Under the hammer

The government has published its consultation response, High street rental auction, on its proposed policy designed to help local authorities combat the detrimental effects of long-term vacancies on the high street. Over the coming months, the government will work with stakeholders to design and develop secondary legislation to give effect to the proposals. It anticipates that this legislation will come into force in mid-2024 (although this may be pushed on with an election called at the time of writing).

Events permitting, detailed guidance will be released to help stakeholders navigate the policy and organise a number of introductory events to explain and help stakeholders understand it.

Key points

The proposals give local authorities the power to auction the rental rights of commercial high street property that has been vacant for longer than 12 months in a 24-month period. The purpose behind this is to tackle the problem of persistently vacant property on high streets.

The consultation sought views on detailed aspects of the policy, including the running of the auction process, a proposed new permitted development rights process, disapplication of minimum energy efficiency standards (MEEs) in this context, and the nature of the standardised framework for the agreement for lease and lease arrangements forming part of the process. The successful bidder under the auction will enter into an agreement for a lease (catering for any works that the landlord needs to carry out and possibly also for the tenant’s works) and be granted a lease of the property. The use of high street rental auctions is not intended to apply where landlords are actively trying to find a tenant for their premises.

Guidance

The proposal is to publish detailed guidance ahead of high street rental auctions going live. This will help stakeholders (including local authorities, landlords and tenants) to understand how to operate the policy and how the auction and bidding process will work.

Auction packs

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.

The guidance will advise that local authorities should begin auction pack preparation as early as possible following the service of relevant notices under the process. The auction pack should include local authority searches and flood risk and test certificates from landlords (even though this was opposed by some landlords in consultation responses). The pack will also include information on the business improvement district levy and asset of community value status. A report on the condition of the property (schedule of condition) will be included as the local authority will undertake a survey to ascertain the works required (if any) for the property to comply with the minimum standard.

Marketing process

A minimum marketing period of six weeks will be recommended and mandated for at least five weeks.

The following will be compulsory either to follow (where there is an action for the local authority, such as advertising) or be included in the marketing pack:

• properties will be listed on the relevant local authority’s website (properties subject to “initial notice” only will not be required to be listed)
• advertising on the internet, including at least one of the major commercial property websites
• professional photos of the property, and
• the floor area of the property (amount of commercial space of property).

Reserve price

As there are safeguards offered elsewhere in the proposals, and given that a reserve price could undermine the policy, no reserve price will be set for high street rental auctions. A reserve price, especially one set too high, could discourage bids and lead to the property remaining empty.

Proposed auction option

The sealed-bid auction process outlined in the consultation will be used for high street rental auctions. The benefits of the process are stated to include that it gives the landlord more control by allowing them to select the winning bid; it increases potential demand by not requiring pre-registration checks prior to bidding; and landlords can carry out a holistic assessment of all bids.

Outsourcing the process

Local authorities will be allowed to outsource all or part of the auction process to commercial property agents, which may help them with capacity concerns. This will be elaborated further in the forthcoming guidance.

Costs

The government has determined that:

• costs relating to the marketing of the properties and auction fees will be borne by the local authority, and
• 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.

The government will provide £2m in funding for local authorities to cover costs incurred under its policy.

Minimum standard

The government proposes to use the minimum standard put forward by the consultation, which, as part of the standardised lease framework, sets a minimum standard relating to the physical state and condition to which the landlord must ensure the property is compliant. See paragraph 93 of High street rental auctions for further detail.

Remedies

This relates to remedies that can be used by tenants where a landlord has failed to undertake works to comply with the minimum standard. In addition to other proposed remedies in the consultation (see paragraph 100 onwards), local authorities will have the option to include liquidated damages, subject to the consideration of the landlord’s representations. Liquidated damages will be £55 per day, applicable to high street rental auction leases. Safeguards will be included to ensure proactive landlords are not unfairly penalised owing to events outside of their control.

Subletting / subdividing

Subletting will not be permitted, but assignment of the lease will be allowed, subject to the landlord’s consent (not to be unreasonably withheld or delayed).

Subdivision of large empty premises will be excluded from high street rental auctions at this juncture, although the next government will continue to consider this.

Alterations and fit-outs

This focuses on the tenant’s ability to carry out works that enable the property to function and trade in a manner that gives it the greatest chance of being successful.

The tenant should be allowed to undertake internal non-structural works for their particular use without the landlord’s consent. Such fit-outs include erecting internal counters, shelving, partitioning, display cases and other shop fittings and ancillary equipment, subject to removal by the tenant at the end of the term.

Works to external parts or structural elements of the property must be subject to the landlord’s consent (not to be unreasonably withheld or delayed). A rent-free period for the tenant to account for the time these works are carried out will be included and will be four weeks long.

Tenants will be able to remove or retain non-structural items of existing fit-out as well. Where tenants wish to remove a structural item, they must seek consent from the landlord (not to be unreasonably withheld or delayed).

There will be protections in leases of pubs that stipulate that the removal of the dispense systems, bar, toilets, commercial kitchens or cellars will always be at the absolute discretion of the landlord. Where a local authority is able to agree removal of some of these unique fittings with a landlord as part of its assessment premarketing, the lease can be changed so that the fittings can be removed with the landlord’s consent (not to be unreasonably withheld or delayed).

Definition of premises

Where the property is the whole of a building, a simple red line plan will be used with an accompanying general description to define the tenant’s let area. Where the property forms part of a building, the tenant’s let area will be internal only, with external and structural parts being retained by the landlord. Shop fronts will also be let to the tenant. The tenant will be granted additional rights allowing them to attach into those retained parts for the purpose of a fit out.

Rent deposit

There will be a rent deposit of £1,000 or three months’ rent, whichever is the greater. The landlord will have final choice over the tenant from those who bid (and are eligible to do so) and can choose a tenant who they believe to have greater covenant strength.

Repairs and decoration

Tenants will be required to carry out repairs only to the condition shown by a schedule of condition. Since landlords will be required to carry out works to restore a property to a minimum standard, the schedule will ensure that the works paid for by the landlord are properly maintained, while not requiring the tenant to pay for repairs relating to pre-existing issues.

Service charge

There will be no service charge unless the landlord opts for it and the landlord’s choice will be to reflect the service charge in a superior lease, to match an existing regime where the unit is in a parade of shops with a common landlord, or to select from a list of services.

Utilities

The landlord must ensure that gas (if present), electricity and water are supplied. The lease will require the landlord to be reasonable when considering tenant alterations to premises, which could include internet connections.

Minimum energy efficiency standards

There will be no exemption from MEES for high street rental auctions.

Permitted development right

The proposed permitted development right will provide a tool to support the government’s policy; applying to qualifying high-street uses and providing for the change of use that the local authority determines is suitable. It serves to ensure bidders are free from the difficulty of knowing whether a planning application for change of use will be successful. It also prevents the local authority needing to deal with applications from all prospective tenants or a tenant having entered a lease while still requiring consent for change of use.

The permitted development right will not allow any physical works that would amount to development, unless other permitted development rights apply, and listed building consent will be required for any internal or external works affecting the character of a listed building. The right avoids duplication for the local authority, which will already have considered and set the suitable use and decided which buildings and locations are to benefit from the rental auction process.

The additional permitted development right that would have provided for the permanent change of use following the period of the lease will not be implemented. Therefore, without obtaining separate planning permission, the use will revert at the end of the lease. Tenants who agree a new lease with the landlord will need to make any relevant planning application for change of use ahead of the expiry of their high street rental auction lease.

Safeguards for landlords

Landlords will have concerns around the choice of tenant and potential loss incurred, but the government makes the point that the properties in scope of this policy will have been vacant for a year, or cumulatively for more than a year over a two-year period. The landlord will have had a further grace period in which to rent the property to a tenant of their choosing, too.

The landlord, where engaged, will also have full choice over the successful bidder from those eligible, helping them to screen tenants.

What’s next?

A lot of the detail about the high street rental auction process is now available, but it remains to be seen if and when secondary legislation will be developed to give effect to the proposals.

The timeframe set by the government for the legislation to come into force in mid-2024 is doubtful given the timing of the forthcoming general election. Hopefully, the guidance provided and events organised will be sufficient to enable stakeholders to navigate the new policy, whatever the outcome of the election.

Reinvigorating the high street by tackling the problem of persistently vacant properties is likely to be welcomed by some, but landlords will

still have concerns about the local authority’s power to auction the rental rights of their commercial high street property (notwithstanding the safeguards in the proposals).