Rebecca Bullingham and Annabel Barrett consider if the process will ring in the changes for landlords, tenants and shoppers.
It goes without saying that the high street has suffered in the past decade or so. Out-of-town retail parks and shopping centres are the go-to options for shoppers in many locations, with the local high street or town centre becoming the second choice in many places across the UK, not to mention the substantial growth in online shopping.
The goal of the new high street rental auction process, coming into force on 2 December 2024 in time for the Christmas shopping rush, is to support local businesses and revive the high street in “designated” areas in England. In practice, it may be some time before the scheme is up and running while councils start the process of implementing the new legislation. The question is whether this will work for landlords and tenants alike in the long run.
High street rental auctions in practice
The procedure set out in the Levelling-up and Regeneration Act 2023 – with regulations brought in by the Local Authorities (Rental Auctions) (England) and Town and Country Planning (General Permitted Development) (Amendment) Regulations 2024 – starts with the service of an “initial letting notice” by the local authority on the landlord of the property, based on a standard form. The landlord is prevented from granting or agreeing to grant certain interests in the property during the currency of the initial notice without the local authority’s consent.
After eight weeks, the local authority may serve a “final letting notice” on the landlord, which the landlord can appeal by serving a counter-notice. Where there is no appeal, or the appeals process has been exhausted, the rental auction process is instigated.
The properties which will be impacted by the scheme will be those in certain high streets and town centres which are suitable for a “high-street use” and which have been vacant for the past year or for 366 days during the previous two years. Shops, restaurants, offices and those properties intended for public entertainment or recreation could all be included, among others.
The likely implications
An occupied unit is much better for a landlord than a vacant lot, but it remains to be seen whether the compulsory letting of properties will see affected landlords make gains in terms of rent and longevity of occupation. The tenancy to be granted is a “short-term tenancy”, to be at least one year but not more than five years under the legislation. There is no minimum rent.
On the upside, this could have a positive impact on service charge schemes, with affected landlords no longer needing to pick up the tab for the vacant shops in their estates. An occupied unit would also reduce a landlord’s business rates liability. In turn, this could boost the overall improvement of affected high streets, with more money in the pot for landlords to spend on maintenance and refurbishment.
A point of conflict may arise on the terms of the new lease. The statutory framework includes a draft standard tenancy agreement which will be put into place if landlords fail to engage with the process. Where the standard agreement is at odds with leases of other properties in the estate, this could have an impact on various lease provisions, including the service charge regime, resulting in recoverability issues for landlords with service charge costs.
Some properties within the scheme may also have remained unlet previously owing to a poor state of repair. In some cases, the costs of refurbishment may outweigh the rent offered by the highest bidder and might add a substantial burden on the party responsible for repairs under the new lease.
As well as the landlord being required to undertake works so that the property is up to the “minimum standard” under the provisions of the tenancy contract, there is no exemption for the Minimum Energy Efficiency Standard, and a landlord will be required to carry out works to bring the property up to the required level if it is in breach.
If nobody bids for the property during the auction process, then the council will have incurred costs which cannot be recouped. This will include costs incurred in connection with the auction process, service of notices and the preparation of a survey, which can otherwise be recovered from a successful bidder if the auction succeeds.
Clarity needed
The compulsory letting process does factor in a landlord’s intention to redevelop or demolish the property in question, including this as a potential ground of appeal. While leases are to be excluded from the protections of sections 24 to 28 of the Landlord and Tenant Act 1954, the relevant ground of appeal in Schedule 20 is similar to the landlord’s ground of opposition to a renewal lease within section 30(1)(f) of the 1954 Act. There is no clarity at present as to when the appeal ground is required to be proven, whether this be on the date of service of the landlord’s counter-notice or at any appeal hearing in the county court, although the latter seems more likely.
For the time being, the reaction to the introduction of this legislation in the real estate market has been a generally positive one. Leaving aside the political or ethical objections which will inevitably be raised by many to a process which entitles local government to compel the private sector to deal with its property, the hope is that small, local businesses will be given a boost and the high street will be improved in the long run.
Photo © Dimitris Legakis/Shutterstock
Rebecca Bullingham is of counsel and Annabel Barrett is an associate at CMS Cameron McKenna Nabarro Olswang LLP
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