New rental auction regime to begin for empty high street premises in England

The initial policy framework to enable local authorities to by-pass those with legal interests in the property and compel lettings of certain premises for up to five years was set out in Part 10 of the Levelling Up and Regeneration Act 2023 (LURA).

Regulations have now been passed which set out a commencement date of 2 December 2024 and the auction process. They include timelines, details for the service of pre-auction letting notices (giving the landlord eight weeks to let the premises), duties in relation to the compilation of an auction pack, the marketing and bidding process, and the tenancy terms that may be imposed.

Which premises are within scope?

To fall within scope of these powers, properties must have been vacant for a qualifying period, being the whole of the previous year, or 366 days out of the last two years.

In addition, they must be considered by the local authority to be suitable for high-street use and must be located on a high street or within a town centre which has already received designation for the purpose by the local authority. A street or area may be designated (following consultation) if the local authority considers that it is important to the local economy because of an existing concentration of high-street uses.

High-street use is widely defined, including shops, offices, businesses offering services to the public, cafes, restaurants, pubs and bars, public entertainment venues, communal halls and some manufacturing or light industrial premises (where compatible with high-street uses). Notably, the regulations refer to units within shopping centres as falling within scope of the regime.

It is not necessary for premises to have a history of high-street use to fall within scope, provided they are considered suitable for such use by the local authority. The regulations include amendments to permitted development rights to allow for a temporary change of use for premises let through the auction process.

What are the letting terms?

Contract and letting terms are included in the schedules to the new regulations (supplementing the terms already included in LURA). These terms can be deviated from with the agreement of the landlord.

Leases are to be between one to five years, contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954, include a four-week rent free period and tenants must pay a deposit of £1,000 or equal to three months' rent (whichever is higher). The rent will be determined through the bidding process (with no minimum). Any necessary superior landlord or mortgagee consent will be deemed to have been granted.

Is the landlord involved in the process?

If premises are identified by the local authority as suitable for the compulsory auction process, the landlord must cooperate with the local authority by providing specified information relating to the premises and allowing entry for a survey to be carried out. Failure to comply may constitute an offence.

The local authority is required to invite the landlord to make representations on the terms of the contract and the tenancy, which it must take into account. After the bidding window closes and the local authority has notified the landlord, the landlord is entitled to choose any of the valid bids submitted, although it only has two working days to communicate its decision to the local authority. If the landlord fails to do so, the local authority can choose whether to accept any bid, and if it does, it must usually select the bid offering the highest annual rent.

Landlords can also be required to carry out (and pay for) works in advance of the start of the tenancy to ensure the premises satisfy prescribed minimum standards relating to safety and security.

While not specifically mentioned, there is no exemption from the obligation on landlords to ensure that the minimum energy efficiency requirements for letting commercial premises are satisfied, which could leave landlords facing enforcement action in respect of a letting over which they had little control.

Who pays?

Local authorities can pass on legal costs incurred in the preparation of the auction pack, specified search fees and survey costs to the  successful bidder, which may be off-putting for some potential occupiers.

The regulations prohibit any other costs being passed on and so there will be certain costs that local authorities will be unable to recover.

In order to utilise these powers, local authorities are also likely to need to invest in training their workforces to understand the process and its prescriptive deadlines. These costs may affect the viability of undertaking the process for under-resourced local authorities.

Osborne Clarke comment

This summer's general election brought the previous government's plans to implement the regime by the summer of 2024 to a standstill, to the relief of many landlords of high street premises. As its manifesto did not refer to the policy, it is perhaps surprising that the regime is now to be introduced so quickly by the new government.

The policy is intended to revitalise English town centres by reducing vacancy rates, and offer support to small businesses. Town centre premises could potentially be obtained by tenants at lower rents through the auction process.

However, the policy is highly controversial, and the power to impose tenancies has been seen as an invasion of owners' property rights. Any discontent could also have implications for new landlord/tenant relationships created through the auction process, with the potential for disputes later on. It also remains to be seen whether local authorities will succeed in filling vacant premises where landlords have been unable to do so.

The powers are discretionary and it is questionable whether local authorities will have the resources to put these powers into practice. It is considered unlikely that the £1 million in additional government funding and ability to recover certain costs from the successful bidder will provide sufficient financial support to enable frequent adoption of the auction process.