COMMENT Business rates can be one of the biggest expenses for property owners and occupiers. A criticism of the current system was that rateable values of non-domestic property in England and Wales were based on a five yearly review cycle. With the last valuation date being 1 April 2015, the system was failing to reflect the evolving real estate landscape.
New RVs have now been calculated across the 2.1m properties liable for business rates, taking effect from 1 April 2023. In future, rate reviews will be carried out every three years. This will enable the Valuation Office Agency to change rates as property values fluctuate.
While aimed at maintaining fairness, the revaluation has led to significant variations in rates across locations and sectors. Accepting there will be sub-sector disparities, it is estimated that total business rates paid by the retail sector will fall by 20% as a result of the exercise, while rises will be felt in the office and industrial sectors – with a 27% increase for some large distribution warehouses to reflect growth in online sales.
The more favourable outcome for properties in the traditional retail sector compared to those in other sectors stems from the VOA’s chosen valuation assessment date. New values are based on the annual rent the property would be let for on the open market on 1 April 2021 – a time when non-essential retail was still reeling from the effects of multiple lockdowns, while online and last mile logistics was growing.
The Autumn Statement sought to level the playing field with packages of support worth £13.6bn over five years. In addition to freezing the rate multipliers for a further year, rather than allowing them to increase with inflation, the statement extended the Retail Hospitality and Leisure Relief Scheme, increasing relief from 50% to 75% from 1 April 2023, and put in place a Transitional Relief Scheme.
These measures should ensure businesses whose rates have reduced see a direct benefit, paying less, and those business that are subject to increases will see them phased in, with the government funding the shortfall as the paying company tapers up to the new cost.
The extended rates relief scheme will not apply to offices but businesses that qualify could secure savings running into thousands of pounds.
Historically, where business rates have risen more slowly than anticipated or fallen, some landlords have been quicker to end unproductive tenancies and seek to relet or redevelop premises. Is that a legitimate concern for tenants now?
A property’s RV forms the basis for calculating statutory compensation for lease renewals, so for landlords with development aspirations, lower re-evaluated rates could mean savings against budgeted payments. However, this must be balanced against increased energy prices, the cost of construction materials and borrowing. Landlords must also weigh up any decisions around termination alongside the financial and operational implications posed by new Minimum Energy Efficiency Standards regulations.
Since 1 April 2018, landlords have not been permitted to grant a lease of a commercial property with an EPC rating below E, unless they have carried out all possible cost-effective energy efficiency improvement works or an exemption applies.
After 1 April 2023, continued lettings of properties rated below E will be prohibited, although it will not invalidate ongoing leases. Whether the possibility of making unbudgeted savings on rates will encourage landlords to bring properties up to minimum rating level remains to be seen.
Relations between landlords and tenants are arguably stronger than they were pre-Covid and certainly less adversarial. The reality may be that there is little appetite for tactical terminations. In any event, who will these landlords relet to?
Retailers and other bricks and mortar businesses have shown resiliency in recent years but with an economic downturn now being felt and consumer spending falling, there are questions over whether there is sufficient demand for physical space. The same applies for traditional offices following changes to working habits and an increase in the availability of flexible work space.
Changes to business rates may be welcome news for some sectors. However, it is clear that there are many challenges still facing landlords and tenants. Increased collaboration is required, and it is only by working together that tenants and landlords can put themselves in the best position possible to overcome these hurdles.
Kate McCall is a partner in Shoosmiths’ real estate disputes team
