Reed Smith’s Katherine Campbell on why something needs to give for high street rates

Larger retailers such as Joules and TM Lewin closed some 6,000 shops and around 151,500 retail jobs were lost. In total, roughly one third of all the closures were due to insolvency. With the cost-of-living crisis turning shoppers away and energy prices making it increasingly difficult to keep the lights on, 2023 doesn’t look any better.

Astonishingly, retail accounts for around 25% of all business rates paid by UK companies, despite adding less than 10% to gross domestic product, and rates make up over 40% of all tax paid by retailers.

From 1 April 2023, rateable values for commercial property changed. The latest valuation has been taken at 1 April 2021, specifically to reflect the impact of the pandemic on rental values. But different sectors were affected differently by the pandemic: rental values increased in storage, distribution and industrial, but decreased in leisure and retail. True, retailers will pay less than warehousing and logistics companies under the revaluation and those large London retailers may see a big cut in their bills. However, given the drastic drop in retail rents over the same period, the adjustment falls far short of compensating the average high street.

Unsurprisingly, new retail tenants are hard to come by. Yet, when a commercial tenant leaves, rates don’t vanish – the burden of paying merely falls to the landlord. As a result, landlords are reluctant to terminate existing leases even where the tenant is not paying rent, because then at least the rates liability is covered.

“Altus Group estimates that retailers and landlords will need to find around £1.07bn to pay for empty property rates in 2023-24.”

Altus Group estimates that retailers and landlords will need to find around £1.07bn to pay for empty property rates in 2023-24. Although there is a three-month rates exemption for empty retail premises, in the current climate, where re-letting is a lengthy process and is more incentive driven in terms of rent-free periods, that won’t make any meaningful difference to landlords. Additionally, while the new Non-Domestic Rating Bill aims to modernise the business rates system through means such as more frequent property valuations and added incentives to encourage property improvements, this does little more than skirt around the edges of the problem. Business rates for retail need to be overhauled urgently, if we are to regenerate the high street.

Yet the government prefers to address the issue of empty shops on the high street through the Levelling-up and Regeneration Bill in a frankly alarming provision that allows local authorities to intervene in the commercial landlord and tenant relationship and agree lettings of vacant high street premises through auction. The bill gives rights to the local authority where high street premises have been unoccupied for a year and where it deems the occupation of the premises for a suitable high street use would be beneficial to the local economy. Ultimately the local authority can take an empty property to auction, without the landlord’s agreement, and can bind the landlord to a new tenancy agreement.

Nothing in the bill suggests there will be any rates mitigation schemes for the lucky auction winners, so prospective tenants may well lose interest when they factor in the rates liability. The government is missing the point – properties are empty not because greedy landlords are holding out for higher (or in some cases any) rent, but because tenants simply can’t afford to pay the business rates demanded of the high street. Until more rates relief is given, to occupied and unoccupied premises alike, the current devastation of our high street is likely to continue.

Katherine Campbell is counsel at Reed Smith