The Levelling Up and Regeneration Act 2023 will give local authorities new powers to hold rental auctions of empty high street properties if landlords do not find tenants for themselves. The relevant parts of the legislation are not yet in force, but if you are a landlord of urban retail, office or hospitality premises which are either vacant or at risk of becoming vacant, you should talk to your solicitor now, to assess the risk of your property being subject to a compulsory rental auction and understand what the process would mean.
‘We frequently see headlines about struggling high streets lined with empty shop units,’ says Simon Walker, head of the commercial property team with Talbot Walker LLP. ‘Successive governments have tried to find ways to solve the problem and high street rental auctions are the latest idea.’
Under the new rules, a local authority can effectively take over the letting process of a qualifying property by inviting bids from potential tenants and granting a lease of up to five years to the highest bidder. If you are a commercial landlord this could be helpful, but it could also feel like unwelcome interference with control of your property. Some details are still to be set out in the regulations, but we already know broadly what to expect.
Designated high streets and town centres
If a local authority wants to use rental auction powers, they must first make the relevant area a ‘designated high street’ or ‘designated town centre’. This is possible where the local authority believes the street or area is important to the local economy because it has a concentration of high street uses, which means:
- shops or offices;
- premises where services are provided to members of the public (for example beauty salons or walk-in advice bureaus);
- restaurants, bars, pubs, cafés, and takeaways;
- premises for public entertainment or recreation; and
- communal halls or meeting places.
Residential housing, heavy industry and warehousing do not count as high street uses, although the legislation says that industry and manufacturing can be included in the area if they can reasonably be carried on close to other high street uses. It is not exactly clear what this means, but it presumably includes light industry that does not create noise or hazardous waste.
Eligible properties
The local authority will be able to use the rental auction powers on a particular property if it would be suitable for a high street use, is currently vacant, and has been vacant for the whole of the preceding 12 months or for at least 366 days during the preceding 24 months. This can include periods before the relevant rules come into force, which means that if your property is currently vacant or is likely to become vacant, you could find yourself involved with a rental auction process in the future.
The process
If the local authority targets your empty property for rental auction, they must serve an initial notice on you. If you want to avoid a rental auction, you have eight weeks in which to find an occupier who will use the property for a high street use for a period of at least a year.
You do not have to enter into a formal tenancy; a less formal licence arrangement will be good enough, but there are risks in granting licences for more than six months so you should discuss this with your solicitor. You do need the local authority’s consent, but they cannot refuse if the arrangement meets the one-year high street use requirement and will start within eight weeks of their initial notice.
If you have not found an occupier by the end of the initial eight-week period, the local authority can serve a final letting notice, which triggers another period of 14 weeks before a rental auction can take place. There are some limited grounds on which you may be able to appeal. Probably the most important one is if you plan to carry out significant construction or demolition work on the property, which you could not do if it was occupied. There are provisions for the 14-week period to be extended if you appeal and our solicitors will be able to give you detailed advice on this.
If the final notice period and any extensions expire without a successful appeal or the property being occupied for a high street use, the local authority can hold a rental auction. Details of how this will work will be set out in statutory regulations which have not yet been published. The intention is that the local authority will be able to broker a lease of between one and five years between you and the highest rental bidder. If you do not grant the lease when you are required to, the local authority can grant it but it will take effect as if you had granted it, so you will still be the landlord.
Loss of control
The key issue for you as landlord if you are faced with a rental auction process is loss of control over who your tenant is and the terms on which your property is let. It is still not clear whether regulations will set out standardised terms for leases granted following rental auctions and how much influence you as landlord could have.
The whole regime is based on the idea that high street properties are empty because landlords are not being sufficiently pro-active in looking for tenants or not being flexible in who they will let to and on what terms. In reality, few commercial landlords will deliberately keep property empty unless there is a good commercial reason to do so. The real question at this stage is how many local authorities will want to use these new powers? And, if they do, whether they will be more successful than experienced commercial landlords at finding a suitable high street tenant.
How we can help.
We still do not know all the detail on how rental auctions will work and when the legislation will come into force. If you think your property could be affected, our expert lawyers will be able to explain the current position and keep you up to date with practical advice as more detail emerges. For further information, please contact Simon Walker in the commercial property team on 01264 721 705 or email simonw@talbotwalker.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.