High streets under the hammer

Insight

17.12.2024

Local authorities’ new powers to auction leases of vacant commercial units in town centres and high streets came into effect on 2 December 2024, as part of the Government’s drive to rejuvenate our ailing local centres. Following the Levelling-up and Regeneration Act 2023 and the Government’s 2023 public consultation, new regulations have set out the detail on the rental auction process and the terms of the auction contract and tenancy that will be granted. Government guidance has also now been issued.

Accelerated by the pandemic, a mass consumer switch to online shopping has led to high long-term vacancy rates in high streets and town centres. With evidence that persistent vacancy leads to further economic decline in local centres, with a knock-on effect on employment, living standards and anti-social behaviour, the Government’s drive to revamp high streets and town centres is no surprise.

Shop ‘til you drop

The local authorities’ new powers are fairly draconian: the local authorities can compel landlords (and their mortgagees) to rent the landlords’ properties and force landlords to incur potentially significant expenditure carrying out works to their premises to bring them to a prescribed minimum standard. The local authorities can also grant automatic planning consent for temporary change of use to a “suitable high street use” and impose criminal liability on landlords who fail to provide detailed information about their premises within a tight timeline (which may be as short as a week).

But will local authorities really attempt to outperform commercial landlords at letting problem premises? There is often very good reason for commercial premises to remain vacant long-term and it remains to be seen whether the local authorities can do better than commercially minded landlords with the economics of supply and demand. With empty rates, maintenance bills, utilities costs and no investment return, it is unlikely many landlords leave their premises empty out of choice. Premises may remain vacant because they are too costly to put into repair or redevelop, and smaller retail units may be empty simply because there is a lack of retail demand for them. It will be interesting to see if the Government’s reforms to business rates to support small and medium sized enterprises will boost the high street rental market in due course.

From cafés to cobblers, who’s on the auction block?

The new regime applies to premises which are:

situated in a designated high street or town centre (and the local authority has to publish and consult on the designation proposal);
unoccupied and have been unoccupied for the last year or at least 366 days in the last two years (the vacancy condition); and
considered by the local authority to be beneficial to the local economy, society or environment if they are occupied for a suitable high street use (the local benefit condition).

The auction process: going, going, gone

The pre-auction process involves the local authority serving an initial letting notice on the landlord and then, following a minimum grace period of eight weeks, a final letting notice before progressing to the 12 week auction process. The Government has produced a helpful flowchart of the process.

There is a counter-notice and appeal process for the landlord. However, ultimately a landlord can only block an auction if:

it lets the premises itself; or
successfully counters the auction on the basis either that the property designation is wrong (ie the unit is not suitable for high street use, or the vacancy condition or local benefit condition are not met) or that the landlord was wrongly prevented from letting the unit by the local authority during the pre-auction process; or
the landlord itself intends to occupy or carry out substantial works to the unit.

Following the auction the landlord chooses from the bids, but if it fails to do so within two working days the choice falls to the local authority. The local authority must choose the bidder offering the highest annual rental value (unless it considers that it is not reasonably practicable to contract with that bidder). There is no reserve minimum rent for the auction but the scant commercial comfort from the landlord’s perspective is presumably that the premises have been vacant for some time and the auctioned lease will be for a short term of five years or less (and the landlord has had the opportunity to make some representations to the local authority about the terms of the tenancy during the pre-auction process).

The local authority has power to enter the agreement for lease and grant the lease on the landlord's behalf, if necessary.

The key terms of the new lease

Term: A term of between one and five years, and the lease will be contracted out of the Landlord and Tenant Act 1954 (so the tenant will have no statutory security of tenure).
Rent free: A fixed four week rent free period.
Rent deposit: A rent deposit of the higher of £1,000 and three months' rent.
Repairs: The tenant’s repair obligations will be limited by reference to a schedule of condition.
Disposals: The tenant will be permitted to assign the whole lease with the landlord's consent, and the tenant must provide an authorised guarantee agreement where the landlord reasonably requests.

Coming soon to a high street near you?

Although the introduction of these rather eye-popping “right to rent” powers pose significant concerns for landlords, the messaging from the Government is that they are aimed at areas struggling with high vacancy rates and economic decline and at compelling inactive landlords to engage. The process is aimed at persistent vacancy rather than interfering with natural turnover in occupancy rates; it seems unlikely that local authorities will have an appetite to interfere with commercially minded landlords proactively managing their properties.

Early adopter local authorities are Bassetlaw, Darlington and Mansfield who will champion the auction process by “immediately taking action and working with [the Government] to provide strategic guidance and best practice advice to other councils”.

There has been little consultation on the detail of the regulations and only three weeks between the regulations being laid before parliament and coming into force; not long for local authorities or landlords to prepare themselves. In practice, it is therefore likely to take some time for the local authorities to get to grips with their powers and a complex and onerous process, let alone act.

Raising the gavel?

Will over-stretched and under-resourced local authorities actually use their new permissive powers? Even if a local authority can pass its legal and surveyor’s fees onto the successful bidder tenant, there is still a cashflow issue for the local authority in the meantime. The Government guidance explains that a local authority can apply for a “new burdens payment” to cover the cost of implementing a rental auction. The Government has committed over £1 million in funding to support the high street rental auction process; but divided amongst over 300 local authorities, is this really enough to assist local authorities, given the highly complex and lengthy auction process?

It remains to be seen whether this new process will fulfil the Government’s mission statement “to breathe new life back into high streets and transform long-term empty shops”.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.