The new rules on rates for empty business properties, introduced in April, are putting added pressure on both tenants and landlords in an increasingly difficult marketplace, according to RICS West Regional Chair James Gregory, who is a commercial property specialist with Alder King.

He explains: “In times of commercial challenge one way in which businesses can look to maximise financial strength is to ensure they are operating from the right premises.

Selling or sub-letting surplus space can release cash for other activities. Moving from buildings that no longer really reflect business need can make a massive difference in terms of operational efficiency.

Commercial and industrial property markets are holding up better than the residential sector but the need now to pay rates on empty buildings is clearly having an impact on business mobility.”

In RICS’ most recent commercial property survey (published in July) a number of respondents highlighted the effect of the rates, particularly on the rentals being charged.

Up until April this year, empty industrial buildings received 100 per cent rate relief, whilst office and retail premises received 100 per cent relief for three months and 50 per cent thereafter.

Under the new rules industrial buildings only receive 100 per cent relief for six months and office and retail premises have three months relief but incur the full amount thereafter.

Whether a business owns or leases a building that it would ideally vacate, either because it is surplus to requirement or no longer suitable, this situation makes deciding to move that much more risky. This is all the more prevalent in a difficult economic climate, since it is likely to take longer to find either a purchaser or a new tenant.

The constraint on business mobility is clear. The rating rules are, at the same time, putting downward pressure on rental values since landlords are increasingly keen to find tenants within six months of a building becoming vacant and before large rate bills, which can run to many thousands of pounds, kick in. As a result ‘realising the asset’ becomes somewhat less financially attractive than might otherwise be the case.

Neither does the rate regime only affect existing properties. Since speculative developments are also liable, there is an additional pressure on developers, with many commentators predicting a downturn (irrespective of the current climate) in this type of construction over the coming months.

Of course, every cloud has a silver lining and the downward pressure on rentals can be seen as good news for those that can find the right existing property to meet their needs – if they are acquiring additional space, rather than simply moving from premises which will then, themselves, fall into the ‘empty properties trap’.

Says James Gregory: “Many in the property industry have disputed the appropriateness of the Rating (Empty Properties) Act 2007. As it turns out, its implementation, in April this year, could hardly have been at a worse time and it certainly is adding to the woes faced by businesses of all types.

All businesses should still take a long hard look at their premises as part of their financial housekeeping but there will be benefit in seeking professional input, at the outset, on rental potential and being realistic about leases and incentives that may need to be offered as part of any deal.”