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“Levelling-Up”: Rental auctions and considerations for commercial landlords

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What is “Levelling-Up”? The government’s proposals to “level-up” the UK were finally unveiled in February 2022, with the Levelling-Up and Regeneration Bill being formally introduc...

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Date: 23/06/2022

Authors:

Lucy senior colour 2021

Lucy Senior

Associate

What is “Levelling-Up”?

The government’s proposals to “level-up” the UK were finally unveiled in February 2022, with the Levelling-Up and Regeneration Bill being formally introduced to the House of Commons in May 2022. The Bill undoubtedly has good intentions; it sets out to “restore a sense of community, local pride and belonging, especially in those places where they have been lost”. However, some of the Bill’s envisioned programmes for reinvigorating local areas and, in particular, UK high-streets, are controversial.

As such, the Bill has potential wide-reaching and concerning implications for commercial landlords. The most widely-discussed, and controversial, provision is to allow local authorities to agree lettings of vacant high-street premises at auction.

The planned scheme for rental auctions

Which properties are affected?

The proposed scheme can be used where a local authority considers a particular high-street as being “important to the local economy because of a concentration of high-street uses of premises on the street”. What defines “high-street use” is very wide-ranging, including use as a shop, office, restaurant or use for manufacturing or industrial processes. If premises are unoccupied on a particular day and have either been unoccupied for one year, or during the last two years were unoccupied on at least 366 days, they are designated “vacant”. Finally, if the local authority considers “the occupation of the premises for a suitable high-street use would be beneficial to the local economy, society or environment” the local authority can serve an “initial letting notice” on the landlord of the vacant high-street premises. The “initial letting notice” will remain effective for 10 weeks.

The Process

While an “initial letting notice” is in force, the landlord may not grant, or agree to grant, a tenancy or licence to occupy the premises without the written consent of that local authority. Notably, any attempt by the landlord to grant a tenancy or licence will be void. During this initial 10 week period, the local authority must give its consent to the grant of a tenancy or licence should the term be at least one year in length, or the period of occupation would begin within the period of eight weeks beginning on the day on which the “initial letting notice” took effect.

On the expiry of this 10 week period, and if no letting is agreed or made, a local authority may then serve a “final letting notice” on the landlord, allowing the local authority to let the vacant premises at a rental auction.

Additionally, once a “final letting notice” has been served, the landlord may not carry out any works to the premises without the written consent of the local authority. Any person who carries out works without consent is liable to a fine on summary conviction of up to £2,500.

The local authority (and not the landlord) may then enter into a tenancy contract with the “successful bidder” at auction as if the contract had been entered into by the landlord of the premises. The contract entered into by the “successful bidder” and the local authority to let the premises must set out the terms of the agreed tenancy and contain certain standard provisions as set out in the Schedule to the Bill, however, the landlord has no control as to the contract to be entered into on its behalf. The local authority must “have regard to any representations made by the landlord”, although how much influence a landlord may have in this situation is uncertain.

A contract entered into in this way between a local authority and a “successful bidder” is deemed to have been entered into or granted with the express consent of any superior landlord and any mortgagee of the land.

Commentary

Landlords can seek limited comfort as any tenancy granted by way of the proposed rental auctions would be contracted out of the Landlord and Tenant Act 1954. There is also an appeals procedure that landlords can follow. Nonetheless, the proposed Bill represents a potentially radical overhaul of the traditional landlord and tenant relationship, with local authorities seizing control of landlord’s properties.

The government proposes that these forced rental auctions will revitalise town centres by “reducing blight and enabling high-streets to thrive”. It is, of course, true that there are many vacant commercial premises across UK high-streets; recent estimates as of March 2022 indicate almost 16% of shops on Britain’s high-street are empty, although there are geographical disparities with the North East having a higher proportion of vacant high-street shops than the South East, for example. Moreover, many such premises have been vacant for a number of years. There are numerous reasons why many shops remain unoccupied for extended periods, such as the rise of online retail and the change in consumer habits in recent years. The Covid-19 pandemic has also clearly affected the viability of high-street shops with many forced to close during lockdown.

Commercial landlords will no doubt be keenly aware of the number of vacant properties. This reality drives at the heart of the puzzling point of view of the Levelling-Up Bill. The Bill suggests that commercial landlords are willingly hoarding empty properties for some unknown benefit, deliberately evading attempts by willing tenants to let these properties. This is not the reality for most commercial landlords. While business premises remain unlet, the burden of paying business rates will fall on the landlord. Instead, many commercial properties remain unlet because the landlord has been unable to find a suitable tenant, often due to business rates being so high that tenants cannot viably trade from the premises.

Most commercial landlords will be actively engaging in negotiations with potential tenants in order to start seeing the benefit of a steady income stream in rent. Landlords are also frequently offering heavy rent concessions to potential tenancies as incentives to enter into a lease. If a landlord cannot find a suitable tenant through the normal contractual process, it is unclear why the government thinks tenants would be found at auction. These proposals also take control away from landlords in maintaining their asset, as landlords could be forced to let to unsuitable tenants that would disrupt an existing tenant mix, leading to poor estate management and difficult landlord and tenant relations from the start.

Conclusion

RICS’ response in relation to these proposals was measured and pointed, noting these forced auction sales may “be too blunt a tool and one which does not fully address the challenges of the retail sector”.

The government aims for its Levelling-Up policies to be achieved by 2030. There is clearly a great deal of work that can be done to regenerate UK high-streets and to help local communities, however, these proposals seem muddled and gimmicky. The government needs to recognise that the reasons for vacant high-street premises are wide-ranging and that commercial landlords do not benefit from vacant premises, in fact, quite the opposite. There is also the question of how the process would work in practice: local authorities are stretched very thin to begin with, where will they find the time to serve notice on numerous landlords and enter into agreements with “successful bidders”? What will the tenancies granted at these auctions look like? How will a “successful bidder” at auction be identified? The proposals need more clarity, despite their admirable aims.

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