Empty shops: a problem that isn’t going away

Katherine Campbell, Partner at Reed Smith, looks at the declining British high street and how this affects commercial landlords.

Related topics:  Landlords,  Investment,  Commercial,  High Street
Katherine Campbell | Reed Smith
5th May 2023
Empty shop 058
"You need look no further than the number of retailers that are failing, with 26 retail businesses having been shuttered already in 2023, at the cost of 506 stores and over 5,600 jobs. Some will be replaced. But not enough."

The British high street is currently in crisis. 2022 saw Britain suffer a net loss of 3627 shops, with both major retailers and independent businesses struggling to keep the lights on. There is more than one root cause, not least the soaring cost of living, inflation, and the ongoing issues with energy supply, so solving the crisis will not be straightforward. But that does not mean that there aren’t steps that can be taken.

This leads us to one of the other major issues affecting the British high street – business rates. The government has not been blind to this issue, or not completely blind to it, adjusting business rates for 1 April to introduce new rateable values based on figures taken on April 1, 2021 (and therefore factoring in the pandemic’s impact on rental values). But although this move is welcome, it fails to account for the drop in retail rents over the same period, significantly diminishing its effectiveness.

The problem is particularly acute for smaller businesses and independent shops, all the more so for those not based in the capital. There is no great need to scour Britain for evidence of this. In fact, you need look no further than the number of retailers that are failing, with 26 retail businesses having been shuttered already in 2023, at the cost of 506 stores and over 5,600 jobs. Some will be replaced. But not enough.

That is creating a knock-on problem for landlords. When a commercial tenant leaves, the responsibility for paying rates does not leave with them. Instead, it falls to the landlord. There is a three-month exemption for empty shops, but in the current economic climate where retail tenants are hard to come by and the re-letting process is invariably a lengthy one, such a short grace period does not make a meaningful difference to landlords. What will make a meaningful difference to landlords is the estimated £1.07bn that they will have to spend paying property rates for empty retail properties over 2023-24.

The government does have a plan to address the issue of empty shops through the Levelling-Up and Regeneration Bill that is currently being heard in the House of Lords. Unfortunately, the proposed solution is granting local authorities the power to take any high street property that has been vacant for longer than a year to auction if it would benefit the local economy, regardless of the landlord’s wishes.

Not only does this stand to bind landlords to legally binding tenancy agreements they have not agreed to, but it also fails to address the root of the problem. An auction system such as that proposed by the Levelling-Up and Regeneration Bill might be useful in solving a problem of supply, but that is not the problem confronting the British high street. Rather, high streets are emptying because of a lack of demand.

Holding auctions without any interested bidders will do little to alleviate the pressure on landlords, whilst the lack of any rates mitigation schemes is also likely to deter prospective tenants from taking part in the scheme. After all, the reason that many properties are empty in the first place is that the previous tenants could not afford to pay the business rates.

The government’s Non-Domestic Rating Bill also misses the mark, aiming to fix the situation by introducing more frequent property valuations and incentivizing landlords to make property improvements. This makes it another attempt to tackle a non-existent issue with supply and is accordingly another example of the government failing to address the lack of demand.

The logical solution to the problem would be to provide rates relief with an overhaul of the business rates system long overdue. The remarkable reality is that retail currently accounts for around 25% of all business rates paid by UK companies, despite adding less than 10% to GDP, with rates making up over 40% of all tax paid by retailers.

Reforming our business rates system might sound drastic, but urgent action is what is needed if we want to save our high street.

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