Revitalising high street retail? High street rental auctions

Local authorities will be able to use “High Street Rental Auctions” as a tool to address persistently vacant premises on the high street. Under this legislation, the local authority is given the power to auction a lease of vacant premises, which meet the criteria set out in the legislation and impose penalties on landlords who fail to comply. Under this scheme, the government is also making funding available to local authorities by way of the “New Burdens Payment”, to cover the cost of implementing these rental auctions. 

Landlords will be concerned about having a letting imposed on them, where they deem the terms to be unreasonable and potentially facing a large bill for the cost of works to be carried out to bring the premises up to the standard required under the legislation. 

Before instigating the process, however, local authorities are encouraged to engage with landlords to explore alternative options for bringing empty properties back into occupation and landlords would be well advised to work with local authorities to agree alternative options, which may avoid the need for a High Street Rental Auction. 

There is also a strict process which must be followed before the High Street Rental Auction can be taken forward.

This article sets out some of the key features of the new regime.

Contents

Designation

To qualify for the process, the premises must be situated in an area designated by the local authority as an area where a High Street Rental Auction can be used. To be designated, the area must be one which the local authority considers is important to the local economy and suitable for "high street use." The designation includes a 28-day minimum community engagement period. The designation will be a local land charge and will therefore be revealed by a local search. 

The conditions

Once it has been established that the premises are in a designated area, the local authority must also be satisfied that the premises fulfil both the vacancy condition and local benefit condition:

• The vacancy condition requires that the premises have been continuously unoccupied for 12 months, or for at least 366 days (non-continuously) within a 24-month period.
• The local benefit condition is satisfied where the local authority considers that its occupation for a high street use would benefit the local area.

The process

There is a strict procedure set out in the legislation to follow once the local authority is satisfied as to the above, with timeframes for compliance, before moving onto the next step. 

The government has produced a useful flowchart within the guidance which sets out the timeline for the process. 

Notices

The process starts with the service by the local authority of an initial notice on the landlord, following which the landlord has an 8 week period to let the premises themselves, with the consent of the local authority. Consent must be granted if certain conditions are met. Any lettings completed without the local authority’s consent will be void. The landlord is permitted to sell the premises during the 8 week period, however, any incoming landlord will be bound by the initial notice, which will be registered as a local land charge.

If the landlord fails to let its premises within the 8 week period, the local authority can serve a final notice on the landlord. Whilst the final notice is in force, there are restrictions on letting the premises without the local authority’s consent, which will be at the discretion of the local authority. As with the initial notice period, the landlord is permitted to sell the premises during the final notice period, however, any incoming landlord will be bound by the final notice, which will be registered as a local land charge.

There are also restrictions on the landlord carrying out works to the premises (subject to some exceptions) without the consent of the local authority, following a final notice and a breach of this provision is a criminal offence.

The landlord has 14 days to respond to the final notice and can contest it on the basis of one of the grounds prescribed in the legislation. If the local authority disputes the grounds on which the landlord has contested the notice, the landlord may lodge an appeal based on the same grounds.

The auction

Once any appeal has been exhausted, the local authority can begin the auction process. Following service of its notice of intention, it has a 12 week period in which to auction the premises and exchange the tenancy contract (agreement for lease).

Early on in the auction period, the local authority must carry out a survey of the premises to establish if there are any works which the landlord will need to carry out in order for the premises to achieve the “Minimum Standard.” “Minimum Standard” means a condition which is safe and secure and that any significant occupational risks such as water ingress, fire safety or energy supplies are removed or managed.

The local authority will prepare the draft agreement for lease, attaching the form of lease. There are standard forms of lease to be used by the local authority, which are appended to the guidance with forms for retail premises, pubs or a unit in a shopping centre. The local authority will provide the draft documents to the landlord, after which time the landlord may make representations in respect of certain matters including the term and service charge provisions. The local authority must take the landlord’s representations into account when finalising the documentation. The rent will be left blank until the conclusion of the auction process.

The landlord is obliged to provide full and accurate replies to enquiries along with proof of its title to the premises. The legislation provides that any agreement or lease granted as part of the process shall be deemed to have been granted with the consent of any superior lessee or mortgagee and so no consent from these parties will be required. It is not clear from the guidance how any other third party consents will be dealt with.

The landlord must also provide various other certificates in respect of the premises such as electrical installation or water safety certificates, as well as any EPC.

If a landlord fails to comply with these obligations it is committing an offence.

The local authority will prepare the auction pack then market the premises in accordance with mandatory marketing requirements. The local authority must notify the landlord of any bids received from prospective tenants and the landlord can make the decision to accept any of the valid bids although the timescales for doing so could be quite short. If they do not, the local authority should accept the bid with the highest rental value or otherwise the highest rental value with whom it is reasonably practicable to enter into a contract and may decide not to accept any bid.

Once a bid is accepted, the local authority must enter into the agreement for lease before the end of week 12 of the auction period and can do so as though it were the landlord, acting for and on behalf of the landlord. 

After the auction

Under the agreement for lease, the landlord will be required to carry out any works to bring the premises up to the Minimum Standard and will be responsible for the costs of doing so. There may be “step in” rights for a tenant should the landlord fail to carry out these works, with liquidated damages payable for any delay. If the premises have an EPC rating below E, in order to comply with the Minimum Energy Efficiency Standards, the landlord may also need to carry out energy efficiency improvement works to avoid a breach of MEES Regulations.

The main terms of the lease are prescribed by the legislation and include the following:

• The term shall be not less than one year or more than 5 years.
• The tenancy shall be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954.
• The permitted use will be the use prescribed by the local authority ahead of the auction.

Following completion of the landlord’s works the lease should be completed within 10 working days. A local authority may complete the lease in the landlord’s name if the landlord fails to do so in the requisite time.

Following the grant of the lease, the local authority’s involvement will come to an end. The landlord and tenant must comply with their respective obligations in the legal documents and the usual legal remedies will apply for any breach of those obligations. 

Whilst most will appreciate the laudable aims of the legislation, landlords may be concerned about this seemingly rather draconian power and how the regime will be implemented in practice. The guidance does not provide much further information around the practical implications of the legislation, including what happens if the highest rental bid is insufficient to meet the landlord’s costs of running the premises and how the landlord (whose premises have produced no income in the last 12 to 24 months) will fund any works required to meet the Minimum Standard. Landlords with vacant premises in their portfolios should ensure they are aware of any proposals to designate areas in which their premises are situated, as suitable for High Street Rental Auctions. Engagement with local authorities to ascertain the extent of any designation might be a sensible first step and if it is likely to apply we recommend seeking legal advice.

It remains to be seen to what extent local authorities will use this as a tool to rejuvenate their communities. We will be interested to see whether potential tenants will have any appetite to bid for premises in areas where designation has occurred and to enter into long relationships with landlords where the landlord has had no input in selecting the tenant.