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Compulsory shop leases – what, why and how?

Posted on 13 May 2022

In the Queen's Speech on 10 May, the Government announced plans to compel landlords of empty shop units to rent them out. The following day, the Levelling-up and Regeneration Bill was published, giving more detail on how this is meant to work.

This is how the Government summarised the new policy:

"New legislation will enable local leaders to force landlords to rent out commercial properties, revitalising high streets, rejuvenating town centres, and restoring community pride in their home towns. Councils will be given greater powers to take control of buildings for the benefit of their communities, transforming boarded up shops or derelict buildings into thriving businesses, shared community spaces or housing."

It is easy to see the attraction of this proposal. Empty shop units are an eyesore and lower the tone and quality of high streets, town centres and shopping malls. If someone is willing to pay rent and operate a business at a shop unit, then it should surely be encouraged, rather than leaving the unit locked, empty and crumbling.

Some landlords and property investors may feel it is not that simple. Landlords are highly unlikely to leave premises empty just for the sake of it. If nothing else, a tenant will pay the business rates which otherwise the landlord must pay. If premises are standing empty, usually it is because no acceptable tenant is interested.

How will this work?

Local authorities will have a new power to designate a high street or town centre as being important to the local economy due to a concentration of "high-street uses". This is defined as including shops, offices, provision of services to visiting members of the public, food and beverage, public entertainment and certain other uses.

If premises have been vacant for at least a year and their occupation for a "high-street use" would benefit the local economy, then the local authority can issue an "initial letting notice". For the next ten weeks, the landlord cannot let the premises without the local authority's consent. There are detailed provisions about when consent must be given.

After eight weeks but before the initial notice expires, assuming no lease has yet been granted with consent, the local authority can then issue a "final letting notice". This runs for a further 14 weeks. The landlord is now prevented from either letting the premises or carrying out any works without the local authority's consent.

Rental auction

During the 14 week period of the "final letting notice", the local authority may offer the premises for letting to the highest bidder, for a "suitable high-street" use. The local authority is given the power to enter into an agreement for lease with a tenant on behalf of the landlord, and to actually grant the lease itself if the landlord refuses to do so.

If there is a mortgagee or superior landlord, their consent will not be needed. The landlord can resist a letting notice if the premises are not suitable, if it intends to carry out a redevelopment (similar to 1954 Act ground F) or it intends to occupy for its own business (similar to ground G) or as its residence.

The new lease is to be for a term of between one and five years. It will be automatically excluded from the Landlord and Tenant Act 1954. It is to contain terms covering landlord's works, tenant's fit-out, rights granted, permitted use, maintenance and repair, supply of services and payment of service charge, alterations, insurance, assignment and sub-letting, rent deposits, forfeiture and yielding up.

The rent will be whatever the successful bidder offered, even if this is less than existing rents for comparable premises in the neighbourhood. There is no scope for the landlord to negotiate.

Detailed regulations will set out the procedure, but there are already a number of questions to be considered:

  • How long would the compulsory lease be, within the parameters of one to five years? Does the bidding tenant choose?
  • If one tenant proposes five years with a break at two, and another tenant suggests four years with no breaks but a lower rent, who is the winning bidder?
  • If one tenant offers £20,000 pa with 12 months' rent-free, and another offers £15,000 for the same term with no rent-free period, which one is the winning bidder?
  • What if the winning bidder has a serious criminal record, or a past history of defaulting on lease obligations or causing disturbance to other tenants? Must the landlord still take them on as a tenant?
  • If the winning bidder has no obvious means of being able to pay the rent, can the landlord pick an underbidder who is a better covenant?

Comment

Underlying these questions is what happens if the local authority and the landlord cannot agree on a letting strategy. As the Bill stands, it seems the local authority will have power to take the final decision, merely "having regard to any representations by the landlord".

If the cliché "devil is in the detail" did not exist, we would have to invent it to describe this imaginative but challenging proposal. If it does prove to have the effect of revitalising derelict shop units and high streets, then it will be widely applauded. Time will tell.

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