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Sheltering from empty property rates

29 Jun 2010

Paul Taylor, an Partner in the Commercial Property Unit, offers guidance for landlords on how to try and minimise their exposure to empty property rates

In April of last year, legislative changes were introduced to the level of business rates payable in respect of unoccupied commercial buildings (‘empty rates’) with the aim of encouraging landlords to re-let quickly at a competitive rent. The Rating (Empty Properties) Act 2007 came in to force on 19 July 2007 and since 1 April 2008, full business rates have been chargeable on all vacant commercial properties after an initial concessionary period of six months in respect of warehouses and industrial buildings and three months in respect of retail and office premises.

There are some exemptions from the new system (for example listed buildings do not attract a charge to tax) but generally business rates will now be payable on all vacant commercial buildings once the relevant concessionary period has expired, bringing the liability for empty rates to the same level as that for occupied properties. 

The current economic climate has led to an increasing number of landlords being faced with a tax on unused assets where they are unable to re-let their empty properties within the initial rate-free void period.  Therefore, it is vital that landlords do all that they can to shelter themselves from the liability to pay business rates on vacant buildings for as long as possible, for example, by ensuring that the terms of any lease allow them to take the full benefit of any available empty rates relief when that lease comes to an end.

Set out below are some of the ways in which landlords can seek to limit their exposure to empty rates:

  • When buying an untenanted investment property that is ready for occupation, try and delay completion until you are in a position to proceed immediately (or within the relevant rate-free period) with the proposed lease.  This will prevent any void period before the lease starts but will need to be balanced with the interests of the other parties to the transaction. Similarly, where a landlord is in the process of developing commercial premises and has not pre-let, it may consider stopping work until a tenant is found as unfinished buildings which are not capable of beneficial occupation may not satisfy rateable criteria and may therefore be exempt from business rates (however, a local authority can serve a completion notice in certain circumstances where it is reasonable to assume that a property can be put into a lettable condition within three months).     
  • Keep track of notice periods. Good estate management is essential to avoid delays in replacing old tenants.
  • Leases should be tightly drafted to protect a landlord in the event that a tenant leaves the property before the lease has ended, for example, by indemnifying the landlord where a tenant vacates the property early and utilises the concessionary rate-free period. This should help to limit the liability of the landlord where a property suddenly becomes vacant.
  • Maximise the opportunities for short-term lettings.  Letting a property for a period as short as six weeks – so long as it is genuine – will entitle the owner to a new period of relief when the property once again becomes vacant.
  • Where a landlord is faced with a defaulting tenant it may, in certain cases, be more advantageous in the short term to keep that tenant in place rather than seeking to forfeit the lease.  This is because the forfeiture of a lease brings the tenant’s right to occupy to an end and therefore triggers the landlord’s liability to pay business rates.  Where it is unlikely that a new tenant can be found for the property quickly, a landlord may wish to consider retaining a tenant who is in default to avoid the liability to pay empty rates.  Obviously, this will require a cost: benefit analysis in each case.

The examples given above briefly outline some of the options available to commercial landlords to help to ease the impact of the new ratings regime.

For further information contact Paul Taylor on 0191 232 8345 or email paul.taylor@hay-kilner.co.uk

Please note: This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.