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Empty properties - an increasingly costly, and risky, business

It is more important than ever for owners of commercial properties to ensure their premises are used and occupied.

Changes to Scottish business rates in 2016, and the impending amendments to rateable values from April 2017, mean property owners face a financial ‘double whammy’ for unleased premises.

Added to that, upcoming legislation means communities could buy buildings that aren’t being used or appropriately managed.

Lower business rate relief

While tenants pay business rates on leased premises, empty properties mean increased costs for owners.

It’s generally acknowledged that securing tenants and attractive rental income is challenging in the current market; however, there are a number of clear advantages in leasing to a tenant willing to meet the property’s liabilities, and actively maintain the building.

Even if this is at a reduced rent; with a generous rent-free period; or another incentive.

So what do the rate changes actually mean?

  • Until April 2016, empty industrial premises benefitted from 100% relief from business rates.
  • From April 2016 this was limited to a six month period, with the rate being slashed by 90% to 10% after 6 months
  • The situation is worse for offices and retail premises from April 2016: only 50% relief for three months, then 10%.

Increasing rateable values

In a move that could be seen as compounding these difficulties, the Scottish Government is proceeding with a revaluation from April 2017.

While there are concessions for small businesses paying lower rates, this exercise will increase the rateable value of many premises, sometimes significantly.

It would also have a disproportionately negative impact on certain areas of the country.

Concerns about the impact of increases in rateable values in the north east, for example, were raised at First Minister’s Questions in the Scottish Parliament recently.

Risks of community empowerment for owners

The Scottish Government’s community empowerment legislation also presents risks for property owners who allow premises to be left empty or abandoned for too long.

Under the Community Empowerment (Scotland) Act 2015, community organisations will be able to identify, and potentially buy, land or buildings deemed “abandoned or neglected,” which could be put to better community use.

The detailed proposals are at the consultation stage, but it is anticipated that the relevant parts of the Act will be given full legal force at some stage this year.

If a community exercises this right successfully, it operates as an effective compulsory purchase, meaning the owner is forced to sell.

This is different from other community rights to purchase, which are merely pre-emptive and are only activated if the owner is intending to sell anyway.

The price paid by the community is to be fixed by an independent valuer, whose views on value may be very different from an owner’s expectations.

Mitigating threats

Together, these threats provide an excellent incentive for ensuring commercial premises are leased.

Having a lease in place with the tenant actively using and managing the property will likely avoid any adverse community right to purchase being instigated, and of course the tenant usually bears the rates liability.

As such, in the current market, a lease - even one secured at a lower rate given market conditions - is useful in reducing an owner’s exposure to the liabilities and risks of holding an empty property.

Posted, 31 January 2017 Categories: Commercial property