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A closer look at high street rental auctions

Posted on 13 July 2023

In last year's Queen's Speech, the Government announced controversial plans to force landlords of empty retail units to rent them out. Despite widespread criticism from the property industry, the Government are pressing ahead with this and have published a consultation which closed last week.

The consultation fleshes out the Government's plans and clarifies some of the points we queried in an article on this topic last May.

Landlord's safeguards

The Government is trying to get landlords on board. The consultation states that the Government has considered the interest of investors and wants to ensure its actions "do not inadvertently deter commercial property from continuing to be an active area for investment".

The consultation refers to a number of safeguards to protect landlords, which include:

  1. Limited scope
    The auction process will not apply where a landlord is actively trying to let a premises. But if vacancy rates are a significant issue and a landlord is not cooperating with the local authority, then the Government will encourage the local authority to step in. It is not clear what will happen if a landlord is actively trying to let a premises, but at an unrealistic rent.
  2. Grace period and landlord's appeal
    As we mentioned in more detail in our previous article, there will be a grace period of eight weeks following service of an initial notice. During this period, a landlord will be given the opportunity to conclude a letting with the local authority's consent before the auction process begins. There will also be the right for a landlord to appeal against a final notice if, for example, the landlord is carrying out a redevelopment.
  3. Sealed-bid process
    The consultation sets out a number of possible mechanisms for the auction process. The Government's favoured approach is not "highest bidder wins", but rather a sealed-bid process. The landlord will be sent details of the bidders, the proposed rent and their business plan. The landlord will then decide who to let the premises to. However, if none of the bidders is particularly attractive, the landlord will be stuck with the best of a bad bunch. If the landlord refuses to cooperate, then the local authority will have the power to step in and will be obliged to choose the highest bidder.
  4. Minimal rental bid
    The Government has queried whether a "reserve price", or minimal rental bid, should be set by the local authority. The Government's view is that there should not be a reserve price, as it would reduce demand and make the process more complicated. Some landlords may not agree with this approach.
  5. Rent deposit
    The tenant will be required to give a rent deposit of the greater of £1,000 and three months' rent. In practice, this will provide landlords with limited comfort. The consultation does, however, make it clear that the landlord's usual remedies will apply, such as forfeiture.
  6. Standardised lease terms            
    A standardised lease and agreement for lease have been proposed to ensure a quick and efficient process. The consultation recognises that some variations will be required to meet the particular requirements of the property and envisages some input from the landlord on "flexible terms", such as any service charge provisions.

Costs of the auction process          

The Government is considering whether the landlord or the tenant should meet the costs of the auction process itself, including the survey, marketing and preparing the auction pack.

Landlord and tenant works

A "minimum standard" of repair and condition has been proposed. The landlord will need to carry out any works required, at their own cost, to bring the property up to this standard. However, if a property is already in a reasonable condition, this should not be too onerous. It will include ensuring there is no significant water ingress; all fire safety requirements are in place; and mains water, gas and electricity are connected (or capable of reconnection without significant expense to the tenant).

If a property has an F or G EPC rating, then the Government is considering disapplying the minimum energy standard. So the landlord will not have to carry out further energy efficiency works to bring the property up to an E grade or higher, in order to lawfully let the property.

The cost of any fitting-out works will fall on the tenant.

Permitted development rights

The Government is also considering whether permitted development rights should apply to the property for the duration of the lease, to allow a temporary change of use to suitable high street use without the need for planning permission.

The Mishcon view

All stakeholders agree that regenerating the high street is a worthy cause. Having said that, it is not yet clear how successful this auction process will be. In the current economic climate, there may be a shortage of tenants interested in taking vacant space, even if at a low rent. There will be significant wasted time, energy and costs if no interested bidders come forward during the auction process.

In our experience most landlords do not keep properties empty without good reason. A reform of business rates would be welcomed by many as a more effective way of rejuvenating the high street.

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