In March 2007 the (then) Chancellor of the Exchequer, Gordon Brown, announced in his budget report that the Government was planning to reform the rating relief given to owners and occupiers of empty property. This was to be part of a package of legislative changes designed to encourage the efficient use of land and property in a time of economic growth and an increasingly high demand for such land and property. This high demand was seen to be pushing the UK commercial property market closer to being one of the most expensive in the world, especially when compared to its counterparts in the EU, reducing the UK's competitiveness.

The changes take effect on 1 April 2008. This article will examine what these changes are and what they mean for the UK property market.

Empty rates until 1 April 2008

Until 1 April 2008, the 1989 Regulations state that the majority of empty commercial properties receive 100% relief from business rates for the first three months they are empty. This is then reduced to 50% relief for the remainder of the time for which the property is unoccupied. Industrial and warehouse property currently receives 100% relief from business rates for the entire period they are empty and property that is owned by community amateur sports clubs and charities receive 90% relief from business rates for the entire time they are empty.

The relief from business rates was a response to the low demand for property and economic recession of the 1980's. The change of economic climate since then has caused the unlimited reduced relief to be of concern to the Government. They view the empty rates relief as a reason behind many commercial properties in the UK lying empty, causing a shortage of available space on the market and increasing commercial property rents. Such unlimited relief from business rates is regarded as a disincentive for landowners to put property to good use, redevelop property and have a quick turnaround between occupants.

In addition, two separate enquires were carried out, in relation to Land Use Planning and also Local Government. The outcome also confirmed demand for property is high and so is rent. It is anticipated that if there is a disincentive to leave properties empty, more properties will be available again on the market. This would hopefully address some of the issues that arose on enquiry, namely, to reduce the need to build on green field sites.

Empty rates from 1 April 2008

The Rating (Empty Properties) Act 2007 came into force on 19 July 2007 and the regulations governing the position come into effect on 1 April 2008.

Under the new regulations:-

  • The majority of empty commercial properties will still receive 100% relief from business rates for the first three months the property is empty, after which owners and occupiers will have to pay full business rates;
  • Owners and occupiers of industrial and warehouse property will have 100% relief for the first six months of vacancy, after which liability for the full cost of business rates will apply;
  • Property that is owned by community amateur sports clubs and charities will be zero rated for the entire time they are empty so long as the next use of the property is to be for charitable purposes or for the purpose of the club;
  • Vacant non-domestic buildings that are listed or enjoy statutory protection will continue to have permanent exemption from rates;
  • Non-domestic properties of companies in administration will have permanent exemption, when empty.

The Government has considered the possibilities of anti-avoidance tactics by potential rate-payers. At present however, it has framed the regulations so as to be entitled to make legislation to cover this at a later date, if it is deemed necessary, rather than putting preventative measures in place.

As before the relief from business rates attaches to the property, not the owner or occupier. If the landlord has claimed relief, the tenant cannot then also claim it. The provisions will also remain whereby occupation for a minimum period of six weeks will then trigger a new three-month period of relief for the property, if subsequently vacant. The reaction of the UK property market

The changes have received widespread criticism especially from the commercial property industry. The industry argues that proper consultation did not take place and the new legislation could have major consequences due to the change in economic conditions between July 2007 and the current time.

This criticism is stronger since the government announcement at the end of January. Owners and occupiers of warehouses and industrial premises that had been empty for six months or other commercial premises, such as shops and offices, that had been empty for three months, prior to 1 April 2008, will face full business rates bills on that day. It had been hoped that the legislation would not apply "retrospectively" and that a limited period of relief would be available for empty properties from 1 April 2008.

A spokesperson for the department of Communities and Local Government stated that:

"It would clearly not be appropriate to start a new clock running on 1 April, deferring liability beyond that point, and therefore allowing owners to benefit from a further rate-free period of three or six months, before the reforms take effect. The empty property rate reforms were announced in the Budget to come into effect on 1 April."

Conclusion

In the majority of cases properties are not left vacant deliberately. Landlords are faced with the disincentive of missed rental income when a property is left empty and it is not believed that an additional cost will provide any more incentive to return the property to the market, than that which already exists. The view is that property owners already do all they can to let properties. These changes may also impact on future developments if owners become less willing to take the risk that a new development will lie empty while lots are sold or let. This may lead to less regeneration in the parts of the UK where it is needed the most.

When the new empty rates legislation comes into effect on 1 April, landowners and occupiers will have had almost a year to make arrangements to comply with the legislation and put revenue aside to meet any potential costs. However it appears that many anticipated an initial period of relief and so will have to dig deep into their pockets to meet the cost of owning empty property as at 1 April.

It is yet to be seen what long-term consequences these changes will have on the commercial property market. This is an extra financial burden on people who are already feeling the effects of the recent economic downturn. The industry appears to be hoping for variations to the regulations once their impact is felt and the government have given themselves power to be flexible according to future market conditions, so perhaps early changes will appear.

That is not to say that there are no possible benefits in the meantime. If the result is more property on the market, rents may stabilise and investment in the UK may be won back from overseas. Further, with the increasing awareness of environmental issues, we may all benefit in the long run from regeneration of old existing buildings as well as the regeneration of new.

To view the Rating (Empty Properties) Act 2007 please click here.