UK government commits to controversial high street rental auctions of vacant premises

The draft Levelling-up and Regeneration Bill, published on 11 May 2022, contains details of the government's proposed high street rental auctions process.  The government intends the Bill to "unlock new powers for local authorities to bring empty premises back into use and instigate rental auctions of vacant commercial properties in town centres and on high streets.”  In practice what will this entail for the already beleaguered retail property sector?

Designated areas with suitable high street uses

The local authority can designate a street or an area as important to the local economy because of the concentration of high street uses.  The range of high street uses defined in the Bill is wide and includes shops, offices, restaurants and light industrial but not warehouses.  

Once designated, vacant units are vulnerable to local authority intervention if the local authority considers occupation would be beneficial to the local economy, society or environment.

What are vacant premises?

A unit is vacant if it is unoccupied for a year or, broadly, if it has been unoccupied for at least 366 days in the last two years. Occupation involves "the regular presence of people at the premises" but how does that translate into a meaningful test?  Will a series of intermittent licences satisfy this test?  What if the premises are used as storage?  It remains to be seen whether regulations will alter the precise circumstances in which premises are considered vacant. 

What are premises?

Premises can be the whole or a part of a building or any part that could with reasonable adaptation be used as such.  This would allow a local authority to specify that premises comprising a ground floor retail unit with accommodation above be divided and the ground floor only be auctioned. 

How would the scheme work?

Where the Local Authority decides vacant premises should be subject to a rental auction, the Bill sets out a process under which:

•    The Local Authority serves an initial letting notice on the landlord which broadly prevents the landlord from letting the premises whilst the notice is in force without the consent of the local authority unless the landlord had entered into a pre-existing contract with a tenant.  The initial letting notice may not expire for up to ten weeks;

•    During the initial letting period the landlord can only let out the premises with the Local Authority's consent, which must be given if the tenancy is for at least a year and the Local Authority is satisfied that it will lead to the premises being occupied by the regular presence of people at the premises.

•    If the premises have not been let within a period of eight weeks, the Local Authority can serve a final letting notice on the landlord before the initial notice has expired.  

•    The final letting notice will expire at the end of a maximum 14 week period if it has not been withdrawn or revoked on appeal. 

•    During the final letting notice period, the landlord cannot let the premises or carry out works to the premises without the Local Authority's written consent and the Local Authority can arrange for a rental auction of the premises.

Rental Auction Process

Future regulations will provide more detail about the auction process.  These regulations may give some discretion to the Local Authority as to who is ultimately chosen as the successful bidder rather than it being determined purely by price.   

Once the successful bidder has been identified, the Local Authority will enter into a contract with that bidder for a short-term tenancy of the premises.  A short-term tenancy is for a term of at least one year but not exceeding five years.  The contract will take effect as if it was entered into by the landlord.  The Local Authority will act in its own name "but with an indication that it is acting so as to bind the landlord rather than itself".  The Local Authority must then give the landlord a signed copy of the tenancy contract as soon as possible.  The landlord is not part of the negotiating process.

Terms of the Tenancy

There will be secondary legislation to further govern the terms of the contract BUT under the Bill, the contract may include provisions requiring the landlord to carry out pre-tenancy works or allowing the tenant to do these.  The Local Authority "must have regard" to the landlord's representations but this seems a low threshold when it is the landlord's property and these negotiations would normally be a commercial bargain struck between two legally represented parties and designed to protect both parties' interests.  

With a seeming disregard to prevailing market rents in the area (which in turn dictate open market rent reviews), the draft legislation states that the amount of rent or premium that the successful bidder would be prepared to pay must be the amount included in the tenancy unless the landlord agrees otherwise.  

The auction process gives the landlord no right to negotiate the rent or premium.  It also fails to take into account more nuanced rental models, particularly in the post COVID-19 world, such as turnover rents, stepped or index-linked rents, pandemic rent concessions and rent free periods.  

A small crumb of comfort for landlords might be the stipulation that all leases are to be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954.

Powers of Appeal 

The landlord can serve a counter-notice on the Local Authority once a final letting notice has been served.  Grounds for appeal include: the premises were not vacant or not suitable for the Local Authority's intended high-street use;  the local benefit argument is not met; the landlord intends to carry out substantial works of construction, demolition or reconstruction affecting the premises; the landlord intends to occupy the premises for the purposes of business or as a residence; and the Local Authority  failed to consent to a letting during the initial letting notice.  It is not clear what happens if, say, the landlord intends to redevelop but not for another six months.  Could a five year lease be forced upon them in the meantime?

Comment

These proposed new measures seem to bulldoze through the usual open market letting process.  They give local government enormous power over commercial property in which they have no proprietary interest and to interfere in a free market scenario with scant regard to the fact that many properties are vacant due to lack of demand, not a reluctant landlord.  

Forcing the landlord to contract with a tenant that it has not chosen may result in poor estate management, an inappropriate tenant mix in any given location and a strained landlord and tenant relationship from the outset.  This is particularly so where the landlord has no ability to object on credit grounds, covenant strength or tenant mix let alone ESG credentials.  

Mathew Ditchburn, Head of Hogan Lovells’ Real Estate Disputes team comments that "Surely what the government needs is to encourage the property industry to invest in our failing high streets.  These draconian measures risk having the opposite effect.  Why would any investor, you might ask, plough their hard earned money into high street regeneration, when their property might be seized from them at any moment, scuppering any longer term redevelopment plans, and an unvetted tenant forced upon them on terms beyond their control, potentially for a long time and below the market rent? If the high street is not an investible asset then investors will simply put their money elsewhere".

As a workable solution to a failing high street, this piece of legislation has fallen on particularly stony ground. 

Next steps

The Bill is at early stages having been introduced into the Commons on 11 May 2022.  It is to be hoped that the voice of the industry will be heard in re-balancing the negotiating power of the parties and restoring a common-sense approach. Re-invigorating the high street is what all parties want but in a workable framework. 

Authored by Mathew Ditchburn, Jane Dockeray and Ingrid Stables.