Butta Singh, a paralegal in our Commercial Real Estate Team, takes a look at the proposed High Street Rental Auctions in more detail.
What are they?
One of the latest ideas to tackle high street vacancy rates, High Street Rental Auctions (HSRA) formed the subject of a Government consultation (see their response to this here). The proposed process will give local authorities discretionary powers to conduct auctions and rent out persistently empty commercial properties.
To put the vacancy concerns into context, in 2021, over 8 in 10 commercial properties were vacant for more than 2 years, and 1 in 5 were vacant for more than 4 years. More recent data from The Local Data Company suggests the high street vacancy rate is holding steady at 14% with persistently vacant units – those empty for two years or more – at 7%. The Government consultation also noted the negative impact of vacancies on people's perception and use of the high street and ultimately on the economic performance of the location.
How will the High Street Rental Auctions work in practice?
While the framework sits within the Levelling-up and Regeneration Act 2023, the regulations around the auctions have yet to be implemented but are expected this year.
Under the framework, the process envisages powers that will essentially permit the local authority to seek potential tenants willing to take a lease of a vacant property, to determine the rent, and to compel a landlord to grant the tenancy.
It starts with an 'initial notice' from the local authority, notifying a landlord that they seek to undertake the HSRA process in respect of its premises. From this point, the landlord then has eight weeks to find a tenant and enter into a lease. Failing this, the local authority can progress to the next stage by placing the premises under a 'final notice' to indicate that they intend to proceed to auction in 14 weeks. Once this notice has been issued, the landlord can appeal but cannot grant a lease or licence, or carry out works, without the approval of the local authority.
The auction process itself is to be by sealed-bid, with bidders being encouraged to provide supporting evidence of how they will meet the leasehold obligations. The landlord will be able to choose which bidder to progress with. If they fail to engage with the process, the local authority will step in and choose.
Does it apply to all high streets and town centres, and to all properties?
If a local authority wants to use the powers, they must first make the relevant area a 'designated high street' or 'designated town centre'. They may do so where they believe the street or area is important in the context of having "high street uses" which include shops or offices, service premises such as salons and walk-in advice bureaus, restaurants, bars, pubs, cafés and takeaways, entertainment and recreation premises or meeting places with a benefit to the local environment, society or economy.
Qualifying properties would be those which have been vacant for 12 months or for at least 366 days during 24 months. Any vacant periods prior to the regulations coming into force can be counted, so landlords who currently have vacant properties should be mindful of the potential for ending up involved with a HSRA process.
The tenancy terms
Following an auction, the successful bidder will enter into agreement for lease with the local authority which provides for a tenancy to be granted for 1 to 5 years. As to the terms of that tenancy, amongst others, the consultation confirmed the following points:
- Subletting is not permitted (largely to prevent tenants from profiting from auctioned properties) but assignment of the lease is to be allowed with landlord's consent.
- The tenant is allowed to undertake internal non-structural works for their particular use without the landlord's consent (subject to removal by the tenant at the end of the term). Any works to external or structural parts will require the landlord's consent. Additionally, tenants are able to remove or keep non-structural items of the existing fit-out. However, if they want to remove a structural item, landlord's consent is needed.
- The tenant will benefit from a 4-week rent-free period for their fit-out.
- The repair obligations are to be limited by reference to a schedule of condition, so tenants are not required to pay for the repair of any pre-existing issues.
Will anything stand in the way?
The scheme seems to be fairly bullish in its approach, focussing on the main aim of filling vacancies. As such, it may force landlords to enter into leases with entities, and on terms, chosen for them, perhaps without regard to a landlord's operational needs in keeping leases aligned in a portfolio, and potentially at a lower than desired rental level.
If the property isn't sufficiently safe, stable and secure, the landlord will be forced to carry out works to reach a "minimum standard" with penalties by way of liquidated damages for a failure to do so.
If the unit doesn't benefit from a suitable planning permission for the proposed high street use of the successful bidder, the Government suggests that a new Permitted Development Right would allow the change of use without the need for planning application.
To avoid concerns about undermining wider environmental goals, properties let under the scheme won't be exempt from the Minimum Energy Efficiency Standards, which may necessitate energy enhancement works to ensure that the premises meet the minimum required standard for letting – a further cost for landlords.
However, there are also to be some safeguards in a landlord's favour including:
- An expectation on the local authorities that they must make reasonable efforts to get in touch with the landlord to review the situation before commencing the HSRA process.
- The eight week grace period afforded to landlords to find a tenant following the 'initial notice' from the local authority.
- The landlord's right to appeal on specified grounds against the 'final notice'. For example, in a situation where the imposition of a lease would be disproportionate.
- It will be mandatory for the tenant to give a rent deposit, which offers some financial security.
- Local authorities are not permitted to divide a larger vacant unit (think ex-Debenhams stores and the like) into multiple units for let, although the Government will continue to consider their position on this.
What about security of tenure?
All HSRA tenancies are to be automatically excluded from the security of tenure provisions of the 1954 Act – which avoids any issues around appropriate contracting procedures having been followed, and may actually offer a blessing to landlords who will at least see the easy return of their properties to a more "normal" footing after such a tenancy without the need to deal with proving statutory grounds to deny the tenant a renewal of a lease.
The potential impact
Landlords could be forced to enter into a landlord and tenant relationship with a tenant they would not usually have chosen, whether on commercial or perhaps ethical grounds.
Development plans may be thwarted where voids are the result of landlords steadily recovering possession ahead of implementing redevelopment or refurbishment of a collection of premises (e.g. on a parade or part of a block).
The lack of a reserve being set for a minimum rent has led to concerns around tenancies being granted below the market rent – or below the passing rent on other units – therefore potentially impacting on rental levels and comparables for rent reviews in the vicinity, and also having a negative impact on investor interest as a result. Investors may also be reluctant to plough funds into properties which may become the subject of a HSRA.
Parting thoughts
The scheme is based on the notion that vacancies in the high street are simply a result of landlords not being pro-active enough in seeking new tenants or not being sufficiently flexible in who they will contract with and on what terms. While there may be some disengaged landlords out there, we suspect the majority are struggling to let their properties as a result of various other factors at play which the scheme seems to overlook, such as economic pressures, the cost of living crisis impacting on people's spending habits, the challenges due to the level of business rates and changing consumer behaviour with the popularity of online retail. Questions also remain over whether local authorities will have the resource and appetite to use the powers.
We await further detail with regard to the regulations and will see in due course whether the scheme will breathe life back into our high streets in the way envisaged.
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.