The Rent and Rates Equation

Published on: 29th November 2018

The two largest occupational costs for most businesses are rent and rates, the latter of which is inextricably linked to the former. Rob Cohen and Stephen Jefferies from our Leeds office consider this issue below and the careful balancing act that needs to be struck by tenants.

Rob Cohen, partner in our rating team comments;

“Rates are calculated by reference to a property’s ‘rateable value’ (RV) and a paired back definition for RV is the Rental Value for a property at a fixed date. The fixed valuation date for the current Rating List is 1 April 2015 and the valuation date for the next Rating List is set to be 1 April 2019, less than 5 months away.

The rents agreed by tenants over the coming months are going to form the basis of valuation for their business rates over the coming years.

With the rates multiplier (that results in the amount payable) nearing 50% of RV, a very simplistic way of looking at it is; ‘Occupancy Cost = Rent x 1.5’

The complex web of legislation and case law surrounding business rates means that in some instances this may not be true, such as transitional phasing capping the amount rates bills can increase / decrease for certain properties, however it remains that it is rents that underpin the amount of business rates paid on a property.

This equation has been of great significance in London for the current Rating List, especially in the retail sector. A lengthy previous Rating List (that ran from April 2010 to March 2017), meant that rates were based on very historic rental values and resulted in some rents being agreed at inflated levels as a consequence of disproportionately low RVs. Low rates outgoings meant that occupiers could afford to pay a high initial rent.

Since the business rates’ valuations have caught up, giant increases in RV will see annual rates bills nearly tripling for some over 3 years; even after transitional phasing. Retail assessments in St Pancras Station increased by around 400%, Portobello Road assessments increased approximately 300% and Westfield Shopping Centre was up circa 250%.

This may be seen as old news but an illustration of the balancing act in practice. Future planning and expert property advice are important for all occupiers in order avoid pitfalls that could have drastic consequences further down the line and jeopardise a company’s viability.”

Stephen Jefferies, partner in our lease consultancy team adds;

“Occupiers might be concerned in these uncertain times about incurring costs associated with professional fees but it is important to remember that an unjustified rental uplift of just £500 per annum will result in an additional rental liability over a 5 year period of £2,500 (more than the likely cost of initial professional advice) and that a throwaway nominal increase can also limit the ability to negotiate a reduction in the rating assessment.

Occupiers sometimes look to take the quick and easy option when their business is performing well, by doing a deal directly with the landlord and chipping him down a little bit on the quoting rent, rather than seeking professional advice and agreeing a rent in line with the wider market evidence. This then becomes a problem when the market turns. Not only because the business ends up paying a higher rent than other occupiers in the locality and potentially a higher rates liability, but also because the occupier may struggle to assign or underlet their lease to a new occupier if needed.

We always advise our clients no matter how well they are doing, to carry out the appropriate due diligence when dealing with a lease renewal or rent review to make sure they are paying the market rent in a specific location.

Where market values are not tracked, it results in inflated rental growth and this is further exacerbated by fast growing retail and restaurant operators, who have agreed sale and lease back transactions at rental levels to maximise the sale price and based their agreed annual rent on demographic trends and expected sales performance modelling, which has had limited long-term regard to new entrants to the market and increased staffing costs. This in turn has ultimately proved to be unsustainable in a lot of cases.

The knock-on consequence of this is the establishment of open market evidence, which results in the VOA assessing rateable values at higher levels and then impacts on remaining occupiers in these locations.

Hopefully shorter and more flexible lease terms and the shorter Rating Revaluation periods that are set to come in from 2021 will enable occupiers to overcome the hardship they are currently facing but it remains of great importance that they remember to carry out the appropriate professional due diligence when agreeing the rental terms on their premises”.

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Business Rates

Sanderson Weatherall Rating specialists are RICS and IRRV qualified surveyors that can offer a comprehensive range of Rating services to clients including Rating Appeals, Rating Valuations, Rates Management and Rates Audit, together with cutting edge advice on Empty Rates mitigation. Regarded as experts in the field, all our senior staff are members of the Rating Surveyors' Association and are able to offer the very best Rates advice on the accuracy of Rating assessments and resultant Business Rates liabilities. Through our experts' memberships of the Institute of Revenues, Rating and Valuation we are also happy to assist clients who have international local property tax liabilities. We participate in the activities of both of these professional bodies at the highest level and negotiate with government on the introduction of all new non domestic rating proposals. On the 1st April 2017 the new rating lists were published across England and Wales and from that date, businesses looking to challenge their business rates were required to do so through HMRC’s Government Gateway. If you don’t currently have an account then please follow the steps in our guide to setting up a Government Gateway account, registering properties and appointing an agent here.    Contact Us

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Sanderson Weatherall Rating specialists are RICS and IRRV qualified surveyors that can offer a comprehensive range of Rating services to clients including Rating Appeals, Rating Valuations, Rates Management and Rates Audit, together with cutting edge advice on Empty Rates mitigation.

Regarded as experts in the field, all our senior staff are members of the Rating Surveyors' Association and are able to offer the very best Rates advice on the accuracy of Rating assessments and resultant Business Rates liabilities. Through our experts' memberships of the Institute of Revenues, Rating and Valuation we are also happy to assist clients who have international local property tax liabilities. We participate in the activities of both of these professional bodies at the highest level and negotiate with government on the introduction of all new non domestic rating proposals.

On the 1st April 2017 the new rating lists were published across England and Wales and from that date, businesses looking to challenge their business rates were required to do so through HMRC’s Government Gateway.

If you don’t currently have an account then please follow the steps in our guide to setting up a Government Gateway account, registering properties and appointing an agent here. 

 

Contact Us

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Lease Consultancy

Sanderson Weatherall’s Lease Consultancy team are leaders in the field. We are expert negotiators in rent and lease terms for all forms of commercial properties across the UK. Our knowledge of the property market and experience in dealing with complex tenancy agreements allows us to deliver top results for you, no matter how big or small your business is. Our understanding of business and people also means we’ll work with you to achieve the best result, without damaging your relationship with your landlord or tenant. The Lease Consultancy team are able to offer: Lease Audits We will analyse your leases and identify, critical dates and liabilities leading to the creation of a comprehensive lease database. This will simplify your processes and avoid key dates and obligations being overlooked. Lease Renewals & Restructuring We will undertake a strategic review and inspection of your property portfolio and identify opportunities to rationalise or restructure leases, and reduce your costs by reviewing future lease events and potential liabilities. Rent Reviews We act on your behalf on the negotiation of rent and lease terms to obtain the best possible outcome. Dispute Resolution Our highly experienced lease consultancy team will represent you at Court and Arbitration and have a wealth of experience in the preparation of Expert Report and Replies to Independent Experts and Arbitrators. Members of the team are also frequently appointed by the RICS to act as arbitrators, Independent Experts and Mediators. Strategic Property Due Diligence Advice We provide detailed rental advice if you are considering acquiring property or businesses with existing leasehold liabilities. Contact Us

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Sanderson Weatherall’s Lease Consultancy team are leaders in the field.

We are expert negotiators in rent and lease terms for all forms of commercial properties across the UK. Our knowledge of the property market and experience in dealing with complex tenancy agreements allows us to deliver top results for you, no matter how big or small your business is.

Our understanding of business and people also means we’ll work with you to achieve the best result, without damaging your relationship with your landlord or tenant.

The Lease Consultancy team are able to offer:

Lease Audits

We will analyse your leases and identify, critical dates and liabilities leading to the creation of a comprehensive lease database. This will simplify your processes and avoid key dates and obligations being overlooked.

Lease Renewals & Restructuring

We will undertake a strategic review and inspection of your property portfolio and identify opportunities to rationalise or restructure leases, and reduce your costs by reviewing future lease events and potential liabilities.

Rent Reviews

We act on your behalf on the negotiation of rent and lease terms to obtain the best possible outcome.

Dispute Resolution

Our highly experienced lease consultancy team will represent you at Court and Arbitration and have a wealth of experience in the preparation of Expert Report and Replies to Independent Experts and Arbitrators.

Members of the team are also frequently appointed by the RICS to act as arbitrators, Independent Experts and Mediators.

Strategic Property Due Diligence Advice

We provide detailed rental advice if you are considering acquiring property or businesses with existing leasehold liabilities.

Contact Us

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Autumn 2018 Business Rates Budget Review

In his last budget before the outcome of the Brexit negotiations, much of the focus of Philip Hammond’s speech was on the impact that Brexit will have on the UK economy, but what did yesterday’s announcement mean for business rates? 

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In his last budget before the outcome of the Brexit negotiations, much of the focus of Philip Hammond’s speech was on the impact that Brexit will have on the UK economy, but what did yesterday’s announcement mean for business rates? 

[fulltext] =>

Key Facts from the Budget 2018

- Business rates bill for retailers with a rateable value of £51,000 or less to be cut by third over two years

- Measure said to benefit 90% of independent shops, pubs and restaurants; cutting bills by up to £8,000 and totalling £900m in business rates relief 

- £650m to rejuvenate High Streets

- New 100% mandatory business rates relief for all standalone lavatories made available for public use 

Rob Cohen, partner in our Leeds rating team shares his thoughts:

“The outwards appearance of yesterday’s budget is a positive one for businesses with a number of seemingly favourable announcements, especially for smaller independent retailers and restaurants.

In an attempt to help businesses that are struggling with ever changing consumer habits, Hammond announced that those with rateable values of up to £51,000 will have their rates bills cut by a third over the next two years.  Hammond also declared that a pot of £650m would be available for local areas to rejuvenate High Streets.

Whilst this will be a welcome announcement for independent retailers it is just papering over the cracks of the UK’s struggling high streets and these measures are not what they may first appear to be.

We have seen a number of high profile closures on the high street recently and the new retail rates relief will not benefit the likes of Debenhams, Primark, WH Smith or Waterstones that anchor our high streets; as their rateable values exceed the £51,000 threshold.  Furthermore, State Aid rules mean that it is only possible to claim up to €200,000 for this type of funding over 3 consecutive fiscal years.  Many of those retailers with multiple outlets who need assistance will receive little aid as a consequence and none if they have already claimed up to €200k of Government assistance.  In reality, the vast majority of our main high street shops will not have their bills cut by third.

For the largest properties in towns that have seen the biggest drops in values over the last 10 years, these are still tied to rates payable from the last Rating Revaluation and a valuation date in 2008 as a consequence of the highly disadvantageous transitional caps that restrict how much bills can decrease each year. A large shop that saw its assessment half on 1 April 2017 will only be paying circa 14% less in 2019/20 than they were 3 years prior as a consequence of these caps.

It is these larger stores that the independents rely on to draw shoppers in and drive footfall and a release from downwards transitional caps that restrict the amount rates can decrease, as well as a more fundamental reform of the system are required.  If measures aren’t taken to assist the big businesses soon, these most recent handouts may prove pointless”.

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[layout_type] => blog [menu_text] => 1 [page_title] => Latest News and Insight on the UK Commercial Property Market | Sanderson Weatherall [page_heading] => Latest News [menu-meta_description] => News, industry insight and features on the UK Commercial Property Market from Award Winning Property Consultancy Sanderson Weatherall [secure] => 0 [page_description] => [page_rights] => [robots] => [access-view] => 1 ) [initialized:protected] => 1 [separator] => . ) ) URL: /news/22-blog/1615-autumn-2018-business-rates-budget-review?layout=default&breadcrumb=noimage

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