Do you rate it? Impact of rate revaluation on landlords


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For several weeks the usually dry topic of business rates has unusually been headline news. It has been predicted the recent rates revaluation will mean the end of independent retailers on the high street, with reports suggesting that many businesses, particularly in the South East, are expecting a rise in business rates of more than 40%.

The biggest losers of any rates increase will, of course, be tenants or occupiers who are primarily responsible for the payment of these rates.  However, landlords are not immune either to paying business rates or to the effect that these increases will have. This article outlines a few key aspects of the rates increase that landlords should be aware of.

The most obvious time when a landlord is worried about business rates is in the lead up to, and after, vacation by their commercial tenants.  Landlords are entitled to empty rates relief for the first three months after a property becomes empty.  However, after this date the landlord will be responsible for the business rates to the same extent as a tenant would.  The increase in rates is likely to prompt more landlords to take advantage of rates avoidance schemes, some of which have been given judicial approval, including short leases of three months for storage of documents, lettings to pop-up businesses used to restart the empty rates period, or lettings to charities for nil rent.

If business rates rise, prudent landlords will want to improve their advance planning for vacating tenants, including timing of marketing to reduce the period the property is left empty.

The level of business rates will also affect the amount of compensation payable by landlords terminating a lease protected by the Landlord and Tenant Act 1954. Compensation is commonly payable when a landlord terminates because they are redeveloping or intend to occupy the premises for their own purposes. It is calculated on the business rates valuation on the date that the Section 25 trigger notice is served and will be 1 x the rateable value if the tenant has been in occupation less than 14 years, or 2 x the rateable value if it has been in occupation for more than this.  Accordingly, if there is due to be a big hike in business rates, landlords who are able may wish to serve their proposed Section 25 notice before these new rates kick in.

Finally and more generally, landlords will need to consider how any increase in business rates will affect the rent that can be achieved for their property. Inevitably, as with all market influences, a big increase in rates for a property is likely to have a knock on effect for rents. Landlords will need to factor this into their business models and plan for such an impact.

 

If you have any questions about this article, please do not hesitate to contact the property litigation or property team.

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