Impact of new council powers to let empty high street premises through compulsory rent auctions

(5 min read)

The Levelling up and Regeneration Act 2023 has been given Royal Assent, bringing significant changes to the planning system. This Act grants extensive powers that may necessitate the disclosure of information about landowners and new council powers to let empty high street premises in England and Wales through compulsory rent auctions. To find out more please read the article below.

It's finally here: The Levelling up and Regeneration Act 2023 (Act) has received Royal Assent. It introduces some wide-ranging reforms to the planning system and potentially wide powers that would require the disclosure of information about those who control land. This could see details such as parties and terms relating to land arrangements which are currently "off-register" and confidential, brought into the public domain via the Land Registry's open-access register. Any exercise of this power would be subject to consultation on the detail.

The good news is that its impact is not immediate. Further regulations are required to bring into effect the new power given to local authorities to force commercial landlords to let empty premises in town centres and on high streets by instigating compulsory rent auctions. These further regulations will provide more detail on the rental auction process and possible further grounds of appeal.

What do we know currently?

Vacant premises such as shops, offices, restaurants and pubs (after a two-stage notice procedure and a short grace period for landlords to fill the vacancy) could end up being subject to an auction process for a letting which is forced on the landlord by the local authority (LA);
The LA will be empowered to grant the lease on behalf of the landlord (including provisions for works) after inviting bids from prospective occupiers;
An owner's grounds for appeal at the pre-auction stage include: the rental auction process conditions have not been satisfied, that the owner intends to carry out substantial works or intends to occupy the premises for its own business or residential purposes;
Any tenancies granted will be for a minimum of one year and a maximum of five years (with deemed consent from superior landlords and mortgagees);
The LA can ultimately decide and grant the tenancy at an agreed rent for a suitable high street use;
Some comfort is offered to landlords as any lease granted will be outside the security of tenure provisions of the Landlord and Tenant Act 1954.

Issues

No minimum level of rent/reserve price: Currently, there is no guidance as to the criteria under which rental offers should be assessed. Is the most suitable offer the one where the tenant agrees to pay the most rent or should other factors such as the tenant's commitment to renovate the premises (or at least put them into repair), be considered? In theory, a prospective commercial tenant could offer £1 a year in rent and, if they are the only bidder, could be awarded a lease of the premises;
Impact on rent review: There could be a significant impact on rental values in the area in question if leases granted pursuant to rental auctions could be included as comparable evidence for statutory lease renewals and rent reviews, (the effect on rent reviews being mitigated by the fact that most leases provide for upwards-only rent reviews);
Repair of premises: Hopefully, the guidance will cover maintenance of the premises. Otherwise, there will be a risk of premises falling into disrepair and the character of high streets being adversely impacted. Landlords are likely to think twice about carrying out significant improvement works, if their property is in an area which could be subject to a rental auction;
Service charge regime: Guidance should cover this and the LA's ability to divide large premises and auction these off as separate sections. If a LA can grant a lease which is not aligned with other leases that have been granted in a building, this could result in unfair outcomes for tenants and complex issues for landlords to navigate;
Costs of auction process: whether landlords or tenants should pay the costs associated with surveying, marketing, running the auction, solicitor's fees and searches and enquiries;
Desired effect: There is some scepticism whether the powers will achieve the desired effect. Whilst no landlord wants to see a property sitting empty, LAs may not have the time and resources available to implement the new powers when they are already stretched. Landlords may decide to repurpose their stock for example, from commercial to residential, rather than this having the effect of regenerating the high street.

The devil will be in the detail when further regulations and guidance are issued. We do not know when this will happen.

If you want more detail on the Act and the auction process, please read on.

The Act in more detail

What type of premises will be affected?

High street/town centre designation: Local authorities (LAs) can designate a street in its area as a high street, or an area as a town centre, if it considers it to be important to the local economy because of a high concentration of "high-street" uses (see list below). A designation will be registered as a local land charge. The LA must maintain a public list of designated areas. Any premises located in a designated area could be affected by the new proposals if the following two conditions are met:
- Vacancy condition: the premises are unoccupied and have been unoccupied for the whole of the previous year or for at least 366 days out of the previous two years (occupation by a trespasser does not count and it is not specified whether such 366 days should be consecutive occupation); and
- Local benefit condition: the occupation of the premises for a suitable high street use would be beneficial to the local economy, society or the environment.

High street use means any use of premises

as a shop or office;
for the provision of services to people (including visiting members of the public);
as a restaurant, bar, public house, café or other establishment selling food or drink for immediate consumption;
for public entertainment or recreation;
as a communal hall or meeting place;
for manufacturing or other industrial processes that can be reasonably carried out in proximity to and are compatible with the uses specified above.

Warehouse use is excluded. When considering whether a use is suitable, the LA can take into account any work which the landlord may be required to do or which the tenant would be allowed to carry out.

Occupation requires the "regular presence of people at the premises". Further guidance on the precise meaning of occupation and what is meant by a "regular presence" will be welcomed. There are provisions in the Act which require landlords to give information on their premises to the LA, including information as to the occupation of the premises. Failure to respond to such requests for information or giving false information in response is an offence punishable by a fine.

What is the letting and rental auction process?

Initial letting notice: The LA can serve an initial letting notice on the landlord giving it a minimum 8-week period in which to let the premises (the notice expires after 10 weeks if a final letting notice has not been served);
Restriction on letting while initial letting notice is in force: Once an initial letting notice has been served, it prevents the landlord from granting (or agreeing to grant) a lease or licence to occupy the premises without first obtaining the LA's consent (such consent to be given or refused within a reasonable time). Any lease or licence granted without LA consent is void. It is not clear how this would work in practice. However if there is an existing agreement for the letting of the premises, the service of an initial or final letting notice will not prevent the landlord completing that agreement;
Permitted lettings: The LA must give consent to a lease or licence to occupy which is for one year or more (without a right to terminate during the first year) which begins within eight weeks from the initial letting notice taking effect and results in the premises being occupied for an activity that involves the "regular presence of people at the premises" (quite what this amounts to, remains to be seen);
Final letting notice: If the landlord is unable to let the property within an 8-week period, the LA can serve a final letting notice. This starts the rental auction procedure. The final notice starts a 14-week window during which the LA is entitled to run a rental auction to try to find a tenant for the business. The landlord cannot grant or agree to grant a lease or licence during this period without the LA's consent;
Counter-notice and appeal: There is a process for the landlord to appeal the service of a final notice by serving a counter-notice on the LA. The LA must receive the counter- notice specifying the appeal ground within 14 days from the final notice taking effect. The permitted grounds are specified in Part 1 Schedule 20.They are (broadly) that the relevant conditions for exercising the rental auction process have not been satisfied, that the owner intends to carry out substantial works or intends to occupy the premises for its own business or residential purposes. Further regulations may be brought in which add to the grounds of appeal. If the final letting notice is not withdrawn, the owner of the premises can make an appeal to the county court within 28 days of serving the counter-notice. The county court must either revoke or confirm the final letting notice;
Rental auctions: The LA may arrange a rental auction to find prospective occupiers willing to take a tenancy and at what rent. Regulations will detail the process, how the successful bidder will be identified and allow the LA to specify the suitable high street use ahead of the auction. The LA can ultimately decide and grant the tenancy at an agreed rent for a suitable high street use;
Grant of tenancy to successful bidder: The LA has the capacity to enter into any tenancy with the successful bidder on the landlord's behalf, at the end of the auction. The landlord will then be required to grant the lease, and if it does not do so, the LA can do so on the landlord's behalf. The lease is deemed to be granted with the consent of any mortgagee or superior landlord;
Terms of tenancy: The terms of the agreement for lease and lease can be decided by the LA (having regard to any representations made by the landlord). There are no provisions allowing the landlord to challenge the terms agreed by the LA. The detail of the clauses will follow in further regulations, but the Act does set out the types of covenant that must be included. All leases will be contracted out of the Landlord and Tenant Act 1954 and the contractual lease term must be between 1 and 5 years (subject to the length of the landlord's own interest) and must include a restriction on use to the relevant high street use notified by the LA in the rental auction process. The agreement for lease can also include terms forcing the landlord to carry out pre-tenancy works to the premises or allowing the tenant to enter the premises to carry out fitting-out works.