Vacant premises to be let by compulsory rental auctions: What you need to know

Last year, the Government published the draft Levelling Up and Regeneration Bill 2022. On 31 March 2023, it published a consultation seeking views on how the high street rental auctions will work in practice. You can access the consultation here; it is open until 23:45 on 23 June 2023. We have updated our article on the draft Bill to take account of new information from this consultation. The updated article is below.

 

What does the new Bill seek to achieve?

As well as bringing in wide ranging planning reforms, the Bill requires commercial landlords to let vacant high street properties under a new compulsory high street rental auction process. The draft legislation is only a starting point: it has yet to pass through Parliament, and further regulations and guidance must be published so that the industry can understand the mechanics of the Bill, which is fairly light on detail. However, these changes are unprecedented and it is important for commercial landlords be aware of the potential impact.

 

Which premises would be affected?

In theory, any premises on a street or in an area with a high concentration of “high-street uses” (such as shops, offices, restaurants, pubs and others), so long as (a) it has been vacant for 12 out of the previous 24 months (not necessarily consecutively) and (b) the occupation of the premises for a suitable high street use would be beneficial to the local economy.

Occupation requires the "regular presence of people at the premises" – but further guidance will be welcome on the precise meaning of occupation. For example, on a first reading of the draft Bill, it was not clear if a property would count as unoccupied where it was vacant pending redevelopment. However, the consultation recognises that there are many good reasons for a property being vacant, including plans for redevelopment. In such scenarios, the Government encourages local authorities to work with landlords on possible alternatives such as meanwhile use or a shorter-term lease.

The Government notes several times in the consultation that it does not intend to use the high street rental auction process for all vacant properties which meet the conditions above, particularly where landlords are proactive in seeking new occupants. It is more likely to be used for properties in areas with high vacancy rates, and where landlord cooperation is low - we would welcome reference to this in future guidance.

 

How will the Government require landlords to let qualifying high street premises?

The local authority may serve an initial notice, giving the landlord a 10 week period in which to let the premises – although the landlord will need the local authority's consent before it can actually grant (or agree to grant) a lease or licence to occupy. It is worth noting the following points in relation to the requirement to obtain local authority consent:

• No consent is required for the grant of a lease further to a contract that bound the landlord before the initial notice took effect (such as an agreement for lease which was entered into before the notice was served), but there is no equivalent exception for an agreement to grant a licence to occupy (which landlords may sometimes agree to do under the terms of a share purchase agreement).
• The local authority must give consent to a lease or licence which is for one year or more (without any landlord break right in the first year), commences within 8 weeks of the initial notice taking effect and would be likely to lead to the regular presence of people at the premises.
• If the landlord grants a lease or licence to occupy without local authority consent, the Bill states that the arrangement will be void. It is unclear how this would work in the context of existing property law.
• Notices are binding on a purchaser, so buyers of potentially affected premises should, once the legislation is in force, ask the seller whether it has received any notices under the Bill.

If the landlord is unable to let the property within the initial notice period, the local authority may serve a final notice on the landlord, which starts the rental auction procedure.

 

How would a rental auction work?

The final notice starts a 14 week window during which the local authority is entitled to run a rental auction to try to find a tenant for the premises. The landlord cannot grant or agree to grant a lease or licence during this period without the local authority's consent. There is a process for the landlord to appeal the service of a final notice.

The consultation proposes a “sealed-bid” auction process, whereby all bidders submit their highest bid, a report on how they would use the property and relevant supporting evidence (such as evidence of covenant strength). This information would be sent to the landlord, who would then select their preferred bidder. This gives the landlord an element of control and flexibility rather than with a traditional auction where the highest bidder automatically wins. With sealed bids, a landlord would be free to consider other important factors such as covenant strength, business experience or tenant mix.

A few other points to note on how the auction process would work:

• If a landlord does not engage in the process, the local authority will be required to select the highest bidder regardless of other considerations.
• There is still no information on what would happen if there is only one bidder. However, the consultation does seek views on whether (and how) a reserve price (essentially a minimum rental bid) should be set, which would give some landlord protection in a single-bid situation.
• The local authority would be responsible for running the rental auction (either in house or outsourced). The consultation considers who should bear the local authority’s costs (such as preparation of the auction pack, surveys, marketing, searches and legal advice). The landlord and any bidders would bear their own costs in relation to the auction.

 

How is the tenancy granted to the successful bidder?

In a departure from established property law, the Bill provides that the local authority has the capacity to enter into an agreement for lease with the successful bidder on the landlord’s behalf, if the landlord does not do so. This is not something that we have seen before in English property law but appears to confer statutory rights for a local authority to act in the name of the landlord, akin perhaps to those rights granted to certain insolvency professionals.

The lease is deemed to be granted with the consent of any mortgagee or superior landlord. It must logically follow that the landlord will be protected from any breach of covenant claims from its superior landlord or mortgagee but we await further clarity on this. It is unclear what would happen if the preferred bidder delays or refuses to complete the lease, so we would welcome more information (such as whether a landlord would then be able to sign up a willing tenant of its own choosing, on its own terms).

 

What will be the terms of the agreement for lease and lease?

The terms of the agreement for lease and lease can be decided by the local authority (having regard to any representations made by the landlord): the Bill sets out certain key terms to be included, with further detail to follow in regulations. From the wording of the consultation, we expect the regulations to include a “framework” of terms, rather than an actual form of draft lease; it is therefore likely that the landlord’s solicitors would need to produce a draft lease, at the landlord’s cost (or the local authority’s solicitors, in the case of a non-cooperative landlord).

All leases will be contracted out of the Landlord and Tenant Act 1954, but it is not clear whether the usual notice and declaration procedure would have to be followed. The contractual term of the lease will be between 1 and 5 years, depending on the length of the landlord's own interest. The consultation notes that as well as these “fixed” terms, there will be some “flexible” terms for example, around any service charge regime. The proposal in the consultation is not to include any service charge provisions, so landlords with particular service charge requirements should consider responding to this question in the consultation.

The consultation proposes that there would be no guarantor, but there would be a rental deposit of the higher of three months’ rent or GBP1,000.

 

What else have we learned from the March 2023 consultation?

The consultation refers to some new aspects of the policy which are not included in the draft Bill. For example:

• Physical state and condition: the local authority may be entitled to impose a “minimum property standard”, to account for the fact that many properties to which the rental auction process would apply could be in a dilapidated state. The landlord would bear the cost of bringing the property up to this minimum standard. These requirements would be largely safety-focused, for example the property must be free of significant leaks, mould or decay, doors and windows must be capable of safe operation, toilet and hand washing facilities should be provided. There are some specific carve-outs in the consultation, such as heating/cooling/lighting systems. Of interest to both landlords and tenants is the proposal that if the landlord failed to carry out and complete these works, the tenant may be given step-in rights (in the agreement for lease) to complete the works and set off the costs against its rent or seek a court order against the landlord.
• Properties requiring significant repair: premises affected by very significant issues such as combustible cladding or serious damp are likely to be outside the scope of the rental auctions process on the basis that any works to bring them up to the required standard would be prohibitively expensive.
• Minimum energy efficiency standards (MEES): again, due to the possibility that many buildings in scope of the rental auction process may be dilapidated and of a low energy efficiency standard, the consultation proposes that the MEES regulations be disapplied (although an EPC would still be required prior to auction so that bidders are aware of what they would be bidding for).
• New permitted development right: most properties falling within scope would be within class E for planning use purposes. However, where a suitable alternative use is proposed by a bidder (such as a community hall or a pub) the consultation proposes a new permitted development right to allow the change of use without a planning application.

 

Conclusion

The Bill has already proven controversial, with a chorus of industry voices expressing scepticism about whether these new proposals will have the desired effect. They highlight, in particular, that few landlords like to see their properties sitting empty and that the biggest obstacle to letting properties is high business rates, which landlords are required to pay on unlet premises. For local authorities, running rental auctions and deciding terms of commercial leases puts additional pressure on already-stretched resources. The Bill will potentially introduce some of the biggest changes to the commercial landlord and tenant landscape we have seen for some time. If you need further advice or information on the proposed changes, please contact one of our partners.