The Government previously anticipated that new powers granted to local authorities to hold high street rental auctions (as set out in the Levelling Up and Regeneration Act 2023 (the Act)), could be exercised as early as mid-2024 (prior to the announcement of the General Election).
Whilst the framework for the high street rental auction is set out in the Act, much of the detail will be set out in regulations (yet to be published), which can only now follow once the General Election has taken place.
A Government consultation invited views on what the standardised lease arrangements should look like, the costs of the auction process, and how the auction process should run. The consultation response has now been received and will form the basis for the regulations which will govern high street rental auctions.
Recap - what are high street rental auctions?
Local authorities will have discretionary powers to tackle vacancy rates on high streets in England, by requiring landlords to rent out persistently vacant commercial properties to new tenants, such as local businesses or community groups.
Where a town centre or high street has been designated by the local authority for this purpose, and a property has been unoccupied for 12 months within a 24-month period, the local authority will be able to issue an initial notice on a landlord.
This grants a window of 10 weeks (the first "grace period") where the landlord can put in place a new tenancy or licence, but only with the local authority's consent (there is no proviso in the Act that consent must not be unreasonably withheld, however, they must consent where the tenancy or licence is for a term of one year or more and which is for high street use).
If no letting is created with the local authority's consent during the first 8 weeks from the date of the initial notice, the local authority can serve a final letting notice (subject to a landlord right to appeal). This grants a second grace period of 14 weeks, giving the landlord a further opportunity to enter into a tenancy or licence, but only with the local authority's consent.
Before the end of the final letting notice period (and following any right for the landlord to appeal), the local authority can arrange a rental auction, whereby a successful bidder is then identified and an agreement for lease entered into for a short-term tenancy (between one and five years), which will not have security of tenure under the Landlord and Tenant Act 1954.
The costs of the auction process will be covered by both the local authority and successful bidder.
Our previous article Levelling Up and Regeneration Bill - high street rental auctions provides a comprehensive summary of the process of high street rental auctions proposed by the Levelling Up and Regeneration Bill, which has subsequently become law.
What are the current proposed terms of the "standardised agreement for lease"?
If the local authority exercises their powers to arrange a rental auction, bidders will be bidding for a short-term lease of property, and the successful bidder will enter into an agreement for lease with the local authority (although this will take effect and bind the landlord as if it had been the landlord). To streamline the process and reduce costs for all parties involved, use of a 'standardised' form of agreement for lease and lease is proposed.
The current proposed terms of the agreement for lease are:
- the landlord must carry out works to ensure that the property meets a "minimum standard" (the property must be safe (for example, all fire safety requirements must be in place), stable, secure (all doors and windows fully operational), and with any significant occupational risks (such as decay or mould) removed) at their own cost before the property is occupied;
- where these works are not carried out by the landlord, local authorities will have the option to include liquidated damages (£55 per day), subject to their consideration of the landlord's representations;
- the tenant can carry out any fit out works at their own cost without the landlord's consent; and
- a schedule of condition is prepared before the lease is granted.
What are the current proposed terms of the "standardised lease"?
The current terms of the "standardised lease" proposed are set out below. Most of the terms will be fixed, save where they may need to be adapted on a case-by-case basis, and the local authority will ask the landlord for its preferences on the flexible terms of the agreement for lease and lease.
Rent(s): The tenant shall be liable to pay the rent or premium determined through the rental auction, however, there shall be no guide price or reserve price (the intention being so as not to deter bids).
The tenant shall also be liable to pay (it is not yet known if these will be expressed as rents):
- business rates;
- insurance - this may need to be adapted on a case-by-case basis;
- interest on late payments;
- outgoings;
- VAT; and
- landlord's costs.
Service Charge: this will not be a standard provision in the lease. The landlord will need to opt for this provision to be included in the lease. If the landlord opts for a service charge, it will either: (i) reflect the service charge in a superior lease or match an existing regime; or (ii) a landlord will be able to select from a list of services.
Rent deposit: set at three months' rent or £1,000 (whichever is greater) (a guarantor will not be required by the local authority)
Rent free period: the tenant shall have a rent-free period of four weeks for carrying out its fit out works.
Term: the length of the short-term tenancy will be between one to five years (and will not have the benefit of security of tenure under the Landlord and Tenant Act 1954).
Use: the use of the property must be prescribed by the local authority prior to the rental auction (Class E or outside this use class for example, community halls or public houses, permitted under a new permitted development right).
Repair: tenant's repair obligation limited to a schedule of condition.
Alterations: the tenant can undertake certain internal alterations/fit out works without the landlord's consent (erecting internal counters, shelving, and display cases). External or structural alterations subject to the landlord's consent (not to be unreasonably withheld or delayed).
Alienation:
- assignment of the lease permitted with the landlord's consent (not to be unreasonably withheld or delayed); and
- subletting prohibited.
Other tenant covenants:
- to insure - this may need to be adapted on a case-by-case basis;
- not to commit a nuisance;
- to comply with statutory requirements and regulations;
- to yield up; and
- to preserve rights enjoyed by the property.
Landlord covenants:
- for quiet enjoyment; and
- compliance with Minimum Energy Efficiency Standards (there is to be no exemption).
Rent suspension and termination rights in the event of damage.
Rights granted - these may need to be adapted on a case-by-case basis.
Rights reserved.
What landlord safeguards are there?
The Government propose that landlords will have the following safeguards and will be included in this process as follows:
- the landlord will have the opportunity to let the property during the grace periods;
- the landlord can serve a counter notice to the final letting notice on prescribed grounds (including grounds of redevelopment, or the landlord occupying either for business or residential use);
- if the final letting notice is not withdrawn following the landlord's counternotice, the landlord may be able to appeal the final letting notice;
- the landlord can specify preferred tenant characteristics at the start of the sealed-bid process;
- the landlord can feed in information about the property in the auction pack;
- the property will be marketed for five weeks to encourage as many bidders as possible;
- the landlord will have the final choice as to who is the successful bidder (this presupposes that multiple bids are made);
- the local authority will ask the landlord for its preferences on the flexible terms of the agreement for lease and lease; and
- if there are plans for redevelopment, local authorities will be encouraged to work with landlords to put in place a shorter-term lease.
What does this mean for landlords with vacant high street premises?
There is clear concern from landlords, investors, and property agents regarding this process. Whilst the Government acknowledge these, they believe consideration must be given to the fact that properties in scope must have been vacant for a year or cumulatively for more than a year over a two-year period. Landlords will also have grace periods in which to rent the property to a tenant of their choosing during this process, prior to any rental auction being arranged.
Whilst there is a question mark as to whether under resourced and underfunded local authorities will in fact exercise these powers, landlords (and/or developers who have obtained property prior to carrying out a wider development) would be well advised to review their portfolios and concentrate their efforts on trying to let their premises before they are restricted in dealing freely with their properties.
In particular, developers who are assembling property ahead of carrying out a larger development (or, who have acquired property, but are in the process of obtaining planning permission or dealing with development constraints before commencing development) will need to think carefully about letting relevant property for meanwhile use. Otherwise, the risk is that a lease of up to five years is effectively imposed on the landlord.
Landlords should also be aware that there are criminal sanctions (which carry a fine) for those landlords who do not provide requested information without reasonable excuse, or provide false information, or who obstruct a person authorised by the local authority to enter the property in accordance with the provisions of the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.