It was announced in May 2023, by the previous conservative government, that new powers for local authorities to regenerate the high street and fill empty shops will be in force this summer! There’s no doubt that the general election and change of government may cause a delay but we understand that it is unlikely that the new government will look to abandon the legislation altogether. Therefore, it should be assumed that these new powers will be available to local authorities in the near future.
These powers originate from Part 10 of the Levelling Up and Regeneration Act 2023 which received royal assent on the 26th October 2023. The powers are known as the Compulsory Rental Auctions of Vacant High Street Premises.
The Powers of the Local Authority
Local authorities will have powers allowing them, in certain circumstances, to take over the letting of a high street property by inviting bids from potential tenants. If a bid is accepted then a new 1- to 5-year lease will be granted. The rent agreed as part of the bid will still be payable to the landlord but effectively the landlord will have lost control over who they let the property to.
For the local authority to use these powers, the situation must be as follows:
- The property must be in a designated high street or town centre;
- The property’s use must either be retail, offices, restaurants/cafes/bars, community halls or manufacturing. Residential properties and warehouses are excluded;
- The property must have been vacant for at least one year or 366 days in the last 2 years; and
- Letting the property must be beneficial to the local economy, society and environment.
If all of the above conditions are met then the local authority can look to serve an initial notice on the landlord giving them eight weeks in which to find a tenant. Any new tenant must take a lease for at least a 12-month term and the landlord will need the consent of the local authority to ensure that the letting complies with the legislation. If the landlord fails to find a tenant within this eight-week period then a further 14-week notice is served on the landlord. During this time, they are prevented from letting the property. If the landlord does not appeal the 14-week notice then the rental auction process can begin and should be completed within 14 weeks. However, this period can be extended under certain circumstances. Please note that there are limited grounds to appeal against this 14-week notice.
The Auction Process
In relation to the rental auction, the following applies:
- There is no minimum rent; this could be a serious issue as the landlord may have to let the property at a very low rent and is unable to allow another tenant to take on the lease, who may be willing to pay more;
- It is not automatically the case that the highest bid wins as the landlord can choose and consider other relevant factors. If the landlord refuses to choose a tenant then the local authority can choose instead;
- The costs of the marketing and auction fees will be paid for by the local authority. The tenant is required to pay for searches, surveys and solicitors fees for the lease preparation; and
- The landlord can be required, before the lease commences, to carry out works to the property to ensure that it is safe, stable and secure. Please note that the local authority will have powers to compel the landlord to carry out the said works if they refuse to do so.
The Terms of the Lease
A lease that is granted to a tenant under this process is to have the following terms:
- The use of the property must be a high street use as previously mentioned;
- Tenants can undertake internal fit-out works without the landlord’s consent but external or structural works will need the landlord’s consent; such consent not to be unreasonably withheld. For such fit-out works, the tenant will have the benefit of a four-week, rent-free period;
- The tenant’s obligation to repair the property will be limited to a suitable schedule of condition, so the tenant will not be required to put the property into any better state of repair or condition than the property was when it was let to them;
- The lease is to have a term of between 1 and 5 years;
- The tenant can assign the lease subject to the landlord’s consent. Such consent is not to be unreasonably withheld, however the tenant may not underlet the property;
- The tenant will not be required to provide a guarantor but they must provide a deposit of £1,000.00, or three months’ rent, whichever is the greater; and
- The landlord can require a service charge in certain circumstances.
The Summary
These new powers are being seen as radical, effectively allowing the local authority to seize private properties and let them without the consent of the landlord.
There is also concern that as there is no minimum rent, as previously mentioned, a landlord could potentially have its property let at a very low rent, and during this letting the landlord cannot obtain an alternative tenant who may be prepared to pay a higher rent.
Thankfully the landlord will not be completely powerless, as local authorities have been advised to only use these powers if the landlord is not taking reasonable steps to let the property. Therefore, in reality these powers may perhaps only be used as a last resort with most empty properties being let through negotiation and consultation between the landlord and the local authority.
In addition, the landlord does have the power to choose the tenant and the length of term (between 1 and 5 years). However, please be aware that if the landlord fails to choose a tenant or the duration of the lease then the local authority have the right to grant the lease.
Lastly it remains to be seen whether the local authorities will have a suitable budget to enable them to use these powers effectively; only time will tell.
If you need any further advice in relation to this then please do not hesitate to contact Neil Starr, Head of Commercial Property on 01392 285010 or n.starr@dunnandbaker.co.uk.