Commercial units soon to be compulsorily auctioned by local councils

A Bill covers aspects of local democracy and constitutional arrangements along with many aspects of local town and country planning, plus the imposition of an infrastructure levy.

Section 8 of this Bill is of particular interest to commercial landlords with retail premises, in certain designated areas, where local authorities are to be given powers to re-let vacant high street premises.

Auction powers are to be given to local authorities over vacant high street commercial premises, predominately shops. The Bill is said to underpin the UK Government’s levelling-up agenda and will give local authorities greater direct powers to help regenerate their local areas.

The new auction provisions are aimed at re-invigorating high streets and town centres by enabling local authorities in designated areas to take over from landlords and re-let their vacant commercial premises through rental auctions, regardless of any intentions the landlords may have.

The Bill was first published in May this year and the Levelling Up and Regeneration Bill 2022-2023 is currently being debated in the House of Commons (3^rd reading) before it is passed to the House of Lords.

If passed, the Bill will under its Section 8 grants new powers to local authorities to hold compulsory auctions of long-term vacant high street premises in nominated high streets and town centres in England.

What are designated areas?

A local authority will be empowered to designate a street or an area as being important to the local economy if there’s a concentration of high street uses. There’s a wide range of high street uses as defined in the Bill including shops, offices, restaurants and even light industrial premises, but excluding warehouses.

Once an area has been designated, any long-term vacancy of a unit will be vulnerable to local authority control, that’s if the unit has been vacant and the landlord has failed to re-let for a certain period of time. The authority can intervene if it considers re-occupation would be beneficial to the public good, to the local economy, society or environment.

How are vacancies defined in the Bill?

A commercial premise is defined as vacant if it has been unoccupied for one year or, at least 366 days in the last two years. Occupation is defined as: “the regular presence of people at the premises” but as the definition stands questions remain as to how this will be interpreted into a practical everyday test?

Would temporary storage be an accepted use?, what about pop-up shop used under temporary licences? It seems at first sight there could be many loop-holes with this.

To what properties would rental auction powers apply?

The auction powers will only apply to ‘qualifying properties’, being those situated in an area designated by the local authority as a ‘high street’ or ‘town centre’ (in accordance with requirements contained in the Bill) and which meet the following criteria:

1 – Suitable for high-street use – the local authority must consider that the property is suitable for a ‘high-street use’. This categorisation will include shops, offices, restaurants and public entertainment spaces. In their process of assessing suitability, local authorities must have regard to any works or fit-outs that a landlord would be required to carry out or an ingoing tenant would do to prepare a unit prior to occupation.

2 – Vacancy condition – the property must have been continuously vacant for more than one year or for 366 days in a two year period.

3 – Local benefit condition – the local authority must consider that occupation of the property for a suitable high street use would be for the public good, beneficial to the local economy, society or environment.

How are the premises identified?

It doesn’t take much thought to realise that problems might arise with split and mixed use premises. Shop premises often have upper parts used as offices or residential accommodation. It would seem that local authorities will be allowed to specify a part of the building to be rental auctioned, for example a ground floor street facing retail unit with accommodation above could be divided and only the ground floor rental auctioned.

How does a rental auction procedure work?

There is a two stage process that a local authority must go through to notify a landlord that it intends to proceed to a rental auction with a qualifying property. The landlord will have a right of appeal. This will be during the second stage notice period, including where the landlord intends to occupy the property itself, or to carry out substantial renovation works or to redevelop the property.

The government will publish further regulations and guidance on how such an auction would proceed in practice. Currently, no guidance has been given as to how a bidder may be deemed to be successful.

What will be the terms of a tenancy?

It is proposed that a rental bidder deemed successful will negotiate with the local authority, the specific letting terms in an agreement for a lease, this ‘having regard’ to the landlord’s representations, before powers requiring the landlord to grant the lease on those terms.

The local authority would have the power to require a landlord to carry out works before the start of a tenancy, The Bill will set out certain terms to be included in a tenancy, but details of these will be left to be covered by additional regulations.

For example, mandatory terms would include include:

1 – the tenancy term for a minimum of one year to a maximum of five years

2 – repairing obligations will fall on the tenant, to repair and insure the property

3 – definition of circumstances in which the tenant may (or may not) dispose of its interest

4 – Provisions will be made out for when a landlord may forfeit or terminate the lease

5 – there will be a requirement for the tenant to hand back the property with vacant possession at the end of the term.

6 – The tenancy will be excluded from security of tenure under the Landlord and Tenant Act 1954 Part2, and consent to the tenancy will be deemed to have been granted by mortgagees and superior landlords.

7 – The Bill considers the use of a model lease agreement for these compulsory lettings and guidance will be issued for a co-operative process between local authorities, landlords and tenants

The Levelling up and Regeneration Bill Bill introduces a new concept in local authority control, effectively taking new compulsory powers to re-let a landlord’s premises. By accomplishing something a landlord has been unable to do for itself, the theory is that the authority’s actions will promote the regeneration of its high streets and town centres.

The provisions of this Bill will be of concern to landlords who have been unable to find what it deems as suitable tenant in the specified time period. Letting commercial premises, finding suitable tenants, can often take a considerable period of time. Landlords would be concerned about being railroaded into letting to what they deem to be unsuitable tenants and uses.

A further concern would be the possibility, given that many or most existing retail premises are older, and potentially need expensive improvement works necessary to meet energy efficiency requirements, to be imposed on landlords as part of an auction letting process.

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