High Street Rental Auctions

From 2 December 2024, local authorities in England will have new powers allowing them to auction long term vacant commercial ‘high street’ properties to new tenants on short term tenancies of between one and five years. The government notes the ‘move is to stop disengaged landlords from sitting on empty properties’.

The framework for high street rental auctions (HSRA) was introduced by the Levelling-up and Regeneration Act 2023 (LURA), but the measures are only fully coming into force now. Regulations were introduced at the start of November which flesh out the details of this new regime.

An overview of the HSRA process is below.

Which properties can be auctioned?

Local authorities will be able to start the rental auction process in relation to ‘qualifying high-street premises’ which satisfy both a ‘vacancy condition’ and a ‘local benefit condition’.

What are ‘qualifying high-street premises’?

Qualifying high-street premises are premises which are in a ‘designated town centre’ area or on a ‘designated high street’ and the local authority considers them to be suitable for a ‘high-street use’.

A ‘high street use’ will include the following:

• use as a shop or office;
• use for the provision of services to persons who include visiting members of the public;
• use as a restaurant, bar, public house, cafe or other establishment selling food or drink for immediate consumption;
• use for public entertainment or recreation;
• use as a communal hall or meeting-place;
• use for manufacturing or other industrial processes of a sort that can (in each case) reasonably be carried on in proximity to, and compatibly with, the preceding use.

However, premises which are or were last used wholly or mainly as a warehouse cannot be qualifying high-street premises.

Premises can be the whole of a building that is designed or adapted to be used as a whole, or any part of a building that is designed or adapted to be used separately from other parts (or could with reasonable adaptation be used separately).

How does a street or area become designated?

Local authorities must publish a ‘designation proposal’ in order to make a designation of a street or area in a town centre (or to vary or withdraw a designation). The street or area must meet certain requirements. Representations can be made in relation to the proposed designation.

A designation will be a local land charge so anyone taking an interest in premises will be made aware of the designation if a local land charges search is carried out.

How are the conditions satisfied?

The vacancy condition will be satisfied on a given day if the premises are unoccupied on that day and either have been unoccupied for the whole of the previous year or for 366 days within the previous two years. Occupation by persons living in a premises which are not designed or adapted for residential use will not count as occupation. In addition for something to count as occupation it must be substantial, sustained and involve the regular presence of people at the premises.

The local benefit condition will be satisfied if the local authority considers that the occupation of the premises for a suitable high-street use would be beneficial to the local economy, society or environment.

What are the steps involved in the rental auction process?

Initial letting notice

If a qualifying high-street premises satisfies both the vacancy condition and the local benefit condition then the local authority may serve an initial letting notice on the landlord. The landlord will be the person who is entitled to possession of the premises and who can grant a tenancy of the premises of one year or more.

The initial letting notice will be in force for 10 weeks and a final letting notice must be served whilst the initial letting notice is in force. The local authority can withdraw the initial letting notice at any time.

This initial letting notice is intended to give the landlord an opportunity to let the premises itself. However, any letting by a landlord during this period must be done with the written consent of the local authority, otherwise the letting may be void. The local authority is required to respond to the request for consent within a reasonable period and the legislation sets out certain circumstances in which consent must be given (this includes where the tenancy will begin within 8 weeks, will be for at least a year and will lead to occupation of the premises for a high street use). In addition, if the landlord had already entered into an agreement for lease before the initial letting notice was served, consent will not be required. However, as an anti-avoidance measure the obligation to grant the lease under this agreement must not be triggered by the service of an initial letting notice.

Final letting notice

Eight weeks after the initial letting notice is served, and provided that the initial letting notice remains in force, the local authority may serve a final letting notice on the landlord of the qualifying high-street premises. It is worth noting that this in effect gives the local authority a 2 week window to serve the final letting notice as the initial letting notice will expire after 10 weeks.

This final letting notice opens up a 14 week window to allow for the auction process and letting by the local authority to take place. Where a final letting notice is in force, again a landlord cannot let the property without the written consent of the local authority. During this period it will also be an offence for a landlord to carry out works to the property without the written consent of the local authority. However, certain works, such as emergency works, may still be carried out without local authority consent.

A landlord’s right to appeal

In response to the final letting notice a landlord may within 14 days serve a counter notice (specifying a permissible ground of appeal which is set out in the legislation) and then appeal against a final letting notice. A counter notice and appeal would result in a delay in the statutory timetable.

Requirement for a survey

Where a local authority intends to arrange a rental auction it must arrange for the property which is going to be the subject of the auction to have a survey for the purpose of preparing a schedule of works required to raise the premises to meet a minimum standard.

The minimum standard the property must meet is set out in the legislation. The landlord will be under a reasonable endeavours obligation under the tenancy contract to carry out any works required to ensure the property meets the minimum standard within three months from the date of the contract. The landlord will be required to meet the cost of these works. A failure to complete the works in the required time frame may leave the landlord liable for liquidated damages which are set at £55 per day if this is provided for in the contract. If a landlord does not complete the works within the required period the contract may also allow for the tenant to carry out the works and deduct the costs from the rent payable under the tenancy.

LURA gives the local authority the necessary powers to carry out the survey. It also sets out various offences in relation to the exercise of the above. An offence is committed if a person without reasonable excuse obstructs another person in the exercise of this power of entry. In addition, a person exercising the power of entry commits an offence if the person obtains and discloses confidential information other than for the purposes for which the person was exercising the power.

The local authority may be liable to pay compensation for any damage done as a result of the exercise of the power of entry.

The rental auction

For a rental auction to take place a final letting notice must be in force and an appeal no longer possible. The legislation then sets out a 12 week timetable for the auction.

Week 1: The local authority must serve notice of its intention to hold the auction on the landlord and undertake a specified set of searches (the result of which will form part of the auction pack).

Week 2 – obligations on the local authority and landlord: A request for information and the terms of the proposed tenancy contract and proposed tenancy must be served on the landlord by the local authority.

The information requested by the local authority will require the landlord to provide responses to pre-contract enquiries for commercial property, evidence of the landlord’s title to the property and various certificates/assessments if available (e.g. EPC, fire risk assessment, asbestos survey). It will be an offence for a party to fail to respond or to give false information in relation to a response.

The information provided should give the landlord the opportunity to make representations on the proposed tenancy contract and tenancy.

Week 3 – landlord’s representations: The landlord has the opportunity to serve any representations it wishes to make on the local authority.

Week 4 – the auction pack: The local authority must serve the auction pack on the landlord before the end of the fourth week. The legislation sets out detailed requirements as to the information to be included.

Weeks 5 - 10 – the marketing period: The local authority must then market the property in a prominent position on the local authority's website and on a website which appears to the local authority to be one of the leading websites advertising commercial properties for rent. It must be marketed from the fifth week to the end of the tenth week. All ‘valid bids’ must be served on the landlord as soon as reasonably practicable after the end of the ninth week, and in any event by the end of the tenth week. The local authority can assist a bidder to submit a valid bid.

The successful bidder: The landlord can choose to accept any of the valid bids as the successful bid. If the landlord fails to serve notice of the successful bidder the local authority may accept a bid. If the local authority accepts a bid, it must accept the party offering the highest annual rent as the successful bidder. However if it appears to the local authority that it is not reasonably practicable to enter into a contract with the successful bidder which was either chosen by the landlord (or by the local authority as a result of the bid being the highest annual rent), the local authority may choose the bidder offering the highest annual rental value for the premises with whom it is reasonably practicable to enter into a contract as the successful bidder.

The rental auction is concluded on exchange of the tenancy contract.

The tenancy contract and grant of the tenancy

Following a successful auction, provided various conditions are satisfied, LURA gives the local authority the power to enter into a contract to grant a new tenancy with the successful bidder as if it was entered into by the landlord. A copy of the contract must be provided to the landlord. If a landlord then fails to grant a tenancy the local authority has the power to do so on the landlord’s behalf.

The legislation sets out provisions that both the tenancy contract and the tenancy should contain. For example, the contract must include the terms of the tenancy and it may include provisions in relation to the works to be carried out by either the landlord or the tenant.

In relation to the tenancy a four week rent free period is provided for as well as an obligation on the tenant to prepare a schedule of condition which once agreed would limit the tenant’s repairing obligation. A deposit which must be a £1,000 or a sum equivalent to three months' rent, whichever is higher is payable. Although a draft tenancy is not set out, the legislation also details the requirements for various terms including in relation to rights and reservations, alterations, use, alienation, yielding up and service charge (where applicable).

The legislation provides that the letting will be contracted out of the protections of the Landlord and Tenant Act 1954 and there are permitted development rights to allow for change of use to the ‘suitable high street use’ which the premises will be used for during the tenancy. Despite being suggested in the consultation on the process, there is no exemption from the obligation on a landlord to comply with MEES.

LURA provides for deemed consent to the letting on the part of any superior landlord or mortgagee. The regulations require a local authority to use reasonable endeavours to identify any person who may have a superior interest in the premises or is a mortgagee and to serve a copy of the initial letting notice or final letting notice on that person.

Are any costs passed to the tenant?

The local authority may require the successful bidder to pay the legal costs incurred by the local authority in the preparation of the auction pack including:

• Preparing the tenancy contract and tenancy agreement;
• the search fees incurred by the local authority
• the costs of carrying out a survey

Other costs cannot be passed on to the tenant.

However, there is also an obligation on the tenant to undertake and finalise a schedule of condition as part of the tenancy requirements which is also likely to incur costs on the part of the tenant.

Comment

The new HSRA process, on paper at least, appears to be a detailed and complex procedure for local authorities to navigate with various tight deadlines that must be met. The overall time frame runs to several months and may be subject to further delay if the landlord appeals. There is also no guarantee the property will be let at the end of the process. Further guidance for local authorities is anticipated.

How attractive the process is for tenants also remains to be seen.