Why Commercial Property Investors Should Check Business Rates Before Buying

The rent may stop when a tenant leaves, but the property costs may not

When purchasing commercial property, investors naturally focus on rental income.

How much is the tenant paying? How long is the lease? What yield does the property produce?

But there is another figure that can become particularly important when a commercial property becomes vacant:

business rates.

For an occupied property, business rates will commonly be the occupier’s responsibility, subject to the lease and circumstances.

When the building becomes empty, however, the financial position can change.

For investors across Bury, North Manchester and the wider North West, understanding the property’s business-rates position can therefore be an important part of assessing potential void costs and future asset-management strategy.

What are business rates?

Business rates are a tax charged on most non-domestic properties in England.

They can apply to premises such as:

• Warehouses
• Industrial units
• Offices
• Shops
• Workshops
• Commercial yards

The system is based around a property’s rateable value, although the actual amount payable can be affected by the multiplier and any applicable reliefs.

General guidance is available through GOV.UK – Business rates.

What is rateable value?

Rateable value is not the same as:

• Market value
• Purchase price
• Annual rent actually being paid

It is an assessment used within the business-rates system.

The Valuation Office Agency (VOA) is responsible for assessing rateable values in England and Wales.

Investors can use the government’s business-rates tools to investigate the assessment applying to a particular commercial property.

Why should an investor care if the tenant pays the rates?

Because the tenant may not always be there.

A commercial investment could be occupied on completion and become vacant two years later.

At that point, the landlord may face:

• Lost rent
• Insurance
• Security
• Utilities
• Repairs
• Business rates

Void periods can therefore cost considerably more than simply the missing rent.

Empty property rates can become a significant expense

Commercial property does not automatically become rates-free simply because nobody occupies it.

There are rules providing certain periods of empty-property relief, after which business rates may become payable, subject to the type of property and any applicable exemptions.

Current rules should always be checked through GOV.UK – Business rates relief for empty properties.

For an investor holding a large vacant property, the resulting cost can be substantial.

Industrial property can receive a different initial relief period

Under the current framework, certain qualifying industrial and warehouse properties can receive a longer initial empty-property relief period than many other commercial premises.

However, investors should not build acquisition models around assumptions.

Rules can change, and the precise treatment depends on the property and circumstances.

Check the current position before purchasing.

A long void period can materially change an investment

Imagine purchasing a warehouse generating:

£100,000 per annum.

The tenant leaves.

The investor expects the building to take twelve months to re-let.

The obvious income loss is £100,000.

But the actual financial impact may also include:

• Business rates
• Insurance
• Utilities
• Security
• Refurbishment
• Agency fees
• Legal fees
• Rent-free incentive for the new tenant

The true cost of vacancy could therefore be substantially higher than one year’s rent.

Business rates should be included in downside modelling

Investors often model the expected scenario:

Tenant stays → rent continues → investment performs.

A stronger appraisal also models:

Tenant leaves → property becomes vacant → what does that cost?

Business rates should form part of that calculation.

Large buildings create greater exposure

A 1,000 sq ft workshop may be relatively straightforward to re-let.

A 100,000 sq ft industrial facility can potentially take considerably longer.

The larger the property and the more specialist the specification, the more important it becomes to understand holding costs during vacancy.

Specialist buildings deserve particular caution

Properties designed around one specific occupier can be attractive investments while the tenant remains.

But if the tenant leaves, the building may require:

• Subdivision
• Refurbishment
• Redevelopment

before attracting new demand.

Business rates can continue to influence cash flow while the investor executes that strategy.

Check the rateable value before buying

Investors can search for information concerning non-domestic property assessments through GOV.UK – Find a business rates valuation.

This can help establish the current rateable value and property description.

The actual liability should then be confirmed based on the relevant circumstances.

Check that the property description makes sense

The rating list may describe a property according to its assessed use.

Investors should compare that information with what physically exists.

Has the property been:

• Extended?
• Subdivided?
• Combined?
• Altered?

If significant physical changes have taken place, professional rating advice may be appropriate.

Subdivision can change the rating position

Commercial investors sometimes purchase a large building and divide it into smaller units.

This may improve letting prospects.

However, subdivision can also affect how the property is assessed for business rates.

Investors should consider the rating implications when preparing their business plan.

Combining units can also matter

The opposite strategy may involve combining adjoining units for one larger occupier.

Again, this can affect the rating position.

Property configuration, occupation and rating assessment can interact in ways that require specialist advice.

Small businesses may qualify for relief

Some occupiers of smaller commercial premises may qualify for Small Business Rate Relief, depending on the applicable rules and their circumstances.

Information is available through GOV.UK – Small Business Rate Relief.

For landlords of smaller units, the potential availability of relief can influence occupier affordability.

But don’t market a property by promising relief

Whether an occupier qualifies for a particular relief depends on its individual circumstances and the applicable rules.

Agents and landlords should therefore avoid making guarantees such as:

“You won’t pay business rates.”

A better approach is to provide the rateable value where verified and advise prospective occupiers to confirm their own liability with the relevant authority.

Business rates affect total occupational cost

Tenants do not assess rent in isolation.

A business considering premises may need to budget for:

• Rent
• Business rates
• Service charge
• Insurance contributions
• Utilities

This creates the property’s total occupational cost.

Two buildings with identical rents can therefore have different affordability for the occupier.

Rates can influence letting negotiations

Suppose a unit has a particularly significant rates liability relative to its rental value.

A prospective tenant may factor that into what it is willing to pay in rent.

Landlords should therefore understand the complete cost package facing their target occupiers.

Rateable value and market rent can move differently

Investors should not assume a change in market rent automatically produces an immediate equivalent change in rateable value.

The rating system operates according to its own valuation framework and revaluation timetable.

This is another reason to check the actual assessment rather than estimate it from the asking rent.

Business-rates revaluations matter

Rateable values are periodically reassessed.

This means an occupier’s rates position can change during a lease term.

Investors should keep up to date with changes to the rating system, particularly when analysing future occupational affordability.

Transitional arrangements can affect bills

Following revaluations, transitional arrangements may sometimes influence how quickly bills change.

The headline rateable value therefore does not always tell you the exact amount currently being paid.

For significant investments, specialist advice can help establish the true position.

Appeals and challenges require professional consideration

Where an owner or occupier believes a rating assessment is incorrect, there are formal processes available.

The VOA operates the Check, Challenge, Appeal system for business rates.

Information is available through GOV.UK – Challenge your business rates valuation.

Investors should be cautious about companies promising guaranteed rates reductions.

Be careful with unsolicited rating agents

Commercial property owners frequently receive approaches from businesses claiming they can dramatically reduce business-rates bills.

Not every approach will necessarily provide good value.

Investors should check credentials, fees and contractual terms carefully.

The Royal Institution of Chartered Surveyors (RICS) can help investors identify appropriately qualified property professionals.

Empty rates can influence refurbishment timing

Suppose a tenant vacates and the landlord plans a major refurbishment.

The investor may need to coordinate:

• Empty-property relief
• Construction programme
• Marketing
• New occupation

Poor timing can increase holding costs.

A six-month delay to refurbishment can mean six additional months before rental income resumes.

Don’t delay marketing unnecessarily

Some landlords wait until every refurbishment item is completed before beginning to market a property.

That may not always be necessary.

Early marketing can potentially identify an occupier while works are underway.

If a new tenant can move in sooner, the investor may reduce:

• Lost rent
• Rates exposure
• Security costs

The appropriate strategy depends on the property.

Pre-letting can reduce void exposure

Where an existing tenant has confirmed it will leave, landlords may sometimes begin marketing before the lease actually expires.

This can create an opportunity to secure the next occupier before vacancy.

The ideal commercial property scenario is often:

Tenant A leaves Friday.

Tenant B takes occupation shortly afterwards.

Long empty periods destroy income.

Lease-event management is therefore important

Landlords should track:

• Break dates
• Lease expiries
• Tenant intentions

well in advance.

If a lease expires in twelve months, the landlord should not necessarily wait until month eleven to ask what the tenant plans to do.

Early conversations create more time to manage potential vacancy.

Dilapidations and rates interact with timing

When a tenant leaves, the landlord may need to complete dilapidations or refurbishment works before the property can be re-let.

Every additional week can increase the cost of vacancy.

Investors should therefore manage:

• Lease expiry
• Repair works
• Marketing

as one coordinated process.

Business rates can influence redevelopment decisions

An investor holding a largely obsolete commercial property may consider redevelopment.

During that process, rating liability can form part of the overall holding-cost analysis.

Demolition, construction and changes to the property can affect the rating position.

Professional advice should be obtained before relying on assumptions about when liability may change.

Don’t undertake artificial schemes purely to avoid rates

There have historically been various arrangements promoted around empty-property rates.

Investors should be cautious.

Commercial decisions should have genuine substance and comply with applicable law.

Specialist legal and rating advice should be obtained before entering unusual arrangements.

Charity occupation requires genuine consideration

Some property owners may encounter proposals involving occupation by charitable organisations.

There are specific business-rates rules concerning charities.

However, arrangements should reflect genuine occupation and legitimate charitable use.

Investors should not assume that simply signing an agreement with a charity automatically removes liability.

Business rates matter when buying vacant property

A vacant commercial building may offer a strong refurbishment or redevelopment opportunity.

But investors should establish the rates position from day one.

Ask:

What becomes payable after completion?

What relief remains available?

When does it expire?

These questions belong in the acquisition cash-flow model.

Ask whether previous relief has already been used

The timing of empty-property relief can depend on the property’s occupation history and applicable rules.

A purchaser should not automatically assume a fresh relief period begins simply because ownership changes.

This can be particularly important when purchasing property that is already vacant.

Professional advice should be obtained for the specific circumstances.

Business rates can influence auction purchases

Commercial auction transactions often complete quickly.

A vacant property purchased at auction can therefore start creating holding costs almost immediately.

Investors should investigate:

• Rates
• Insurance
• Security
• Utilities

before bidding.

The purchase price is only the beginning of the cash requirement.

Multi-let estates require unit-by-unit understanding

A multi-let estate might contain:

• Ten occupied units
• Two vacant units
• One unit under refurbishment

The landlord’s rates exposure can vary across the estate.

Good property management should therefore track the rating position for each relevant unit.

Service charge and business rates are separate

Investors should not confuse service charge with business rates.

Service charges generally relate to the cost of managing and maintaining shared property or services under the leases.

Business rates are a tax.

Both affect occupational costs, but they operate differently.

Rates can influence the ideal unit size

When subdividing commercial property, investors often focus on achievable rent per square foot.

But smaller units may attract different types of businesses and potentially different rates considerations.

A subdivision appraisal should therefore look at:

• Rent
• Construction cost
• Rates
• Demand
• Management intensity

rather than simply assuming smaller units always produce more value.

Local market knowledge matters

A property may have a perfectly reasonable rates position but still struggle because total occupational cost exceeds what local businesses can afford.

Understanding the North Manchester SME market is therefore essential.

Tenants ultimately ask:

“What will this building cost me every month?”

Landlords need to know the answer.

Business rates should appear in investment appraisals

A sensible acquisition model might consider three scenarios:

Scenario 1 – Tenant remains

Normal rental income continues.

Scenario 2 – Short void

Tenant leaves and the building is re-let quickly.

Scenario 3 – Extended void

The property remains vacant for twelve months or longer.

Business rates can become increasingly important as the void period increases.

Citrus Commercial Circle’s market insight

At Citrus Commercial Circle, we believe investors should never calculate vacancy cost as simply:

Annual rent ÷ 12 × months empty.

Vacancy can also involve:

• Business rates
• Insurance
• Security
• Utilities
• Repairs
• Marketing
• Incentives

Understanding these costs before purchasing creates a far more realistic investment appraisal.

Final thoughts

Business rates may normally sit with the occupier, which can make them easy for landlords to ignore while a property is fully let.

But when a tenant leaves, they can quickly become part of the landlord’s financial exposure.

Before purchasing commercial property, investors should understand the rateable value, current liability, potential empty-property relief and the likely cost of an extended void.

At Citrus Commercial Circle, we help landlords and investors across Bury and North Manchester look beyond headline rental income and understand the real costs involved in owning, operating and repositioning commercial property.

Based in Bury. Active across North Manchester. Always on your side.

Call: 0161 383 1806

Email: info@citruscommercialcircle.co.uk

Visit: citruscommercialcircle.co.uk

Citrus Commercial Circle – Where standards meet success.