Compulsory Rental Auctions for High Street Properties set to go ahead under the Levelling Up and Regeneration Bill 2022, says Joshua Aylott, Graduate Surevyor at SHW. He explains:
Initially put before the House of Commons on 11th May where it received widespread industry criticism, a bill which could give local authorities the power to auction off vacant High Street properties on leases between 1 and 5 years is now at the committee stage and looking increasingly likely to pass.
At a glance
- Local authorities will have the power to let vacant high street properties by way of a compulsory rental auction
- Local authorities designate areas as a high street if it considers the street to be important to the local economy due to a concentration of high street uses
- To be eligible, a property must be vacant for ‘the whole period of one year… or during the period of two years where the premises were unoccupied on ‘at least 366 days’
- The local authority will serve an initial notice, followed by a final letting notice
- Landlords can appeal against the final letting notice to the county court within a period of 28 days
- A tenancy granted under this bill will not be granted security of tenure
Full details can be found here on page 170-184: Part 8 of the Levelling-Up and Regeneration Bill.
The process will begin with the local authority serving an ‘initial notice’ on a landlord. The initial notice is effective for a period of 10 weeks, during which time the landlord is prohibited from letting the property without local authority consent. If the property is not let during the initial notice period, a ‘final notice’ is served any time after 8 weeks following service of the initial notice (but before the 10-week expiry date). The final notice remains in place for an additional 14 weeks. While a final notice is in force, the landlord may not carry out any works to the premises without the written consent of the local authority that served the notice.
The proposed disposal method by local authorities is a rental auction. This is described in the legislation as ‘a process for finding persons who would be willing to take a tenancy of the premises further to a contract’. It is not yet clear how the ‘successful bidder’ is identified as this is to be governed by different regulations. However, given the intention of this legislation to let the premises, it can be assumed the local authority will accept a bid below the open market rental value or passing rent of an existing lease.
The contract will commence as if it has been entered into by the landlord, although the landlord will not be involved in any negotiation or signing, with the local authority acting “in its own name, but with an indication that it is acting so as to bind the landlord rather than itself”. The contract will set out all lease terms, including any initial works from the landlord or tenant. This could mean landlords are forced to conduct works they do not want to do, to facilitate tenant’s they do not want in occupation, at a rent that may not be reflective of the current market. This is particularly prominent with the changes to minimum EPC requirements, whereby possible landlord capital expenditure may be required to get a compliant EPC. It should be noted that all leases must be excluded from statutory security of tenure under the Landlord and Tenant Act 1954, giving some relief to the landlord.
Because of the interference of freedom of contract, this proposed legislation presents a number of dilemmas for landlords. For example, certain charities may not wish to enter into a contract with certain occupiers for ethical or reputational purposes – this legislation will remove the charities’ choice to enter into a contract with certain occupiers, potentially damaging their reputation. In addition, this legislation could throw a major spanner in the works for landlords who seek to gain vacant possession for whole buildings over a period of time perhaps for redevelopment. Some criticisms also suggest that it could further deprive the high street by leading to under-investment as investors would not want to have capital tied-up in properties that could be subject to such extreme local authority powers. Therefore, it could lead to the exact opposite effective that it intends to have. Finally, there is the question of how well-resourced local authorities are in terms of staffing to implement these powers in the timeframes outlined above.
On the other hand, the proposed legislation offers some lucrative opportunities to pioneering tenants who are confident in their offering to agree low rent premises and transform deprived high street locations. However, this acquisition technique wouldn’t work for the majority of strong covenant tenants looking for a presence in prime retail pitches because, although they may be able to achieve below market rents, they still need to expend capital on fit out and rates and may not break even if the high street is particularly deprived and not getting enough footfall. Nonetheless, some brave occupiers may seek to acquire premises using this method, and if successful, could act as anchor tenants bringing increased footfall and ultimately meeting the objective of this new legislation.