High Street Rental Auctions – Why, Who, When, How, and What?

The regulations[1] enabling compulsory high street rental auctions (HRAs) have been made and will be in effect in England from 2 December 2024.

Whilst the prospect of HRAs has been around since Spring 2022 when the Levelling-Up and Regeneration Bill was introduced, it still came as something of a shock when the implementing regulations were unexpectedly made on 11^th and 12^th November. This summary attempts to answer some key questions:

WHY?

The aim of the scheme is to reduce vacancy rates and improve the use and perception of local high streets. High street vacancy entrenches economic underperformance and undermines “pride in place”. The consultation which preceded the legislation noted that 80% of vacant commercial properties have been empty for more than two years, with 20% being vacant for more than four years. 

The aim is noble and, with 1 in 7 high street shops currently closed, the vacancy problem is real. However, the scheme presupposes that lack of landlord cooperation is one of the root causes of fading high streets. Is it really the case that landlords are not motivated to find occupiers for their properties? Or that landlords are unwilling to accept the rents that the market is prepared to offer? It seems unlikely that vast swathes of landlords are strategically choosing to leave their premises vacant and deny themselves of any income stream for years on end. 

Occupiers have experienced the toughest of times in recent years and would no doubt welcome lower rents but there are a host of factors an occupier will consider alongside rent when contemplating the viability of a lease of high street premises (size and suitability, cost of fit-out, anticipated footfall, customer demographics, impact of online retailing, market saturation, business rates, parking, transport links etc.). It will be interesting to see whether the auction process does, in fact, reveal significant amounts of pent-up occupier demand for long-term vacant properties. The government’s press release anticipates that community groups might also avail themselves of the opportunity to take on neglected premises.

WHO?

The key players are:

• Local authorities in whom the new powers are vested. The local authorities will serve the relevant notices and run the auction process. They are also empowered to enter into contracts and grant leases as if they were the landlord. It is interesting to note that the government has allocated a total of £1m of funding to local authorities in connection with the new scheme. At just over £3k per local authority, one wonders how many auction processes this will fund.
• Landlords (i.e. those entitled to possession of the property being capable of granting a tenancy of at least one year), who may be freeholders or leaseholders.
• Occupiers, who can participate in the bidding process.
• Superior landlords and mortgagees, who may be surprised to learn that leases granted under the new scheme are deemed to be granted with the express consent of any superior landlord or mortgagee.

WHEN?

HRAs may take place when the following criteria are satisfied:

• There are “qualifying high street premises”, which are premises in a designated high street or town centre which are suitable for “high street use” provided the premises are not a warehouse.
• The premises are unoccupied and have been unoccupied either:
  • For the whole of the preceding year; or
  • On at least 366 days during the previous two years.
• The local authority considers that the occupation of the premises for a high street use would be beneficial to the local economy, society or environment.

“High street uses” are broad and encompass shops, offices, services to the public, restaurants, bars, establishments selling food or drink for immediate consumption, public entertainment venues and manufacturing which is compatible with other high street uses.

My colleague, Nicola Gooch, has considered the planning aspects of the scheme further in this article

HOW?

The HRA process comprises several steps. In summary:

• First, the local authority serves an initial letting notice on the landlord. This commences an 8-week grace period within which the landlord can let the premises itself (with the local authority’s consent). 
• If the landlord has not let the premises within the 8-week period (note the tenancy must actually commence within that period) then the local authority has two weeks to serve the final letting notice. This starts a 14-week final notice period.
• Upon service of a final letting notice, the landlord has 14 days to appeal; if it does not, the local authority can proceed with the auction.
• The local authority may auction the premises and complete the contract for tenancy within the remaining 12 weeks of the 14-week final notice period. The landlord is restricted from entering into lettings or carrying out works during the final notice period.
• The week-by-week steps involved in the auction process are set out in the regulations but broadly involve:
  • A survey to determine what works the landlord will be required to carry out to bring the premises up to a minimum standard.
  • The local authority undertaking the usual conveyancing searches.
  • The local authority serving notice on the landlord requiring it to provide replies to enquires and title information. 
  • The local authority giving the landlord an opportunity to comment on the proposed agreement for lease and lease.
  • Before the end of the fourth week, the local authority serving the auction pack on the landlord.
  • The marketing period taking place between weeks 5 and 10, during which period bids are received and shared with the landlord.
  • The landlord may choose to accept any of the bids but, if it fails to do so, the local authority can either:
    • Choose not to accept any bid; or
    • Accept the highest bid (or the highest bid it is reasonably practicable to accept).

The local authority may require the successful bidder to pay the legal costs, survey and and search fees incurred by the local authority.

WHAT?

What form will the lease agreement and the lease take? The detail is in the regulations. Key points to note are that:

• The tenancy will be excluded from the Landlord and Tenant Act 1954
• There may be provisions for landlord’s works requiring the landlord to raise the premises to a minimum standard. If the landlord fails to carry out such works within three months, liquidated damages of £55 a day are payable.
• There is a 4- week rent-free period.
• A tenant’s deposit of £1000 or, if higher, 3 months’ rent is payable.
• The term of the lease will be between 1 and 5 years.

FURTHER QUESTIONS!

Q1: The grounds on which a landlord may appeal a final letting notice are limited (disputing the satisfaction of the conditions for the auction process or proving that the landlord intends to carry out substantial works or intends to occupy the premises). What is not clear is what a landlord can do (if anything):

• If it is in the course of negotiations but hasn’t managed to get to the point of lease grant within the eight-week grace period?
• If it is genuinely trying to preserve an established tenant mix for its development?
• If entering into a letting would breach a restrictive covenant?
• If it cannot fund the works required to make the premises lettable? 

Q2: There is a new temporary permitted development right to support a change of use to a “high street use” in an auction lease. But what about any planning permission which is required for landlord or tenant works to the premises? How will obtaining that tie in with the timetable?

Q3: Will the rents achieved at auction be treated as comparables for rent review purposes? Can they be said to be a market rent agreed between a willing landlord and a willing tenant?

Q4: How low will the local authority go? What if the highest bid for the premises is derisory? Does this risk a two-tier market for occupiers (those who agree rents in the open market and those who bid at auctions)? As time goes on, will occupiers become reluctant to enter into open market leases if they think they might get a better deal at auction? And could this, in turn, lead to increased numbers of vacant properties while occupiers play a waiting game to see if premises will come up for auction and go for steal?

If you are still reading you will have come to the realisation, like me, that there is a lot of detail to digest and there are many unresolved questions. The extent to which the industry needs to grapple further with the specifics of all this will depend on the local authorities’ appetite to make use of the new scheme. Let’s see what 2^nd December and beyond brings.

[1]
The Levelling-up and Regeneration Act 2023 (Commencement No. 6) Regulations 2024, which bring into force the relevant provisions of Part 10 of the Levelling-Up and Regeneration Act 2023 (the “2023 Act”)

The Local Authorities (Rental Auctions) (England) and Town and Country Planning (General Permitted Development) (Amendment) Regulations 2024, which set out the detail of the auction timetable, the forms of notice, the terms of the tenancy agreement and the terms of the tenancy itself.