Everything must go

You only have to look at the average high street in the UK at the moment to see evidence of the misery being felt by many retailers. A recent BBC report which uncovered shocking statistics, only confirmed what many in the industry already knew.

The report, which looked at the largest 500 towns across the UK, made for uncomfortable reading and showed how the economic climate was effectively transforming local high streets beyond recognition from just a few years ago.

Specific regions were highlighted in the research as being particularly hard hit with Yorkshire, the North West and the North East all feeling the pain with almost one in five retail units standing empty at the end of 2010. Just as depressing was the fact that only one town surveyed in the whole of the country was enjoying 100 percent occupancy – affluent Kingsbury in London.

The winners highlighted in this stark look at the UK were unsurprisingly supermarkets (up 12 percent) with their continued market dominance and the rise of their ‘local’ and ‘express’ style stores.  These were followed by discount stores/pound shops (up 11 percent) and then charity shops which saw a nine percent rise. All represent a change in character of the retail environment. In addition to the high street a number of shopping centres are also facing issues of vacancy despite the best efforts of many landlords.

Shop till you drop
Vacancy whether in the high street, in a shopping centre or at a retail park will potentially have an adverse impact on the trade of the remaining retailers. In addition the number of vacant properties may have created an oversupply of space.  There are also locations where the loss or relocation of a major retailer has led to deterioration in the value of the area.
Despite the gloomy outlook, there is opportunity for those that remain to reduce their occupational costs and in some instances to claw back significant sums of cash. In many cases, retailers and landlords in equal numbers are successfully securing rateable value reductions on appeal which in many cases are being backdated to 2008.

The law governing the assessment of property for business rates also allows numerous ratepayers to appeal rateable values due to the occurrence of a ‘material change in circumstances’.

The definition of a Material Changes of Circumstance (MCC) is contained in Schedule 6 paragraph 2(7) of the Local Government Finance Act 1988.  The matters to be considered are:
(a) Matters affecting the physical state or physical enjoyment of the property;
(b) The mode or category of occupation (use) of the property;
(d) Matters affecting the physical state of the locality in which the property is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there, and
(e) The use or occupation of other premises situated in the locality of the property.
For appeals to be successful a change has to be shown in line with the above: i.e. the use or occupation of premises situated in the locality of the subject property.

The Valuation Office Agency practice note relating to any material change of circumstances states: “This should be interpreted so as to have regard to all changes of use not just those within the same mode or category of use i.e. it would include where the use of a shop changes from butcher to grocer.  Changes in personal occupation will also be relevant e.g. if a major supermarket chain moves out of a shop in the locality and another occupier begins to trade.  Vacation of a property will also be a change in the use or occupation of other premises.’’

Changing spaces
While rating law precludes the consideration of general economic factors, physical changes as highlighted above can be considered. As a result a Schedule 6 para 2(7) matter is not to be disregarded on account of the fact that its cause is economic.
Accordingly ratepayers can have regard to the following:
- Deterioration in the value of a location due to the level of vacant units in the area; because if shops in a shopping centre are vacant then it is extremely likely to reduce footfall and the value of those units still trading.
- Deterioration in value of a location due to changes in the retailers present in the area; because if major retailers or anchor tenants vacate their premises and are replaced by weaker retailers then this could reduce the value of a location.
- Deterioration in value caused by “oversupply” of retail units in the locality; because if there is high vacancy this changes the balance of supply and demand which leads to a reduction in rental value.

As neighbouring or nearby tenants move out, all measures should be taken to stabilise the situation including reducing the costs of occupation through rateable value appeals. Some landlords are proactively taking action to protect the value of their investment and assist their tenants through undertaking such appeals.

Appeals as a result of empty units nearby, the loss of an anchor store, increased floor space and competition from new developments have all formed parts of successful appeals over the last 12 months with some businesses gaining up to a 50 percent reduction in rateable value.

In our recent study of 30 successful Rating Appeals held across the North and Midlands:
- An average reduction of 16 percent was achieved with the highest being 50 percent at Clarence Dock, Leeds.
- In 18 cases, empty retail space was cited successfully as the MCC.
- In three cases the loss of a key anchor unit was crucial. The loss of TK Maxx at the Leeds Shopping Plaza saw one nearby tenant gain a 15 percent reduction in rateable value as a result.
- In nine examples new competition in the locale was claimed and four applications also warranted a Pioneering Allowance for being the first tenants present at a new development.
- In three cases the closure of a local Woolworth’s store was specifically highlighted as the successful MCC.

What this study shows is that successful appeals are being launched across the UK and there is a real opportunity now for landlords and tenants alike to look at their local environment for an MCC that will open the door for a successful rateable value appeal.

Recent successful appeals by the landlord at Freeport Hornsea saw a 20 percent reduction in rateable value where there was 30 percent vacancy. Some Wrexham town centre tenants saw a 20 percent reduction following the opening of the new Eagle Meadows Centre.

Tenants at The Triangle Shopping Centre, Manchester saw reductions of up to 25 percent in rateable value.

One tenant at the North Western Arcade in Birmingham had a 40 percent reduction due to renovation work taking place in the Mall and increased competition from The Bull Ring. Vacancies at almost 20 percent at the Albert Sq Centre in Widnes led to a 10 percent reduction in rateable value and Partington Shopping Centre in Manchester had a 20 percent reduction agreed when it was revealed the centre had one in three units vacant.

These types of opportunities come in many guises and should not be confused with a change of financial fortune or simple downturn in business due to the economic climate. It is not the fact that customers are no longer beating a path to your door that will get the Valuation Office Agency interested; it’s if there is a physical reason for the change such as nearby vacant units.