The art of mitigation: empty rate act prompts novel solutions for landlords

Research conducted by Northumbria University revealed that 90% of all empty commercial properties across the country are either secondary or tertiary stock and it estimates empty building owners combined could be losing nearly £325m in rent every year.

Buildings can be empty for a variety of reasons and although landlords are not generating an income during this time, they are liable to pay 100% of their business rate liability after their initial exemption periods expire.

In 2008 the Government implemented the Rating (Empty Properties) Act 2007, which removed the 50% business rate relief on vacant commercial properties, a measure that had been in place since the 1990s. Now ratepayers are liable for 100% of their business rate liability after their exemption, unless they fall into exempted criteria of which most properties and their owners do not. Thousands of building owners, businesses and developers are being penalised at a time when they are at their greatest financial risk.

The move was, and still is, widely unpopular with the industry. Despite the poor support it garnered, the Government introduced the legislation, believing it would improve competition in the sector. It hoped that by removing rate relief, it would incentivise building owners to re-let their empty properties, creating wider availability and ultimately reducing rents. It took the view that this would help to stimulate business growth and local economies. It was also thought that discouraging property owners from leaving retail units vacant would help to create footfall and breathe new life into the country’s flagging town centres.

An RICS survey conducted five years after the legislation had been introduced, found that 88% of respondents considered empty property rates as a significant deterrent to speculative development. This figure increased to 91% with offices. Importantly, the majority of their respondents (76%) found the policy to have been unsuccessful in incentivising owners to bring more property to the market. A significant proportion (89%) also felt the policy was restricting economic growth and many cited a lack of demand as the more fundamental issue. Respondents felt landlords with vacant property should be given positive incentives as opposed to a financial penalty on businesses that are already struggling.

The response to the growing pressure on owners and developers was swift. Rate mitigation schemes appeared seemingly overnight and some, it has to be said, were more audacious than others. Indeed, some leapt impishly from mitigation into evasion, and as a result there has been a spate of case law brought about by Local Government which very clearly draws a line between what is and what is not acceptable.

It is widely felt that this noticeable U-turn in stance on mitigation on the part of Local Government can be placed squarely in the lap of the Local Government Finance Act 2012, which introduced the business rate retention scheme and which has been incentivising councils to jealously guard every rating penny ever since.

Ten years later and the industry continues to adapt. Savvy building owners, investors and developers are thinking ahead and building innovative ways to mitigate their empty property rate liability into their business and development plans. A recent example involved incorporating a local student art gallery into a scheme; not only has this helped the landlord reduce periods of void, but it has also benefitted the community by creating a vibrant attraction, boosting local partnerships, footfall and revitalising an otherwise empty and soulless building. It is ironic that it is this type of ‘mitigation’ that is seeing buildings being utilised to their full and playing a vital role in their local community.

Everyone is entitled to mitigate their business rate liability and this is increasingly becoming an essential and necessary part of good financial planning.