Stop, hammer time! Levelling-up and forced rental auctions of vacant high-street premises
The Levelling-up and Regeneration Act 2023 contains powers enabling local authorities to auction off leases of empty high-street premises, and to grant tenancies to third parties if landlords fail to do so.
This is a significant extension of government intervention into landlord and tenant law.
We consider below the stated aim of the legislation, how the process will work and ancillary powers that property owners need to be aware of.
High street rental auctions - policy aims
The government explained its thinking in an earlier consultation. It said that high vacancy rates negatively affect economic activity in the heart of communities, and that there is a clear link with regional economic underperformance. Boarded-up shops are also a target for vandalism, graffiti and anti-social behaviour.
Regenerating high streets, and cracking down on anti-social behaviour, is therefore said to be at the heart of the government’s levelling-up agenda.
The new Act contains provisions intended to give local authorities the power to tackle vacancy rates.
In particular, local authorities have the power to auction-off the rental rights of commercial high street premises that have been vacant for longer than 12 months in a 24 month-period.
The process is supposed to be ‘simple, efficient and affordable’.
The government has indicated that the new powers are not intended to be used where landlords are actively seeking to fill their premises. Rather, they are intended to apply where vacancy rates are a significant issue and landlord cooperation is low.
It seems relatively clear that the new powers are designed to enable local authorities to put additional pressure on landlords to let-out premises voluntarily, without the need for the high street rental auction process to actually be invoked.
How will the process work?
The local authority will, first, designate particular streets and town centre areas as being locations in which it will be appropriate to exercise its powers. It will need to maintain a map showing these areas.
If the local authority considers that premises within these designated areas are suitable for one of a number of specified purposes (such as shops, offices, restaurants and cafes), they will be “qualifying high-street premises”.
The list of high-street uses expressly excludes warehouses. It also does not include purely residential use or industrial uses (unless of a sort that can reasonably be carried on near to normal high-street premises).
Initial Letting Notice
The local authority can serve an “initial letting notice” (ILN) on a landlord if it believes that any qualifying high-street premises that it has identified:
• Are unoccupied, and have been empty for the whole of the preceding year or otherwise for at least 366 days in the previous two years (vacancy condition).
• The occupation of those premises for a suitable high-street use would be beneficial to the local economy, society or environment (local benefit condition).
Unless withdrawn, the ILN will remain in force for ten weeks.
Whilst an ILN remains in force, the landlord will be prevented from granting or agreeing to grant tenancies, licences or other occupation agreements without the local authority’s consent. Any agreement entered into without consent will be void.
The local authority must give or refuse consent within a reasonable time.
The authority will be required to give consent where the landlord’s proposed occupation agreement will run for at least one year, will be for a suitable high-street use, and will start within eight weeks from when the ILN took effect.
Final Letting Notice
If the landlord has not entered into its own occupation agreement (with the local authority’s consent) within a grace period of eight weeks from the date the ILN took effect, the local authority can serve a “final letting notice” (FLN).
An FLN will last for 14 weeks (subject to any appeal, and unless withdrawn or revoked).
The landlord will similarly be prevented from granting or agreeing to grant a tenancy, licence or other occupation agreement to a third party whilst an FLN remains in force, unless the local authority consents.
Subject to certain exceptions, the landlord will also be prohibited from carrying out works to the premises whilst an FLN remains in force, without the local authority’s consent. It will be a criminal offence to carry out works without such consent.
The landlord will be able to serve a counter-notice in response to an FLN, but will only have 14 days to do so.
The landlord can only serve a counter-notice specifying one of a handful of statutory grounds of appeal, including where it says that:
• The vacancy condition was not met.
• The premises cannot reasonably be considered suitable for the proposed high-street use.
• No authority could reasonably have concluded that the local benefit condition was met.
• The local authority failed to give consent to a proposed occupation agreement. • It intends to carry out substantial works of construction, demolition or reconstruction.
• It intends to occupy the premises for its own business purposes or as its residence.
If the landlord has served a counter-notice specifying grounds of appeal, and the local authority still does not withdraw the FLN within 14 days, the landlord can lodge an appeal in the county court.
The appeal must be brought in the county court within 28 days from when the local authority received the counter-notice.
The county court will decide whether to revoke or confirm the FLN.
The FLN will remain live until the appeal proceedings have been finally disposed of.
The rental auction
If the landlord hasn’t entered into an occupation agreement with a third party (with the local authority’s consent), and either no appeal is brought or is unsuccessful, the local authority can arrange for a rental auction.
The rental auction will find third parties willing to take a short-term tenancy (for a term of between one and five years), and ascertain what they are prepared to pay.
The finer details of the rental auction process will be set out in regulations
However, the process will need to require the proposed high street-use to be specified in advance, enable the landlord or the local authority to go with an unsuccessful bidder in certain circumstances, and allow the local authority to choose between different auction procedures having regard to any representations the landlord may make.
Terms of the contract and the tenancy
Following the auction, the local authority will be entitled to enter into a contract (an agreement for lease) with the successful bidder under which the bidder agrees to take a tenancy.
The contract will have effect as if it was entered into by the landlord.
Again, much of the detail still needs to be set out in secondary legislation, but the contract may allow the tenant to carry out pre-commencement fit-out works. The government says that the proposed tenancy itself will contain provisions that one would expect to find in a commercial lease (length of term, use, rent review, repairs etc), and will be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954.
When drawing up the supporting regulations, the government must have regard to the terms on which contracts and short-term tenancies are typically let.
Where it has discretion, the local authority must have regard to any representations made by the landlord.
If the landlord fails to grant a tenancy to the successful bidder in accordance with the contract, the local authority will have the power to grant the tenancy itself. If it does so, the tenancy will have effect as if it was granted by, and so as to bind, the landlord.
The consent of any superior landlord, and any lender, will be deemed to have been given to the contract and resulting tenancy.
Rights of access and to information
The local authority can serve a written request on anyone with an interest in a designated high street or town centre, seeking relevant information about premises that it requires in connection with the exercise of its powers.
The local authority will also have the power to authorise someone to enter and survey the property. This power will kick in if it has given written notice to the landlord or other interested party and access has not been given within 14 days. Force cannot be used unless the landlord obtains a warrant from the local magistrate.
It will be a criminal offence for a person to fail to comply with an information request without reasonable excuse, to provide false information, or to obstruct a person from exercising the power of entry.
A person with an interest in land can apply for compensation for any damage they consider they have suffered as a result of the exercise of the local authority’s powers.
In the event of dispute, the amount will be determined by the Upper Tribunal.
If the government intended the process to be simple and cost effective, we doubt that it has achieved its goal.
Experience suggests that any system that involves the service of statutory notices, appeals through the courts, and civil and criminal sanctions for default, provides fertile ground for litigation. Add to that concepts borrowed from judicial review proceedings, applications for landlord consent, and statutory grounds of opposition under the Landlord and Tenant Act 1954, and you have a system that could be very expensive and administratively burdensome for local authorities. It remains to be seen, therefore, whether the high street rental auction process will be much used by local authorities.
We anticipate that local authorities may, however, threaten to use their powers, and possibly exercise their preliminary information and access rights, to put additional pressure on landlords to let out empty high street shops, even if they might stop short of arranging rental auctions.
Commercial landlords with premises in and around high-streets therefore need to be aware of the new rental auction process and the ancillary powers available to local authorities.
The powers could also have greater reach than might first appear. They could, for example, extend to developers of mixed-use premises where the residential flats may have been let but where the ground floor unit may stand empty.
If such landlords do not let premises out of their own volition, they risk having an unknown tenant forced on them (and their lender) on lease-terms that they did not agree.