Last year, the Government highlighted its intention to introduce the High Street Rental Auctions policy as part of the draft Levelling Up and Regeneration Bill 2022. The aim of this policy is to reduce the number of commercial properties sat empty on our high streets across the country.
Summary of the principles of the High Street Rental Auction policy and process
Here we provide a summary of the principles of the policy along with a review of the proposed High Street Rental Auction process.
THE CONSULTATION
The consultation to gather industry views on this policy is open to all and closes on 7 July 2023. It invites comments in respect of:
- what the standard lease arrangements, terms and documentation should include;
- how the costs of the High Street Rental Auction process should be spread;
- whether the Minimum Energy Efficiency Standard (MEES) requirements should apply to properties subject to a High Street Rental Auction;
- the process of marketing the property and the auction; and
- the terms of the proposed Permitted Development Right.
Read the full details of the consultation. Responses can be provided here.
REASONING BEHIND THE PROPOSED HIGH STREET RENTAL AUCTIONS POLICY:THE ECONOMIC IMPACT OF VACANT COMMERCIAL PROPERTIES
It is expected that from time to time there will be vacant commercial properties, especially in times of rising costs and interest rates. However, the consultation paper informs us that Glide released a report in 2019 which showed that approximately 172,000 commercial properties were vacant at that time; and open data specialists Whythawk released a report two years later showing that 80% of those properties had been empty for two years or more, and over 20% had been empty for more than four years. The Government has found that such high levels of vacancies often have an increased negative impact on the economic performance of the local area, together with contributing to high unemployment rates - particularly in the North of England where unemployment is much higher than the national average.
WHAT DOES THE GOVERNMENT HOPE TO ACHIEVE BY THE INTRODUCTION OF THE HIGH STREET RENTAL AUCTIONS POLICY?
The main aims of this new policy are to:
- regenerate high streets and crack down on anti-social behaviour;
- mobilise the commercial rental market and prevent units from sitting vacant for long periods of time;
- increase co-operation between landlords and local authorities, and
- make high street properties more accessible and affordable for tenants.
The Government hopes that the potential for a rental auction being imposed will provide an incentive to landlords, who may be delaying letting their empty properties whilst awaiting a rise in the rental values of the local market, to encourage them to take steps to let their properties and ultimately avoid the need for the local authority to take action. However, the Government also recognises that it needs to protect commercial property investors and to not inadvertently detract from commercial property being an attractive investment, and so is keen to canvass views through its current consultation in order to ensure all viewpoints are given consideration.
WHAT ARE THE KEY ELEMENTS OF THE HIGH STREET RENTAL AUCTIONS POLICY
The policy will provide local authorities with powers to attempt to let persistently vacant commercial properties by way of a compulsory rental auction. However, there will be conditions limiting the scope of the policy's application:
- The policy is not intended to apply where the landlord is actively seeking to let the property.
- The rental auction would be at the discretion of the local authority.
- The property must have been vacant for 12 out of the previous 24 months.
- the occupation of the property must be shown to be beneficial for the local economy.
As an outcome of the auction process, the landlord will be required to enter into an agreement for lease with the successful bidder; thereafter the parties would enter into a lease of between one and five years after the completion of any necessary works to bring the property to a lettable standard.
If the successful bidder wishes to use the property for a use other than Class E, or they propose a use which is within a different class to the current authorised use, there will be new permitted development rights to allow a change of use without the need for planning permission.
The Government intends that the policy will apply to most commercial properties on high streets. However, the policy will not apply to properties in remote streets or properties used for heavy industrial uses, warehouses, nor will it apply to residential properties.
WHAT ARE THE MAIN STEPS IN THE HIGH STREET RENTAL AUCTION PROCESS?
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The first step in the process will be that the local authority must be able to show that the property has been vacant for 12 months within the past 24-month period, and that occupation for suitable high-street use would be beneficial to the economy, society or the environment.
The local authority will then send an initial notice to the landlord, following which the Landlord will have an eight-week grace period in which it will be permitted to take action in order to find a tenant for the property.
If the landlord is successful in finding a tenant, they may enter into a lease, provided that they have the local authority's consent to do so, the lease is for more than one year and is likely to lead to high street use.
If the landlord is unsuccessful in finding a tenant, the local authority may serve a High Street Rental Auction final notice. Once under a final notice, the landlord may not grant a lease or licence without the local authority's consent.
Following service of a final notice, the landlord will have 14 days to serve a counter notice and appeal against the final notice. If the local authority does not receive notice of an appeal, it will have 12 weeks to auction the property and complete the contract for a tenancy.
The Government is seeking views on how to identify successful bidders as it is unlikely that the ultimate tenant will be determined by 'highest bidder wins' model that we are used to seeing in most auctions. The Government seems open to consider other factors that may be valuable, such as the strength of the tenant's business model and the need to diversify the high street.
SAFEGUARDS FOR LANDLORDS
The Government is conscious that it does not wish to disproportionately impact the rights of landlords through the High Street Rental Auction process. The eight week grace period and the right to appeal the final notice from the local authority are some of the more obvious protections currently proposed to be built into this policy. The local authority must also include and have regard to the representations of landlords during the auction process, the preparation of the auction and the lease and the marketing of the property. It is further suggested that a rent deposit would be required from the tenant, and of course the landlord would have the usual legal remedies against the tenant for non-compliance with lease terms, such as forfeiture and court action.
WHO WILL BEAR THE COSTS OF HIGH STREET RENTAL AUCTIONS?
The consultation acknowledges that there will be not insubstantial costs involved in this process (auction costs, solicitors fees, marketing, survey costs, to name a few) and the Government is considering who should be responsible for the various costs that will be incurred. It appears to have been accepted that due diligence should be covered by the bidders, along with fit out costs being borne by the successful bidder, whilst the landlord should bear the cost of bringing the property up to the minimum standard (ensuring that it is safe, stable and secure when let to the tenant), and providing the legal pack.
AUCTION PACKS
The local authority will be responsible for collating basic information about the property for the auction pack. Given that the landlord has the knowledge of the property, they will be responsible for preparing replies to enquiries and providing any service charge information or Land Registry documentation, for example.
If the landlord does not engage in this process or provide the necessary information, the auction would still go ahead, but the bidding would have to proceed without such details. However, the landlord may be committing an offence under the Levelling Up and Regeneration Bill 2022 if they fail to comply with the process.
MARKETING OF THE PROPERTY
The local authority will be able to decide whether to market a property in-house or to outsource to an external agency. However, as any works required to the property are unlikely to have been completed by the marketing period, the aim is for the marketing brochure to give a fair representation of the property at the standard to which it will comply at the start of the tenancy, which will also ensure that the landlord receives the best possible price.
RESERVE PRICE?
The Government has not yet settled on whether a reserve rental price will be used in the High Street Rental Auction process. If a reserve price is used, it will be set by the local authority and if that reserve price is not met, the landlord would not be required to enter into the lease arrangements. However, the Government is considering that perhaps there should be no reserve price for the auction element of a High Street Rental Auction on account of the following:
- it may reduce demand;
- there may be complications in respect of how the prices should be set;
- there may be added time pressure due to extra work in calculating the price;
- it may introduce non-market influence on the final rental price; and
- it may price out small businesses and community groups.
STANDARDISED LETTING DOCUMENTATION AND LETTING TERMS
The Government proposes to use standard form agreements for lease and leases for High Street Rental Auctions and the aim behind this is to:
- ensure consistency and fairness;
- avoid protracted negotiations; and
- assist local authorities to run the process efficiently, particularly where a landlord is not engaging.
The lease will be for a term of between 1 and 5 years and will be granted outside of the security of tenure provisions of the Landlord and Tenant Act 1954. The rent will be determined through the High Street Rental Auction process itself and the permitted use will be determined by the local authority beforehand or negotiated with the successful bidder.
MINIMUM ENERGY EFFICIENCY STANDARD
Given that the majority of properties lying vacant on the high street may have low EPC ratings, the Government proposes to disapply the requirement for the EPC to be a minimum "E" rating. This will mean that a landlord may not be required to commission potentially costly energy efficiency improvements before engaging in this process. Any such disapplication would be reviewed after five years.
PERMITTED DEVELOPMENT RIGHTS
The Government is aware that many high street properties fall within new Use Class E. The new permitted development rights will allow for the temporary change of use to a suitable high street use during the term of the High Street Rental Auction lease, with the possibility of that use continuing on a permanent basis once the initial lease period ends. The change of use will be conditional on the local authority's prior approval.
Conclusion
The Government does not intend, by way of its High Street Rental Auctions Policy, to target landlords who are proactively trying to let their vacant units. For those to whom this policy may apply in the future, it is an opportunity to benefit from rental income, albeit on a potentially short-term basis, with the relaxation of the energy efficiency and planning requirements that may have been a barrier to successful lettings previously.
However, it is clear that there is currently much uncertainty as to exactly how the High Street Rental Auction process will run, who will bear the costs that will be involved and ultimately a key question is whether our already stretched local authorities will have the capacity to successfully utilise this newly proposed policy.
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.