Business rates reform can help us to net zero

Few people disagree with the government’s aim to decarbonise British industry by 2050, as part of the UK’s contribution to limiting the long-term increase in average global temperatures to 1.5˚C. Many household names in real estate have risen to the challenge and set themselves demanding targets well ahead of 2050.

A crucial component of the government’s strategy will be its ability to create a regulatory environment that promotes the right behaviours by business. When it comes to the upgrading of commercial properties, the government has mandated the Energy Performance Certificate (EPC) targets of C and B ratings for 2027 and 2030 respectively, which will require substantial investment by commercial property owners in the vast majority of the UK’s building stock.

Smart owners want to make this investment because it enables their occupiers to save on energy cost and to occupy assets matching their own Environmental, Social and Governance (ESG) targets, something that employees expect and investors demand to ensure competitiveness and de-risk occupational interest.

However, meeting those targets comes at a cost. With over four in 10 commercial properties languishing at EPC D or below, there is substantial financial investment required to meet upcoming standards whilst at the same time income is foregone from an unoccupied during its refurbishment. 

Without factoring the time involved in mandatory EPC upgrades, contemporary evidence indicates that it already takes an average of 10 months to relet a retail unit. Adding EPC upgrade work will add to the time. But compounding these cost and loss of income is the loss of Empty Property Relief (EPR) after only three months of a tenant vacating, leaving owners with business rates liability. Faced with these financial disincentives, not many owners are going to be doing this in a hurry, despite the clear environmental benefits that would flow from improving a property’s energy rating.

EPR applies for up to three months after a commercial property falls vacant. The government has highlighted its concerns about abuse of the relief and has indicated that it intends to hold a consultation on the future of the relief. But is this the right approach to EPR reform?

This relief is a welcome one in that it recognises that an unoccupied property does not generate an income; conversely expenditure is incurred on upkeep. But that is where the logic stops. With an average 10 months required for reletting, long gone are the days of being able to turn an empty shop around and relet it in three months. The risk of overrunning the three month cut-off any further, disincentivises property owners from committing to environmental upgrades. If the government is serious about 2050 net zero, it needs to give real estate owners the tools they need to achieve it.

So why still restrict EPR to three months? An extension to EPR could provide the necessary incentive for environmental upgrades by removing the additional burden of business rates bills from the already substantial costs associated with refurbishment. This could make the difference between occupiers having nowhere to rent come 2027 or having a plentiful supply of decarbonised commercial space to occupy. That would have far reaching benefits for both GDP and our town centres.

The chancellor has an opportunity at the Spring Budget to demonstrate the government’s commitment both to net zero and Britain’s high streets. By extending the period over which EPR can be claimed from three months to 12, the government would be acknowledging the scale of the task facing Britain’s building stock and engendering the achievement of their EPC targets. A well designed new EPR policy could strengthen Britain’s environmental sustainability in the years ahead and prove to the world that this country is indeed at the forefront of efforts to decarbonise.