High street rental auctions – what you need to know

Last year, Part 10 of the Levelling-up and Regeneration Act 2023 passed into law – it allowed local authorities in England to auction tenancies of vacant premises in designated high streets or town centres without landlord consent. However, it was clear that specific regulations setting out the finer details of the auction process were needed. Those regulations (here and here) have now landed and come into force on 2 December 2024.

With little public consultation on the specifics of these regulations and only three weeks between them being laid before parliament and coming into force, landlords don’t have much time to get to grips with the implications.

 

What is the purpose of the high street rental auctions?

The government has introduced high street rental auctions to help local authorities increase the occupation of high street properties and improve local economies. Whether this process will be used by already overburdened local authorities and what its effect will be remains to be seen.

 

Which premises are affected?

The new regime will apply to commercial premises in England (other than premises last used as a warehouse, which are specifically exempt) which satisfy the following criteria:

• Designation: within an area the local authority has designated as being a high street or town centre;
• Vacant: unoccupied for the whole of the last year or for at least 366 days in the last two years;
• Suitability: suitable for ‘high street use’; and
• Change beneficial: considered by the local authority to benefit the local economy, society or environment if occupied for ‘high street use’.

The government has stated that the target areas are those in economic decline with high vacancy rates and landlords not actively taking steps to rent the property. On that basis, we don’t expect the high street rental auction process to be used for all vacant properties which meet the conditions above, particularly where landlords are proactive in seeking new occupants.

 

Overview of new regulations

The regulations, which come into force on 2 December 2024, include:

• A week-by-week timetable for the auction process which covers (among other things) giving notice to the landlord of the intended auction, producing the auction pack, marketing the property and concluding the auction – the timetable is tight with criminal offences applied to certain acts of landlord non-compliance.
• Amendments to the planning legislation to allow a change of use of qualifying high street premises for the duration of the tenancy – the local authority are not constrained by the existing planning use for the premises but must specify the suitable ‘high street use’ they intend to apply to the premises in the notices served; the permitted use will revert to the original use at the end of the tenancy.
• Provision for the local authority to charge the successful bidder certain costs associated with the process, such as legal and surveyors’ fees and the costs of preparing the tenancy documents – it’s expected that tenants will factor these costs into their bids.
• The prescribed forms of the various notices, the agreement for lease and tenancy terms that will be offered to the tenant. The agreement for lease specifies the minimum standard of repair for the property and an obligation on the landlord to carry out any works that are needed to reach the minimum standard – if the landlord doesn’t carry them out, the tenant may do so and then deduct the costs from the rent payable.

 

What pre-auction steps must be taken by the local authority?

The local authority must serve an initial notice on the landlord – for these purposes, the ‘landlord’ is the person entitled to possession of the premises who is able to grant a tenancy of at least one year. The local authority must also use reasonable endeavours to determine whether there is a superior landlord or mortgagee and serve an initial notice (and final notice) on them.

The landlord has at least eight weeks in which to let the premises (with the local authority’s consent needed for the letting save for a few exceptions).

If the landlord grants a lease or licence to occupy without local authority consent, that arrangement will be void, but it remains to be seen how this would work in the context of existing property law.

If the landlord doesn’t 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 will the rental auction work?

The auction period lasts for twelve weeks and service of a final letting notice starts the process. There is a procedure for the landlord to appeal the service of a final notice on specified grounds. The requirements of the first ten weeks are detailed in the regulations.

Of note, before the end of the third week, the landlord may be required to give the following information:

• full and accurate responses to general pre-contract enquiries for commercial property transactions, including any supplemental pre-contract enquiries relevant to commercial property on the grant of a tenancy;
• proof of the landlord’s title to the premises; and
• if available, current copies of the electrical installation testing certificate, the energy performance certificate, the water safety certificate, the gas safety certificate, the fire safety certificate, the test certificate for any relevant mechanical, electrical or life safety systems, the fire risk assessment and asbestos survey (with asbestos management plan, where relevant).

During this period, the landlord may also make representations regarding the proposed agreement for lease and tenancy terms.

The marketing period is between the 5th and 10th weeks and this is when bids will be received.   

The same restrictions on landlords granting their own leases, licences, etc. apply during the final notice period. In addition, the landlord mustn’t carry out any works to the premises during this period without the local authority’s consent, although there are a few narrow exceptions to this.

 

What consequences are there for landlord non-compliance?

If a landlord fails to comply with the obligation to provide information (either not supplying it or giving false information) or carries out works to the premises in contravention of the prohibition on such, it’s a criminal offence and the landlord will be liable to a fine.

If the landlord doesn’t choose a winning bid or won’t enter into the agreement for lease or lease, the local authority has the power to do so on behalf of the landlord.

 

Are successor landlords bound?

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 such notices. Any lease arising from the auction process will bind a purchaser in the usual way but further consideration will need to be given to any landlord’s works imposed.

 

What about superior landlords or mortgagees?

Both the agreement for lease and lease are deemed to have the express consent of any superior landlord or lender. This may cause issues, particularly where the income potential for the premises is decreased. Future loan agreements may address the potential future risk of high street premises becoming vacant and susceptible to the auction process and superior landlords may seek break rights and additional notification requirements.

 

Will the tenancy have security of tenure?

No – the term of the tenancy, which must be between one and five years, will be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 so the tenant won’t have a statutory right to renew the lease at the end of the term.

 

What if a property doesn’t meet the Minimum Energy Efficiency Standards (MEES)?

Although initially mooted as a possibility in consultation, no exemption from the MEES regulations is provided for within the rental auction process. Currently, it’s unlawful for a landlord to let premises which have an Energy Performance Certificate of below an E rating (and it’s proposed that this minimum rating will be raised to C and, ultimately, B). If the EPC rating doesn’t meet the required minimum rating, the landlord will be required to comply with the MEES regulations and potentially either carry out energy efficiency improvement works or register an exemption (if applicable). The rental auction process takes the decision on whether to let a sub-standard property away from the landlord.

 

So what next?

We expect further government guidance on the operation of the regime but, in the meantime, the government has invited stakeholders to a ‘showcase’ event in Wolverhampton on 21 November 2024, where the powers will be explained in greater detail and early adopter local authorities will be announced. These early adopter local authorities will champion high street rental auctions by, according to the press statement, immediately taking action and working with the government to provide strategic guidance and best practice advice to other councils.  

Industry voices have previously raised doubts about the new regime having the desired effect. It’s unclear to what extent local authorities will have the appetite, capacity and/or the budget to action the auction process, despite the GBP1 million in funding the government has pledged. The procedure involves cost and tight time limits at every stage. There the number of willing potential tenants in the target areas is also a concern. Although, with high business rates being highlighted as one of the biggest obstacles to letting properties, it will be interesting to see if the proposed reforms to business rates set out in the government’s recent discussion paper together with further measures promised to be revealed in 2025 to support small and medium-sized enterprises could change the high street landscape.

If you need further advice or information on high street rental auctions, please contact one of our partners.