Business rates reform and stronger regulation are key to improving tenant mix on high streets – not least on Oxford Street where shops with unclear ownership have become problematic.
There was good news for Oxford Street last month, following HMV’s announcement that it would reopen its flagship store after a four-year absence.
Oxford Street was always considered the premium shopping street in the UK, with stores such as HMV and iconic brands such as Topshop making the street world famous. However, after a number of high-profile retailers and department stores closed, some units were replaced by temporary American-themed sweet shops and vape stores, some of which threaten its pre-eminent status by allegedly selling counterfeit products and evading business rates.
What is the candy store problem?
Landlords let properties to intermediary companies, which subsequently sublet and licence the premises to many layers of shell companies, ultimately manifesting themselves on the high street as candy shops, vape stores or poor-quality souvenir shops.
Putting aside problems associated with the alleged sale of counterfeit goods, the complex layers of ownership and false information filed at Companies House make it challenging for the council to identify the rateable occupier. Even when they can be identified, the shell company is often wound up before the council can take enforcement action to recover unpaid business rates.
The problem is not isolated to Oxford Street – it is a similar story nationwide.
Are landlords to blame?
Landlords are accused of turning a blind eye, but you can understand why: the bricks-and-mortar retail sector has been struggling for years due to the shift to online shopping, enforced Covid-19 closures and now a cost-of-living crisis.
Plans to introduce an online sales tax to address the so called “bricks vs clicks” tax imbalance (the discrepancy between business rates paid by in-store retailers compared to their online counterparts) have been shelved. The failures of multiple large retailers have left gaps on the high street which are difficult to fill. The landlords’ liability for business rates on empty properties once the property has been vacant for more than three months is significant. In the current business rates system, any tenant is better than no tenant.
What can be done?
Local authorities are calling on landlords to consider the impact these stores are having on shopping destinations and, ultimately, rent comparables. While some landlords see the bigger picture and are willing to act, the majority continue to bury their heads in the sand.
For the councils, the obvious solution is for landlords to conduct better vetting of tenants and take what steps they can to impede the creation of complex layers of corporate ownership, which make it difficult for them to trace the rateable occupier. It is also easy for councils to demand landlords terminate the leases of these types of unscrupulous tenants if they are able to do so, either by serving a break notice or forfeiting the lease for any breach of covenant.
But it cannot simply be left to landlords to solve the problem by re-assuming hefty business rates liabilities for empty properties that are not generating any income. The business rates system needs a complete overhaul by the government.
In 2008, when the government reduced the rates relief period for non-industrial property to three months in a bid to motivate landlords to re-let their premises quickly and supply the rising demand for commercial properties, the high street landscape was very different to how it now looks in 2023.
Corporate reform
The problem also needs to be tackled through reform of corporate law and Companies House by making it harder for individuals to set up bogus companies. Government agencies need greater transparency regarding company ownership, coupled with enforcement powers to crack down on the same individuals regularly setting up and dissolving companies.
The Economic Crime (Transparency and Enforcement) Act 2022 created the Register of Overseas Entities, which includes details of the beneficial ownership of overseas entities owning or leasing land or property in the UK. The register, once complete, is intended to be a comprehensive record of overseas entities’ ownership and a source of information for law enforcement and government agencies.
However, we need similar reform on a domestic level in respect of UK-incorporated companies. The Economic Crime and Corporate Transparency Bill follows in the footsteps of the 2022 Act, building on the government’s white paper for Companies House reform. It strives to make it harder for individuals to hide behind complex corporate structures to engage in criminal activity.
The intention is for Companies House to be a more active gatekeeper to company creation and a custodian of more reliable data, through the verification of all new and existing registered company directors and a beneficial ownership register, which will be publicly accessible and updated regularly. The cost of incorporating companies will be increased as a deterrent to the creation and dissolution of companies regularly.
Brighter days ahead
The current state of Oxford Street mainly reflects the poor state of the retail market in the UK, but the situation is not helped by an outdated business rates system, combined with deficiencies at Companies House. It cannot be up to landlords, or councils, to act without assistance from the government.
Further plans to reform business rates need to be brought forward and, in the meantime, councils need to do what they can to encourage landlords to let their premises to genuine businesses through rate mitigation schemes for start-up companies. Some help seems to be on the horizon in the form of the Bill, but it is imperative that Companies House is also given the resource to carry out effective investigation and enforcement once the law is passed.
As for Oxford Street, hopefully HMV returning in place of one of the candy stores, together with Ikea opening in the autumn in the former Topshop site, is a sign of better things to come for the world-famous shopping destination.
Jennifer Ayris, senior associate, Irwin Mitchell
