The government has announced that it anticipates that local authority powers in England to hold high street rental auctions will come into force in mid-2024. It has also just released its response to the related 2023 technical consultation and that response will now form the basis of the secondary legislation needed to finalise the details of the powers. Those with an interest in any high-street premises (not just retail) need to take note.

Background

To recap, the powers stem from Part 10 of the Levelling-up and Regeneration Act 2023. They sanction local authorities in England to hold rental auctions and subsequently contract to let high street and town centre premises without requiring the prior consent of the owner or any superior landlords and mortgagees.

The rationale is that the prolonged vacancy of shops and buildings is a blight on our high streets and so the government wants to promote occupancy to "breathe new life into once bustling town centres and transform them into vibrant places where people once again want to shop, live, work and relax – restoring local pride as we level up across the country".

For a property to be within scope it must:

• be located within a designated high street or town centre;
• be suitable for high street use. This is not confined to retail – it includes (but is not limited to) offices, restaurants/cafés/bars, community halls and manufacturing (though warehouses and residential are out of scope);
• have been vacant for a year or 366 days in the previous two years; and
• be such that the local authority is satisfied that occupation of those premises for a suitable high street use would be beneficial to the local economy, society or environment.

If within scope, the local authority can engage its powers to hold a rental auction through the service first of an initial letting notice and then a final letting notice. Thereafter, it will hold a rental auction and subsequently the premises will be let on standardised contracts for a maximum of five years. For more information, see: New powers for local authorities to rent out vacant high street premises.

Key points from the government's response to the technical consultation

The 2023 technical consultation sought views from stakeholders on the details of how the powers would operate, such as the leasing framework, responsibility for costs and how the auction process should run. The response has just been released and the following are among the points of note:

• Local authorities will be able to outsource all or part of the auction and marketing process to commercial agents, including the creation and distribution of the auction pack. 
• No reserve price will be set at auction.
• There is to be a mandatory marketing period of at least five weeks.
• It will be a sealed-bid auction process as outlined in Annex C of the 2023 technical consultation. The mechanism will not be "highest bidder wins" but rather the landlord will get to choose from any bid submitted irrespective of rental offered.
• Costs relating to the marketing of the properties and auction fees will be borne by the local authority. Costs relating to searches and surveys, as well as solicitors' fees paid by the local authority for lease preparation, will be borne by the tenant.
• Before a lease is granted, landlords will be required to conduct works to the property to bring it up to a condition which is safe, stable and secure for the tenant and where occupational risks are either removed or managed (the Minimum Standard). Further details of what is involved in the Minimum Standard were set out in paragraph 93 of the 2023 technical consultation.
• To ensure landlords do not seek to frustrate the auction rental process by not undertaking works necessary to bring the premises up to the Minimum Standard, local authorities will have the option to include liquidated damages subject to their consideration of the landlord's representations. The fee for liquidated damages is to be set at £55 per day.
• While subletting will not be permitted, the government will allow the tenant to assign the lease, subject to landlord's consent (not to be unreasonably withheld or delayed).
• For the time being, local authorities will not be able to divide larger premises up to auction off into separate sections. However, the government does not rule out the possibility of bringing forward subdivision in the future.
• Tenants will be allowed to undertake fit-out for their particular use without landlord's consent, but external or structural works will be subject to landlord's consent (not to be unreasonably withheld or delayed).
• A rent-free period of four weeks will be allowed to take account of the time it will take for the tenant to undertake fit-out works.
• Tenants will be able to remove or retain non-structural items of the existing fit-out but if they wish to remove a structural item, they must seek landlord's consent (not to be unreasonably withheld or delayed). This is subject to special rules relating to the existing fit-out of pubs.
• Local authorities will not be asked to provide a guarantee. Tenants will, however, be required to provide a deposit of the greater of £1,000 or three months' rent.
• A tenant's repair obligation will be limited by a schedule of condition.
• There will be no service charge unless the landlord opts for one. If the landlord opts for a service charge, it will have the choice of: (i) reflecting the service charge in a superior lease; (ii) matching an existing regime; or (iii) selecting from a list of services.
• The landlord will be required to be reasonable when considering tenant alterations to the premises, which could include internet connections.
• There is to be no exemption from the Minimum Energy Efficiency Standards – so, if premises do not meet the required standard, or do not have a valid exemption, landlords may face financial penalties for non-compliance.
• There is to be an associated Permitted Development Right to permit change from the existing use to a suitable high street use as determined by the local authority for the period of the lease. That right will not permit physical works that would amount to development unless other permitted development rights apply.

Implementation

The findings from the 2023 technical consultation will now form the basis of secondary legislation which the government anticipates will be laid shortly, with a view to the powers coming fully into force in "mid-2024".

Comment

The plans for rental auctions may be concerning to owners of vacant high street premises. The policy has the potential to take control of their properties away from them. If they fail to find occupiers, they will be vulnerable to the new powers. If the property goes to rental auction, there will be no reserve (i.e. no minimum rent) and so presumably bidders could offer a nominal rental sum. If this happens, or if there is only one bid, then little protection will be found in having the final say on which bid to accept (there is not much choice in one bid, or lots of bids at a nominal rent). They will then be tied into the relevant letting for a term of between one and five years.

However, use of these powers:

• will be limited by the conditions that must be met before they can be triggered, including that the premises must have been vacant for at least a year in the last two years. If owners want to avoid the powers, the strategy is simple (if hard to put into practice) – they need to find occupiers; and
• may be limited by the appetite of local authorities to use them, given their limited resource. Clearly this is something the government has considered as it has announced a £2 million fund for local authorities to cover the costs incurred and is intending to work closely with up to eight local authorities, known as "Trailblazers", to be early adopters of the policy.

So, we will wait to see how often these powers will be deployed and, in turn, what effect they will have on our high streets.