High street rental auctions coming into force on December 2, 2024

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High street rental auctions coming into force on December 2, 2024

High street rental auctions coming into force on December 2, 2024

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November 19, 2024

From December 2, 2024, local authorities in England will be able to hold high street rental auctions to let vacant high street and town centre properties without requiring the consent of the owner or any superior landlords or mortgagees. In its recent press release, the government states that councils will be handed these new powers "to breathe new life back into high streets and transform long-term empty shops". This note takes a look at some of the key features of the new regime.

Legislative framework

The legislative framework is set out in Part 10 of the Levelling-Up and Regeneration Act 2023 (the Act) as supplemented by the Local Authorities (Rental Auctions) (England) and Town and Country Planning (General Permitted Development) (Amendment) Regulations 2024 (the Regulations).

Key concept: high street use

Central to the high street rental auction regime is the concept of "high street use".

High street use is not confined to retail. Instead, it is given a very wide definition similar to, but wider than, the commercial, business and service use Class E. It includes (but is not limited to) uses such as shops, offices, restaurants/cafés/bars, public entertainment, community halls and manufacturing.

Which premises are in scope?

To be within scope of the local authority's high street rental auction powers, premises must:

be situated on a designated high street or in a designated town centre. The local authority has power to designate a street as a high street and/or an area as a town centre where they consider them important to the local economy because of a concentration of high street uses;
be considered by the local authority to be suitable for a high street use;
have been unoccupied for the whole of the immediately preceding year or 366 days in the immediately preceding two years (the vacancy condition). A state of affairs will not amount to occupation unless the occupation is substantial, sustained and involves the regular presence of people at the premises. Time spent vacant before the provisions come into force still counts.
be such that the local authority is satisfied that occupation of the premises for a suitable high street use would be beneficial to the local economy, society or environment (the local benefit condition).

If conditions (i) and (ii) are met, the premises are qualifying high street premises. Warehouses are specifically excluded from being qualifying high street premises and so are out of scope.

Process

If both the vacancy and local benefit conditions are met and the premises are qualifying high street premises, the local authority initiates the process by serving an initial letting notice (an ILN) on the landlord. The ILN period is 10 weeks. During that period, the landlord is subject to restrictions on letting the premises.

Once eight weeks have elapsed since the ILN took effect, provided the premises remain unlet (or any new letting is consistent with the exercise of the local authority's powers), the local authority can serve a final letting notice (an FLN) on the landlord. The FLN period is 14 weeks subject to possible extension (for example, in the event the landlord appeals). During this period, the landlord is subject to restrictions on both letting the premises and undertaking works to the premises.

Landlords have 14 days from the date of the FLN to serve a counter-notice stating that they intend to appeal and specifying upon which of the seven permissible grounds for appeal set out in the Act they will be relying. One of the specified grounds of appeal is that the landlord intends to carry out substantial works of construction, demolition or reconstruction and could not reasonably do so without retaining possession of the premises. If the FLN is not withdrawn, the landlord has 28 days (starting on the date the counter-notice was received by the local authority) to launch the appeal to the County Court.

Once the risk of appeal has passed, provided the FLN remains in force and the premises remain unlet (or any new letting is consistent with the exercise of the local authority's powers), the local authority can arrange the rental auction.

Before doing so, the local authority must instruct a survey of the premises with a view to preparing a schedule setting out the works required to raise the premises to meet the minimum standard prescribed by the Regulations – being requirements relating to the condition of the premises (e.g. fire safety). While there are no requirements for the premises to be brought up to the required minimum energy efficiency standard, if the letting proceeds and the premises are sub-standard, there is nothing in the Act or Regulations to prevent the landlord facing enforcement action for breach of the minimum energy efficiency standard regulations¹ that prohibit the letting of sub-standard properties.

The rental auction process is set out in the Regulations. The process takes around 11 weeks. Details of the proposed agreement for lease and lease will be provided to the landlord in the second week (see below) and there is an opportunity for the landlord to make representations during the third week. The rent payable for the letting is left blank as this will be taken from the successful bid – notably, there is no prescribed minimum rent.

While the local authority is primarily responsible for preparing the auction pack, the landlord will be obliged to provide full and accurate replies to enquiries, proof of title and various other documents and information (for example, an EPC if available). There are tight deadlines for compliance – in some cases, the landlord may have as little as a week to comply – and there can be criminal sanctions for breach.

As part of the auction process, the local authority must specify the suitable high street use they have determined should apply to the premises (though this should also have been included in the ILN and FLN). The Regulations include changes to permitted development rights to allow affected premises to be used for that specified high street use for the duration of the tenancy granted following the auction process – for more information, please see this.

There will be a six-week marketing period during which bids can be submitted.

By the end of the 11th week at the latest, the local authority must give notice to the landlord that all bids are in. The landlord then has two working days to serve notice on the local authority of its choice of successful bid. The landlord is not obliged to choose the highest rental bid. If the landlord fails to serve notice of the successful bid by the required deadline, the choice of successful bidder falls to the local authority which can choose:

not to accept any bid; or
choose a successful bid. If it does, it is required to choose the highest rental bid unless it considers it not reasonably practicable to contract with that bidder, in which case it must choose the next highest rental bid.

The local authority has power to then enter the agreement for lease, thereby legally binding the landlord to the arrangement. If the landlord subsequently defaults on the obligation to let, the local authority can also grant the lease on the landlord's behalf.

Terms of the agreement for lease and lease

The key terms of the agreement for lease and lease are prescribed by the Act and Regulations.

This is subject to a provision in the Regulations in relation to the second week of the auction process that "the local authority may amend any of the terms of the tenancy contract or the terms of the tenancy if the landlord proposes, or agrees to, the amended term". So, it seems the parties can deviate from some of the proposed terms at this stage, but only where both the landlord and local authority agree to the change.

The table below summarises some of the key terms prescribed by the Act and Regulations:

Agreement for lease
Completion date	10 working days after completion of landlord's works or any earlier date agreed by the parties.
Landlord works	The landlord must undertake, at its own cost, the works set out in the schedule required to bring the premises up to the minimum standard. The schedule is the schedule of works prepared following the local authority's survey (see above). The works must be completed within three calendar months. There are optional provisions for liquidated damages at a rate of £55 per day of delay or step-in rights for the tenant to complete the works. The long stop date for completing the works is six months after which the tenant can terminate the agreement.
Tenant's works	There is provision for the tenant to apply for landlord's approval (where needed) to undertake works which can include works inside or outside the premises and, in some cases, removal of structural items. Approval is to be documented by way of a licence to alter.

Lease
Deposit	Higher of £1,000 or a sum equivalent to three months' rent.
Term	Between one and five years.
Security of tenure	No – automatically excluded.
Rent	There is no prescribed minimum rent. The rent payable will be that proposed by the successful bidder. Rent is to be paid by monthly instalments in advance on the first day of each month.
Permitted use	The use proposed by the successful bidder (which must be within the suitable high street use identified by the local authority in the marketing brochure). Change of use not permitted.
Repair	Limited by schedule of condition to be prepared after grant of lease.
Service charge	Only applies where the premises form part of a larger building. There are three service charge options, one of which is to include equivalent service charge provisions substantially similar to the service charge regime in the landlord's own lease, in other leases of the building or leases of adjoining properties in which the landlord has an interest. The choice of service charge provision will depend on what the local authority considers appropriate considering representations made by the landlord.
Alterations	Erection of internal counters, shelving, partitioning, display cases and other shop fittings and ancillary equipment are permitted without the landlord's consent. Other alterations permitted subject to landlord's consent (not to be unreasonably withheld or delayed). There is no express prohibition on structural alterations. There is express prohibition on placing anything outside or on the exterior of the premises (save for a sign displaying the tenant's name and business). Where premises have been fitted out for use as a public house, removal of any dispense systems, bars, toilets, commercial kitchens or cellars is subject to landlord's consent which may be refused in its absolute discretion.
Alienation	Prohibited save for assignment of whole subject to landlord consent (such consent not to be unreasonably withheld or delayed). An AGA is to be required but only where reasonably requested by the landlord.

Costs

The local authority has the option of requiring the successful bidder to pay for the searches, survey and its legal costs incurred preparing the auction pack, including the agreement for lease and lease. The landlord will have to bear its own costs, most notably the cost of any works deemed necessary to bring the premises up to the minimum standard.

Consents

If the process is followed correctly, the lease can be granted without the consent of the landlord, owner, superior landlords or any mortgagees. Notices will need to be served on the landlord being the person entitled to possession of the premises and having sufficient interest to grant a tenancy of at least one year's duration. The only obligation on the local authority to involve superior landlords and mortgagees is the obligation in the Regulations to use reasonable endeavours to determine whether there are any superior landlords and/or mortgagees and to serve copies of any ILN or FLN on them.

Comment

There will be concerns that these new powers allow local authorities to take control of high street vacant premises to force lettings on owners. However, it is worth remembering that there are several conditions that must be satisfied before the powers can be exercised (for example, designation as a high street; satisfaction of the vacancy condition). In addition, as the powers are permissive, there is a question as to the extent to which local authorities will choose to deploy them even with the additional £1 million of funding being provided by the government.

So, we wait with interest to see what impact these new powers will have on the high street.