With recent events, including the unthinkable collapse of Lehman Brothers, the time is ripe for the government to take a second look at the recent changes to empty building rates. Investors and developers need to be asking themselves if the new system is just a new revenue generator or if it is, in fact, a constructive way forward for redevelopment.
The new regulations came into force on 1st April 2008. They affected empty buildings rates liabilities for non-domestic properties in England and Wales; Scotland was unaffected. The new regulations saw rates increase from 50% to 100%. The new regulations apply to all “relevant non-domestic hereditaments”, which are defined as buildings or parts of buildings together with land used for the purposes of the building. The new regulations do not apply where a property consists only of land or land with ancillary buildings, such as sports fields, as they do not constitute “relevant” hereditaments. Vacant property held by charities or amateur sports clubs is zero-rated.
Empty industrial buildings had been exempt from the liability indefinitely. However, the new regulations have changed this so they are now only exempt for the first six months. They will now be liable for 100% empty rates from the later of the date six months from the date on which they became empty or six months from 1 April 2008.
One addition to the category of properties to which empty rates liabilities do not apply is properties owned by companies in administration. Administrators will not therefore be called upon to pay empty rates on any property which is owned by a business in administration but which is not occupied by that business.
The legislation was brought into force with a view to increasing incentives for businesses to let or redevelop property, thus depressing rents by around 0.25% to 0.5%. The argument behind this was that businesses were deliberately leaving buildings empty in order to limit the supply of property to let and thus drive up rent values. Areas were therefore developing decaying, empty, unsightly buildings, which it is argued adversely affected local economies.
However, instead of encouraging businesses to let or redevelop property, it appears that in an increasing number of cases, the new legislation has been having the opposite effect. Rather than pay these higher rates, landlords are finding ways to avoid the extra charges. In many cases the avoidance method is demolition. Although this may seem extreme, it is effective. This way, landlords who cannot find a tenant for their premises, can avoid paying the extra business rates they would otherwise incur.
In other cases landlords are leaving buildings unfinished in order to avoid liability for rates under the new regime.
If you are an investor or a developer you probably need this new regulation like a fish needs a bicycle. It will be no surprise therefore that we have advised one client that it makes better financial sense to allow the occupier to remain in possession rent free at the end of the term (and so meet the burden of paying rates). Equally this is another factor to be taken into account in deciding whether to forfeit in the case of tenant default.