes it’s a good time to start thinking about the different ways to minimise this additional cost and to make sure you’re aware of the potential opportunities for complete avoidance or cost minimisation.
Empty Rates can only be charged if there is an entry for the property in the rating list; deletion of an entry of postponing entry of new buildings into the rating list will therefore bring savings.
Existing buildings which are not capable of occupation should not be entered in the rating list. Constructive vandalism, such as the removal of roofs from industrial buildings, a practice which was commonplace in the 1980s, would achieve such a result. Lesser acts, such as the removal of services or finishes, might prima facie appear to achieve the stated aim, but may well fall four of the ‘repair assumption’ included in the rating legislation. In anticipation of acts of constructive vandalism, the government consulted on anti-avoidance measures during last year, and whilst not having introduced measures to negate the effects of extreme acts such as room removal, have adopted a ‘wait and see’ approach and will it is expected legislate to counter such actions should such practice prove widespread.
In relation to new buildings, again assessment and therefore liability can prima facie be frustrated by not completing the property: the floor could not be laid or key elements omitted. Lurking in the background however are he powers of local billing authorities to service completion notices, which effectively assume completion for rating purposes. Nevertheless an option to explore which may at least buy time.
Buildings will naturally reach the end of their economic life when they become functionally obsolete. In these cases an argument can be mounted that “No demand equals no value’ and deletion of a rating list entry justified. Typically this is an argument which will succeed with specialist industrial premises, but may equally apply in other cases where demand is limited and alternatives have been provided. For example, cases of large old-fashioned 1960s office blocks being deleted from the rating list, where occupiers have vacated for a more high spec alternative are not unusual.
Currently there are no empty rates charged on properties comprising wholly land such as car parks or sports fields, as they do not constitute ‘relevant non-domestic hereditaments’ for the purpose of the legislation. There is some confusion on where properties with a large proportion of land stand, as there has been no guidance offered to local billing authorities on what is a relevant non-domestic hereditament, not does any legal precedent in this field exist. This it is expected is an area where he definition will be stretched and challenged through the courts in due course.
Qualification for the three and six months 100% relief from empty rates is ‘earned’ following a period of occupation of six weeks. Intermittent occupation either by the owner or through short-term lets, while active long-term marketing is taking place, is potentially another avenue to pursue to reduce overall liability. Widespread use of such a tactic it is however expected may well attract the government’s attention and lead to an increase in the ‘qualification period’.
As a final resort it is always worth reviewing rateable value assessments with subsequent appeal action, if necessary, to reduce the liability. This will be particularly relevant in relation to vacant industrial properties, which may not have been subject to scrutiny for some time.
Apart from complete demolition there is no panacea for the predicament in which such an increasing number of owners and investors will face come April this year – as always the best tactic is to seek professional advice and formulate the most positive plan possible in what is a pretty difficult situation for all involved.”
Exemptions may ease empty rates worries
Landlords of empty business premises could benefit from potential exemptions in the Rating (Empty Properties) Act says commercial property specialist Underwoods.
From 1 April 2008 reliefs on empty property will be severely curtained. At present empty industrial properties are not rated at all, whilst all other commercial property is entitled to initial three months exemption and 50% relief thereafter. From April, relief will be given only for the first six months on industrial premises and while the three month period is being retained for everything else, when these periods end landlords will be charged 100% on all empty property.
David Wilson, an associate
partner at Underwoods, says: “The three or six month period starts
from when the property actually became vacant sand therefore properties
where vacancy began prior to 1 April 2008 could attract full liability
immediately thereafter.”
He continues: “However, potential loopholes in the legislation could
offer some relief for landlords. Property would escape empty rates if
it is Listed or in the course of refurbishment. Short-term reoccupations
can in some cases trigger a new rate-free period when the building falls
vacant again. There is also a solitary new exemption that will benefit
companies in administration. These will now have a permanent exemption
from empty rates. A start date for this new benefit has not been set but
it is possible that it will run from 1 April 2008.
Underwoods
is concerned that the changes to reliefs will introduce a significant
additional burden on companies that may find themselves holding empty
properties or on investors struggling to let properties in a difficult
letting market. Furthermore companies wishing to downsize or expand will
have to cover the additional cost of the loss or relief until their original
premises have either been let or handed back to their landlords.
David Wilson adds, “Fortunately the Government has now backed down
from introducing radical anti avoidance regulations to combat ‘constructive
vandalism’ where property could be partly demolished or stripped
out to reduce it to a state that would allow it to be deleted from the
Rating List - and hence avoid any rates liability. A wide ranging consultation
showed that destruction or bogus attempts at avoiding empty rates were
extremely unlikely to occur and legislation to prevent them would be intrusive,
burdensome and difficult to enforce. For once the Government appears to
have listed to the property industry.”
Underwoods also advises that whilst now new legislation is proposed to
restrict opportunities, the Government intends to monitor the response
to the new law and if unwelcome anti-avoidance measures are perceived
to be frequent enough, it may introduce fresh legislation to combat this.
Ill-considered attempts to reduce empty rates liabilities may therefore
not only rebound upon the unfortunate owner or occupier, but cumulatively
on all ratepayers.
David Wilson, concludes: “With all the changes afoot and the potential
liabilities for many property owners/businesses, it is increasingly important
to make sure that both the Rateable Value of a building is not excessive
and that any reasonable measures to limit liability on an empty property
should be taken without delay.”
Missing out on
rate reductions
Local companies could be missing out on thousands of pounds in temporary
rate reductions according to a local property specialist.
David Massey, Birmingham-based associate director in the ratings department
at DTZ, says that many companies are unaware that they can apply for a
temporary reduction in rates if their business is disturbed by development
works or natural disasters such as flooding.
He explains:
“If a property is adversely affected by factors outside of a rate
payer’s control, they can seek a temporary reduction through a material
change in circumstances. This is defined in the Local Government Finance
Act 1988 as ‘matters affecting the physical state or a physical enjoyment
of the hereditament; (property).”
Our rating department has recently secured millions of pounds in rate
reductions on behalf of clients in a range of circumstances including
up to 15% relating to disturbances from road works in Lichfield town centre;
up to 7.5% due to new ring road in Walsall; between 7.5 and 15% reduction
following the loss of car parking and redevelopment works in Halesowen
Town Centre and 10% in Tenbury Wells after recent floods. Savings can
last for a few months to several years.
Ratings team member and fellow associate director Robin Walker added:
“Depending on the severity of the disturbance and the location, allowances
of between 2.5 and 45% have been negotiated on behalf of clients where
building works in adjoining properties have adversely affected the use
and enjoyment of their property.
Ratepayers affected by such disturbances should seek specialist advice
on obtaining temporary rate reductions and make sure they record the date
work commences, any changes in intensity, details of trading losses by
comparison with a nuisance-free period and, perhaps most importantly,
take photographs which can support the case for compensation.”