Compulsory rental auctions: whose high street premises are they anyway?

You may have heard in the media recently that the Government is thinking about forcing the owners of vacant high street premises to submit their premises to a rental auction.

Unsurprisingly perhaps, the industry has not been enthusiastic about this idea – but the Government is going ahead with it anyway, and has included provisions for it in the draft Levelling-up and Regeneration Bill, which was published on Thursday 11 May 2022.

So what is this scheme going to look like, then (if passed in its current form)?

First off, it will give local authorities the power to designate as a “high street” or “town centre” streets and areas that are “important to the local economy because of a concentration of high-street uses of premises”. There is a long list of the sort of “high-street uses” that can be considered, including shops and offices, restaurants, bars, pubs and cafés, community halls and meeting places, and some manufacturing and industrial processes (but only if they can reasonably be carried out “in proximity to, and compatibly with”, the other uses). If a street or area derives its importance principally from goods or services purchased in the course of a business, though, it cannot be designated. The list is also interesting in what it leaves out – warehouses and public infrastructure are not included, for instance.

Once an area has been designated as a high street or town centre, vacant premises in it that the local authority decides are suitable for a high-street use can be included in a rental auction. Premises are vacant if they have been continuously unoccupied for a year, or unoccupied for 366 days or more in the last two years. Occupation means “the regular presence of people”, but trespassers don’t count. How that will be assessed remains to be seen. Hopefully, if that is going to be the test, the Government will publish some guidance to explain what it considers to be “regular” and to constitute “presence” – presumably one person popping in once a week to collect the post wouldn’t be sufficient, but where are the lines going to be drawn?

Once a local authority has decided that vacant premises should be included in a rental auction, there is a process of notices to be served before the auction happens:

• First, the local authority serves an initial letting notice on the landlord. This is whoever has the right to possession and sufficient interest to be able to grant a tenancy for at least a year, so will include a tenant with more than a year left on their lease – and if the lease prohibits underlettings, or requires consent from someone else, it looks like that will be overridden.
• This notice prevents the landlord from granting any tenancy or licence for those premises (or entering into any agreement to do so) without the local authority’s consent while it is in force (up to 10 weeks), but does not prevent completion under a contract that was already in place. The local authority must give or refuse consent within a reasonable time after being asked, and must give consent to a tenancy or licence that will start within eight weeks of the service of the initial notice, last for at least a year, and “would be likely to lead to the occupation of the premises for activity that involves the regular presence of people at the premises”.
• If the premises have not been let within eight weeks, the local authority can then serve a final letting notice on the landlord (but must do so before the initial notice expires), which will last for 14 weeks (if not withdrawn or revoked on appeal). In this period, the landlord cannot grant any tenancy or licence of the premises, or carry out works to them, without the local authority’s written consent (which, again, must be given or refused within a reasonable time). The local authority can also arrange its rental auction.
• The landlord has 14 days from service of a final letting notice in which to serve a counter-notice on the local authority, stating that, if the local authority does not withdraw the final letting notice, the landlord intends to appeal against it. The counter-notice must also identify the intended ground of appeal. These include a factual dispute over whether or not the premises are vacant, that the premises cannot reasonably be considered suitable for the local authority’s proposed high-street use, a failure by the local authority to consent to a tenancy or licence (while the initial letting notice was in force), and that the landlord intends to occupy the premises for its own residence. This is a pretty short list! Any appeal must be made to the county court within 28 days of service of the counter-notice.
• If, after a final letting notice has been served, no appeal has been made (and the notice has not been withdrawn), and no tenancy or licence has been granted (other than one granted without the local authority’s consent and in breach), the local authority can start the rental auction.

The Bill describes the rental auction as “a process for finding persons who would be willing to take a tenancy of the premises… and ascertaining the consideration that they would be willing to give in order to do so”. Separate regulations will govern the process, including how the “successful bidder” is identified, so we don’t at this stage know how it might operate or what the criteria for success might be. But presumably, given the intention is for premises to be let, there will be an ability for the local authority to accept a bid that is below the open market rental value, or passing rent under an existing lease.

Once there is a successful bidder, the local authority can enter into a contract with them for a tenancy of the premises of at least one year but not more than five years. The contract will take effect as if it was entered into by the landlord, but the landlord is not involved in negotiating or signing it; the local authority will act “in its own name, but with an indication that it is acting so as to bind the landlord rather than itself”. The local authority must provide a signed copy of the contract to the landlord as soon as possible.

The contract must set out the terms of the agreed tenancy, and may include provision for pre-tenancy works, by either the landlord or the tenant; so a landlord could be forced to carry out works it does not want to do, to facilitate occupation by someone it has not chosen as its tenant, under a contract that has been forced upon it. Further regulations will set out more detail. The Bill does require the local authority to “have regard” to the landlord’s representations but, unless subsequent regulations expand on that concept, it may not mean much.

If this all seems very Draconian, and to drive a cart and horses through the way in which tenancies are normally negotiated (and the concept of freedom to contract, or not, with whomever a landlord wants), that’s because it is and it does!

There is some small comfort for landlords in that all leases must be excluded from statutory security of tenure under the Landlord and Tenant Act 1954, but that could still leave a landlord forced to accept a tenant it does not want at a rent it would not otherwise have accepted. For some landlords, such as charities and other organisations who, for ethical or reputational reasons for example, may not wish to contract with specific businesses, this could be very problematic indeed. It could also be of significant difficulty to landlords with redevelopment proposals working towards vacant possession of a whole block, but over a long period of time, and to landlords with a mortgage who might find themselves in breach of their loan terms. There is also a concern it could lead to further under-investment in our high streets and town centres; after all, why would investors tie up capital in properties that could be subject to these local authority powers? And then there is the question of how local authorities resource themselves to exercise these new powers, too.

The Bill was introduced into the Commons on Thursday 11 May 2022 and so is, at the moment, only a first draft and at a very early stage of the legislative process. Hopefully, the good work of various industry bodies will help to steer Parliament in the right direction; while we all want vibrant high streets, this doesn’t necessarily seem to be the best way of delivering them.