Consultation on new powers for English local authorities for compulsory high street rental auctions closes next month
Published on 11th May 2023
Stakeholders should submit their views before consultation on operation of proposed compulsory rental auctions of high street property in England closes on 23 June
The Levelling Up and Regeneration Bill presented in May 2022 introduces controversial powers for local authorities to essentially step into the owner's shoes and hold a rental auction for certain unoccupied properties.
The policy aims to reduce the rate of prolonged vacancy of shops and buildings as well as promote the regeneration and enhancement of the high street. However, there has been much criticism of this interference with private property rights (which also ignores any requirements that would otherwise exist for the consent of superior title holders or lenders). The detail of the auction process and the protections it builds in for the owner and interested third parties – covered in this consultation – will be critical.
Qualifying for the auction
To be eligible for the auction process, a property would need to be located on a high street or within a town centre which had been designated by the local authority as important to the local economy because of the concentration of high-street use.
In addition, the local authority must consider that the property itself is suitable for a high-street use and that its occupation would benefit the local economy, society or environment. High-street use is defined widely: including shops, offices, businesses providing services to members of the public, restaurants, bars, cafes, public entertainment venues as well as manufacturing and light industrial (where reasonably compatible with the normal high-street uses).
Finally, the property would need to satisfy the "vacancy condition" meaning it must have been unoccupied for 12 months continuously or 366 days in a two year period.
How would the auction process work?
A local authority would serve an initial notice on the owner of the property, giving them time to grant a lease or licence of the property. This must be done within eight weeks of the local authority's notice and, critically, the letting will require the local authority's consent. To obtain consent, the local authority must be satisfied that the owner's letting is likely to lead to occupation of the premises for a high street use. It must also start within eight weeks of the local authority's initial notice and run for a period of at least 12 months.
Where the owner fails to grant a lease or licence within the eight week period, the local authority's next step is to serve a final notice and proceed to organise a rental auction (subject to final appeal options for the owner). The local authority has powers to let the property for one to five years to the highest bidder as if it were the owner. The process bypasses any requirement to obtain the consent of any superior landlord or lender, which will be deemed by statute to have been granted.
An owner's grounds for appeal at the pre-auction stage include: the property not being suitable for the high-street use identified by the local authority, the vacancy condition not being satisfied, or wider development affecting the property.
The consultation closes on 23 June 2023 and while open to all, is primarily aimed at commercial landlords, tenant businesses, community groups and local authorities.
The consultation will gather views on topics including:
- the marketing process of leases (how they are advertised to potential bidders and the minimum marketing period);
- whether any reserve price should be set;
- whether the local authority or an outsourced provider should run the process;
- who should pay the costs involved in each step of the auction process;
- whether the minimum standards suggested for each property by the government (including physical condition, connection to utilities and compliance with regulation) are sufficient or whether they do not go far enough;
- alienation, alteration and other standard tenant rights to be included in the standardised lease; and
- the possibility of introducing a new permitted development right to permit the change from the existing use of the high street premises to a suitable high street use without having to make a formal planning application to the local authority.
High street vacancies
A number of factors, most notably including competition from online retailers who do not have the same level of overheads as "bricks and mortar" shops, have resulted in vacancy rates increasing dramatically over the past ten years. Restrictions imposed in the attempt to prevent the spread of Covid-19 accelerated the hollowing out of the UK's high streets, with many retail premises forced to shut and not re-opening once restrictions were lifted due to difficult trading conditions.
The Department for Levelling Up, Housing and Communities (the DLUHC) notes that of the approximately 172,000 commercial properties that were vacant in 2019, as of 2021, over eight in ten of these properties were empty for more than two years and over one in five have been empty for more than four years.
A link has been drawn by the DLUHC between the vacancy rate of a commercial centre and that location's economic performance. A high vacancy rate is said to "directly and negatively affect footfall, risking businesses shutting down, more jobs being lost, people moving away from high streets, and lower economic activity in the heart of communities".
An attack on property rights?
The proposals have been criticised for allowing local authorities to interfere with an owner's right to (by and large) deal with their property as they see fit. An investor may be waiting for the commercial landscape to improve in an effort to secure higher rents rather than letting out the property at the bottom of a market.
The DLUHC's response to this is that any such powers granted to the local authority must be proportionate to the aim of reducing vacancy and "do not inadvertently deter commercial property from continuing to be an active area of investment". It argues that the aim is not to target proactive owners seeking to let their properties. The DLUHC states in its consultation paper that it wants to see the policy used "where vacancy rates are a real problem and there is little cooperation between landlords and local authorities".
Annex B of the consultation guidance published on the government website sets out a full list of safeguards for landlords the DLUHC has considered.
Osborne Clarke comment
The proposed policy affects an investor's right to take a long-term view in seeking to derive as much value as possible from their asset and could be counter-productive - risking driving investment away from the high street due to fears of unwelcome tenants on unwelcome terms being thrust upon both owners and their lenders.
Owners should be aware of the impact the new powers for local authorities could have on their vacant properties and consider how to avoid qualifying for the vacancy condition and potential grounds of appeal should an initial notice be served on them.
Should you wish to engage with the consultation, a response must be made using Citizen Space, an online platform created by the government.
Osborne Clarke LLP has advised clients as to whether we consider their assets could fall within scope and potential options that may be open to them if, as looks likely, this bill becomes law. Please contact us if you would like any advice either in respect of the interpretation of the bill, your proposed responses to the consultation, or to run through any options to help you safeguard your assets.