No empty threats

A new government policy to utilise currently empty buildings relies on changes in rates rules. Lee Ranson, Practice Group Head, Real Estate, Eversheds speaks to Estates review about empty rates and what the new rules mean

As part of its policy to encourage the use and occupation of empty buildings, the government changed the rates rules for empty buildings on 1 April this year, despite intense lobbying by the property industry against the changes. It is estimated that the changes will generate an additional £1bn in rates revenue.

Under the new rules:
Vacant industrial property, including warehouses, receives full relief from rates for six months only. After this, rates become payable in full unless the property qualifies for relief on other grounds. Previously, industrial property, including warehouses, received full relief for so long as it remained unoccupied.

Other vacant property continues to receive full relief from rates for three months. After this, rates become payable in full unless the property qualifies for relief on other grounds.  Previously, after the initial three month period, other property received 50 percent relief for so long as it remained unoccupied.

Charities and community amateur sports clubs now qualify for full permanent relief from rates if it appears that the property, when next in use, will be used for charitable purposes or by a community amateur sports club, as the case may be.

It is important to note that periods of non-occupation before 1 April 2008 are taken into account when determining when rates become payable under the new rules. For example, if an industrial property had been unoccupied for more than six months on 1 April 2008, it became subject to full rates from 1 April 2008.

Consequences of the changes
Owners of empty premises need to budget for the increased costs of ownership that result from these proposals and should consider ways in which their rates liability can be reduced - such as by the use of short-term lettings. A letting for a period as short as six weeks - so long as it is genuine - will enable the owner to a new period of relief when the property once again falls vacant.  With the economic downturn following the credit crunch, more properties may become vacant and subject to the new rules so this is live issue for many property owners.

Landlords may be more reluctant to forfeit leases if they cannot find new tenants for the property quickly. Forfeiture of a lease brings the tenant’s right to occupy to an end and the landlord becomes responsible for the rates. Landlords may not want to bear the additional rates liability that will result from the new rules. Landlords may prefer to have a poorly performing tenant in occupation rather than face the additional costs of a prolonged vacancy.

Landlords may be more concerned to ensure that their tenants do not claim empty rates relief before their leases comes to an end as this will reduce or eliminate the landlord’s right to claim relief. Many leases require tenants to indemnify landlords against any relief that the landlord cannot claim because the tenant has already received the benefit of the rates relief.

Results of government consultations
Alongside the changes to the rules set out above, the government consulted with property industry on a number of additional proposals to modify rates on empty property, particularly to counter potential avoidance of the new rules. In its response to the consultation, the government has set out the following proposals:

Relief for listed buildings
Listed buildings will continue to receive full permanent relief from rates whilst they remain unoccupied.  This recognises that it can be more difficult to find an occupier for listed buildings as the repairing and maintenance obligations are more onerous and there are more restrictions on making changes to the property. This is a welcome concession by the government.

Relief on insolvency
A company in liquidation received indefinite relief from rates in respect of unoccupied property but a company in administration did not. Changes have been made to the regulations to extend the indefinite relief to companies in administration. Insolvency practitioners will welcome this change although the change does not overturn the controversial decision in Exeter City Council vs Bairstows (the Trident Fashions case) where a company in administration was liable for rates as an expense of the administration in respect of property that it occupied.

Anti-avoidance
Rates are payable only on property that is capable of beneficial occupation. A property can be removed from the rating list if it cannot be so occupied. The government was concerned that the new rules would be avoided by owners stripping out their buildings to make them incapable of occupation.  The legislation introducing the new empty rates rules therefore contains provisions that enable the government to make anti-avoidance regulations that ignore any changes deliberately made to a building in order to avoid paying rates.

Having consulted on proposed regulations, the government has announced that it will defer making anti-avoidance regulations. It will, however, monitor closely the impact of the new rules. If there is evidence that avoidance activity is taking place, the government has indicated that it will return to this issue and consider putting anti-avoidance regulations in place. In the words of the local government minister, John Healey, a “zero tolerance” approach will be take to rates avoidance by “deliberate vandalism” of buildings.

To justify removing the property from the rating list, it is generally necessary to show that the building has been put beyond economic repair. In most cases, therefore, any potential savings from removing the property from the rating list would be outweighed by the costs of the works required to put the property beyond economic repair and the costs of the additional works that would be required if an occupier were subsequently found for the property.

The decision not to introduce anti-avoidance regulations is a welcome one. There was very little evidence that anti-avoidance was taking place and the proposals put forward by the government for the regulations would have been difficult to implement in practice, would have led to a lot more work for valuation officers and would undoubtedly have led to a number of costly legal disputes.

Uncompleted buildings
The government will not make regulations that bring uncompleted buildings within the rating regime where a developer deliberately delays completion of the building works to avoid paying rates.  However, the government has issue guidance to local authorities on when it might be appropriate for them to use their existing powers to serve completion notices to ensure that works are completed. It remains to be seen whether local authorities will be more willing to use completion notices as a means of bringing a property within rates where the local authority suspects that the developer is deliberately delaying completion to avoid paying rates.

Temporary occupation
If an empty property is occupied for a continuous period of six weeks or more, the property benefits from a new period of rates relief if it then becomes unoccupied. Following its consultation, the government has decided not to extend the six week period.  However, the Government will monitor the use of sham lettings used to trigger the six week rule. If necessary, it will introduce anti-avoidance rules to prevent this.