For some time now, empty industrial properties in Scotland have benefited from 100% rates relief when vacant, while commercial properties have only benefited from this rate for the first three months they are vacant. As part of the Scottish government’s 2016/17 budget, some significant changes to the business rates relief system in Scotland were announced, which came into effect on 1 April 2016. Their purpose is to encourage the occupation of empty property and to raise revenue to continue to support expenditure on public services.
Industrial property
Over £50m worth of relief is given to empty industrial properties every year. It was therefore unsurprising when the changes to this category were announced.
From 1 April, owners of industrial properties lost their 100% vacant rates relief. In its place, they will receive 100% relief for the first six months that their property is empty, after which they will receive 10% relief until they re-let it. If an industrial property has been empty for at least six months prior to 1 April 2016, the owner does not get the benefit of the 100% relief and instead moves straight to 10% relief. That is a significant increase to make provision for in a short space of time.
In particular, owners of large, vacant industrial properties in secondary locations will be hit hard. Many of those properties will be lying empty because their owners cannot attract tenants in the current market due to their size, the amount of repair and maintenance they require, and the rates they attract. For some, this could mean that demolition may be the only economically viable option.
For those who don’t want to demolish their buildings, they may look at how else they can reduce their rates liabilities, such as through short-term licences to storage companies or lettings to charities. While these and other ways may be perfectly legitimate methods of reducing this new rates burden, given the objective of increasing revenue, local authorities can be expected to challenge them when the right opportunity arises. For example, there are pitfalls around charitable relief if the charity is not occupying the majority of the property, as the case of English Speaking Union Scottish Branches Educational Fund v City of Edinburgh Council (2009) CSOH 139 demonstrated. If a local authority gets its teeth into the right case with holes that can be exploited, it may just get another decision in its favour, which could affect some of the ways available to rate payers to reduce their rates liabilities.
The case of Secretary of State for Business Innovation and Skills v PAG Management Services Ltd [2015] EWHC 2404 (Ch); [2015] PLSCS 252 is also significant. PAG effectively used insolvency to mitigate rates liability. By the letter of the rating law, that was perfectly legal. That did not, however, stop the secretary of state from raising court proceedings in England to have PAG wound up on the grounds of public interest. While the court decided that the use of insolvency did not engage the public interest test, it still wound up PAG for subverting the purpose of the insolvency legislation. The rules in Scotland for rates and insolvency are different to those in England but, if nothing else, this serves as a warning of the action that the Scottish government might employ against similar schemes in Scotland.
At the other end of the industrial market to large industrial premises in secondary locations is new industrial space. It is expected that the imposition of further costs on the development and redevelopment process by way of empty rates, even with a six-month rate-free period, will increase the viability gap and delay the provision of new speculative industrial space. This could result in a shortage of stock if older, secondary industrial space is being demolished while no new space is being built to replace it.
In the short term, the change may serve to increase occupancy, but it creates the risk that as the economy grows and new businesses are looking for affordable industrial space, none will be available. By the time new space is brought to the market to meet demand, it may be too late for those businesses.
Other commercial property
The changes to the empty rates relief for other commercial property such as offices are less dramatic. The 100% rate of relief currently afforded to all other empty commercial properties for the first three months they are vacant will be reduced to 50%. After the three months, the rate of relief will stay the same as it was before 1 April 2016, being 10%.
It is difficult to imagine owners of other commercial premises not presently doing all that they reasonably can to re-let their premises the minute they are vacated, due to the empty rates liability increasing to 90% after three months. Only time will tell if the lower rates relief for the first three months of a premises being vacant will encourage owners to do even more to find a tenant.
New start relief
Something that may help some developers of new commercial property in Scotland is new start relief. This provides that unoccupied new-build properties receive 18 months of relief at 100%. The relief was due to end on 31 March 2016 but the Scottish government has confirmed that it will be continued for another year. It is however capped at European state aid limits, which restrict the amount of relief to a maximum of €200,000.
What next?
With change comes uncertainty, and we will have to wait and see if the Scottish government’s new approach to empty rates relief will benefit or hurt the economy.
What we do know for certain is that owners will look for ways to mitigate against this new cost and there will be many more industrial property owners challenging the rateable values placed on their properties in the 2017 revaluation.
Matthew Farrell is a partner in the real estate litigation team at Brodies LLP, and Brian Rogan is head of rating and David Rolwegan is head of industrial for CBRE
in Scotland
