16/03/2008

New legislation will threaten speculative development in Yorkshire

Tony Emmott, commercial property consultant

On April Fools’ Day this year, new legislation will come into force that will be no laughing matter for the region’s economy and its commercial property developers, landlords and agents.

The Rating (Empty Properties) Act 2007 will strike at the heart of speculative development by ending the rate relief that previously applied to empty commercial property left unoccupied after three months. This will be the case even though the properties in question will not be generating any income.

The intention of the Rating (Empty Properties) Act 2007 – which reduces empty property relief from business rates – is to encourage owners to bring empty properties back into use as soon as possible. The present system of no rates at all for empty industrial and warehouse properties, a three-month rate freeze and half rate fee thereafter for commercial properties, comes to an abrupt end on March 31, 2008.

From April 1, the message from Government is loud and clear that full rates are payable on empty commercial properties after three months, and full rates payable on empty warehouse/industrial properties after six months. There is no period of transition for the reform, so commercial properties and warehouse and industrial properties that have been vacant for the three or six month period prior to the change, will be liable for the new tax rating system with immediate effect.

Not everyone is convinced the removal of rate relief on empty property will achieve the Government’s aspirations to reduce the number of empty commercial properties and encourage properties back into use. Many argue that commercial properties are unlikely to be left vacant deliberately, as they do not earn rental income. Against the backdrop of an economic slowdown, there is a real worry that this legislation could have a detrimental effect, particularly for the speculative market.”

These concerns are particularly prudent for Yorkshire and the Humber, with towns and cities across the region actively involved in large-scale regeneration. Much work has gone in to stimulating and creating the right environment for a speculative market and some fear the changes in tax rate relief will be a disincentive to build in areas where demand is weak.

Landowners and developers must make an early review of their property portfolios in relation to those units both vacant and let and be aware of when leases are coming to an end. Speculative developers may wish to delay building works until a tenant has signed up. Landlords may consider rental concessions or rent-free periods for prospective tenants to offset future potential rate liabilities if the shop remains empty.
Landlords must not rush in to terminating or surrendering leases unless a new tenant is lined up before the relevant relief period expires. Other options may include service charge provisions on future leases, or passing on empty property rates to other tenants in a development as part of the service charge. Conversely, tenants may wish to check their lease agreements to see if empty rates can be passed on to them in this way.

Subject to regulations still to be clarified there are a handful of exemptions to the new legislation such as such as properties owned by charities or community amateur sports, and listed buildings.

Regulations addressing anti-avoidance powers to discourage owners from deliberately damaging their properties to avoid taxation and other outstanding issues are yet to be clarified. Whatever actions taken by developers, landlords and agents to prepare for the changes, the one option unavailable is to do nothing.

For more information please contact Tony Emmott on 01274 202 150 or email tony.emmott@gordonsllp.com