Levelling Up and Regeneration Bill - high street rental auctions

10 August 2023

Going once. Going twice. Going too far?

The Levelling Up and Regeneration Bill (the Bill) is passing through Parliament and moved to report stage in the House of Lords on 11 July 2023. The Bill is wide-ranging in its scope, and includes provisions relating to matters such as transparency of interests in land and a new Infrastructure Levy. Other articles in our series on the Bill will focus on these aspects, but here we will consider Part 10 of the Bill which sets out provisions relating to letting of vacant high street commercial premises.

What are high street rental auctions?

In pursuit of its aim to revitalise town centres and high streets, the Government has introduced, at Part 10 of the Levelling-up and Regeneration Bill (the Bill), the new concept of compulsory rental auctions. If enacted, this regime will apply to commercial premises (save for warehouses) which satisfy the following criteria:

  • located in an area designated by the local authority as a high street or town centre (being areas with high concentrations of “high street uses”);
  • vacant for more than 12 of the previous 24 months (not necessarily consecutively);
  • considered by the local authority to be suitable for “high street” use; and
  • considered by the local authority to be beneficial to the local economy, society or environment if occupied for high street use.

Where these conditions are satisfied, local authorities will be afforded unprecedented powers which would allow them to compel landlords to let their premises, on terms, or to tenants, which they may not have agreed to in the ordinary course of events.

How are they intended to work? Step one: the initial letting notice

Should the local authority want to exercise these new powers, it must first serve an “initial letting notice” on the landlord of the premises. The landlord is the person entitled to possession of the premises and who can grant a tenancy of the premises of one year or more.

Once an initial letting notice is in force, it will remain in force for a period of 10 weeks or until such time as a “final letting notice” takes effect (see below). During this period, the landlord can no longer deal freely with the premises and unless it has the local authority’s written consent, the landlord is prohibited from:

  1. granting (or agreeing to grant) a tenancy or licence to occupy the premises; or
  2. entering into any other agreement which would result in another person becoming entitled to possess or occupy the premises.

The only instances where the local authority will be obliged to grant consent are where the lease or licence is to be granted for a term of one year or more, commencing within eight weeks of the initial letting notice and which is likely to lead to the occupation of the premises for high street use.

There is nothing currently in the Bill preventing the local authority from unreasonably withholding consent. In terms of delaying consent, the local authority is obliged to respond “within a reasonable time”, though this is not defined and will likely differ between authorities in practice.

Where a landlord grants a lease or licence without consent, the arrangement will be void (save where the initial letting notice expires without a final letting notice having been served and the parties have conducted themselves towards each other on the basis that the arrangement had remained valid).  

How are they intended to work? Step two: the final letting notice

Where at least eight weeks have elapsed under the initial notice period, the 10-week initial letting notice has not yet expired and no letting has been created with local authority consent, the local authority may serve a “final letting notice” (subject to a landlord right to appeal). Once a final letting notice is in force, it will remain in force for 14 weeks. During this period, again, the landlord cannot let or licence the premises without consent and the restrictions are broadly the same as pursuant to an initial letting notice, except that there are no longer any circumstances in which the local authority is obliged to consent.

During this period, the landlord will also be prohibited from carrying out works without the local authority’s reasonable consent. If works are carried out without consent and without reasonable excuse, this will be a criminal offence and the landlord will be liable on summary conviction to a fine. However, no consent will be required where works are urgently needed for repair or preservation or are necessary to satisfy pre-existing obligations.

When is it intended that a rental auction will occur?

Prior to the expiry of the 14-week final letting notice period, if no letting or licence has been created with local authority consent, the local authority can arrange a “rental auction”. The details of this process are yet to be finalised and will be addressed in secondary legislation, though the Bill describes it as “a process for finding persons willing to take a tenancy [...] and ascertaining the consideration that they would be willing to give”.

A successful bidder will be identified and an agreement for lease will be entered into in respect of a short-term tenancy of between one and five years. In a departure from established property law principles, the Bill currently envisages that the local authority will be the party with whom the tenant contracts, though this will take effect and bind the landlord as if it had been the landlord.

The tenancy itself will be without statutory security of tenure and for wholly or mainly high street use. Other terms of the tenancy will be prescribed by secondary legislation, though such legislation must have regard to the terms on which short-term tenancies are typically granted on a commercial basis. The landlord is entitled to make representations as to the proposed terms, though the local authority will be under no obligation to follow these.

Where mortgagee or superior landlord consent is required to such a letting, tenancies created pursuant to this process will be deemed to have been done so with the express consent of the relevant party.

What would be the practical consequences for stakeholders?

The proposals signify a dramatic shift away from established property principles and would allow a local authority with no legal interest in a property to effectively control how those premises are used.

If enacted, local authorities will be granted a great deal of power and discretion. Authorities would be able to influence the composition of their local areas at each stage of the process:  from designating certain locations as high streets or town centres and identifying which vacant premises they consider suitable for high street use, right through to deciding in certain instances which tenants will occupy those premises and, where they consider it reasonable to do so, preventing the landlord from carrying out works to those premises.

However, the proposals do not yet require local authorities to consider practical matters such as tenant mix, nor do they differentiate between landlords who are actively seeking tenants and those who are not. Rather than idle landlords or high rents, it has long been suggested that the more pertinent reasons for high street vacancies are a fall in demand for such premises and the deterrent effect of business rates. In assuming there is a constant pool of tenants ready to take on these premises, these are considerations which the Bill does not seek to address.

For landlords, the Bill introduces the unappealing prospect of being forced to contract with a tenant they would not necessarily have chosen, and at a rent and on terms they did not agree. Several commentators have suggested this may create acrimony from the beginning, which seems contrary to the general desire to move towards a more collaborative landlord and tenant concept (something which was widely encouraged during the covid-19 pandemic).

To avoid being subject to this regime, it is possible that landlords might choose to disrupt any periods of vacancy with short-term lettings, intended solely to avoid being caught by the Bill. While on the face of it, this might reduce vacancies, such lettings with tenants who may not be particularly desirable long-term tenants for either the landlord or the local area are unlikely to help achieve the aim of revitalising the high street. Similarly, landlords may be incentivised to repurpose commercial premises for residential use to escape the reach of the Bill – another unintended consequence which could accelerate the high street decline.

The regime also does little to charm investors and lenders, particularly where carefully negotiated protections in the form of disposal consent requirements can be overridden with no obligation on the local authority to notify such parties of this occurrence. This arguably undermines the whole concept of encouraging investment in our high streets and raises questions as to whether lenders would seek to include early triggers into facility agreements (if ever a premises looked susceptible to interference under the regime) or whether borrowers under existing facilities could find themselves in breach of the ongoing property covenants should a letting be enforced by a local authority.   

Doubt has also been expressed as to the ability of already under-resourced local authorities to handle the additional administrative burden this would bring. Given the period from the initial letting notice to completion of the auction process can be almost six months, any delays in receiving letting consents could act counterproductively to the aim of achieving a revitalised high street and could even result in premises remaining vacant for longer than if the regime had never applied to the property.

Have there been any recent developments?

On 31 March 2023, the Government published a consultation seeking views on how the high street rental auctions should work in practice.

While the provisions of the Bill remain as reported above, the consultation attempts to strike a more comforting tone for those alarmed by the initial provisions of the Bill.  It includes comments indicating that they do not expect the regime to target proactive landlords, with the main focus being uncooperative landlords who are not actively seeking tenants.

The consultation proposes a sealed-bids approach to rental auctions where bidders submit their sealed bid, setting out their proposed rent and a brief overview of how they intend to use the property. They will also be encouraged to provide relevant supporting evidence as to covenant strength. The landlord will then have sole direction over choosing the successful bidder. Coupled with proposals requiring a rent deposit from the tenant equal to either three months’ rent or £1,000 (whichever is the greater), these are positive developments which will provide landlords with at least some comfort that they will retain more control in the process, though the fact remains that the landlord is still only able to choose from a specified pool of bidders, regardless of whether they would actively want them as a tenant. Where a landlord does not engage in the process, the local authority will select the highest bidder.  

The consultation closed on 23 June 2023 and it remains to be seen how these proposals will impact the final form of the Bill and any secondary legislation.

The Bill has yet to be scheduled for report stage in the House of Lords after its first and second readings, though given that the House broke for summer recess on 21 July 2023, followers of the Bill will  need to wait a little longer for further meaningful update.  

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