What you need to know about High Street Rental Auctions

Michael Duncan, senior associate in the Built Environment sector at independent UK law firm Burges Salmon investigates High Street Rental Auctions in the context of the Levelling Up and Regeneration Act.

The Levelling-up and Regeneration Act recently received Royal Assent – as such, a major new piece of legislation has now entered the statute books.
    
The decline in high street retail was one of the factors that prompted the Government to introduce the new legislation, with the purpose to “drive local growth, empower local leaders to regenerate their areas, and ensure everyone can share in the United Kingdom’s success.”
    
The Act includes provisions to give local authorities the power to put empty high-street properties into mandatory rental auctions, and, now, local authorities have officially been granted those powers.
    
The measures introduced are novel and radical, and the impact of high-street rental auctions (HSRA) on the commercial property market are potentially wide-ranging. Here we consider some of the practical implications for landlords, tenants and the affected markets.

What are HSRA?

Under the Act, local authorities can conduct a HSRA, if a “final letting notice” is in force and the property in question remains vacant.
    
Following the HSRA, the local authority would enter into a “tenancy contract” with the successful bidder. The proposed lease must have a term of at least one year, but no more than five years. Under the Act, there is no minimum level of rent that must be paid by the successful bidder. For the purpose of entering into the tenancy contract, the local authority would effectively become a landlord.
    
The suitable “high-street use” must be specified by the local authority before the HSRA; and local authorities appear to have the freedom to specify more than one use.

Property maintenance

Local authorities will be empowered to grant tenancies to a “successful bidder”. However, no guidance is given as to the criteria under which rental offers should be assessed. For example, is the best offer merely the offer under which the tenant agrees to pay the most rent? Or would other factors, such as a commitment by the tenant to renovate the premises (or at least put them into repair) be taken into account?
    
If rent is the only criteria, landlords could be forced to enter into tenancies, without tenants covenanting to fully maintain premises throughout the duration of a lease. This would create a risk of premises falling into disrepair and the character of high streets being adversely impacted. Upon lease expiry, landlords would then be forced to either market the premises in the condition they have been left or carry out their own repairs.

Fairness between tenants

As well as rent, there are a number of other costs that tenants are usually liable for under a lease – e.g. business rates, insurance rent and service charges. This is particularly the case when premises form part of a larger property and the landlord retains responsibility for structural repairs and other matters that affect the whole of the building.
    
Generally, landlords seek to have standardised service-charge regimes that allocate costs fairly between tenants and which are structured in such a way as to reduce the administrative burden associated with providing services, raising a service charge, and collecting payment. If local authorities are granting leases which are not aligned with the other leases that have been granted in a building, this could result in unfair outcomes for tenants and complex issues for landlords to navigate as they seek to deliver services in a fair and cost-effective way.

Landlord and tenant relationships

Under the Act, a landlord may find itself in a position whereby it is forced to enter into a tenancy which may be contrary to its commercial objectives, including ESG considerations and other valid concerns.
    
Further, during negotiations for a grant of a new tenancy, it is usual for landlords to provide proposed tenants with information and documentation relating to the property, e.g. title documentation, information relating to the rights of third parties over the premises, and whether the premises is subject to any particular restrictions which might affect the proposed use.
    
In circumstances where a landlord is opposed to a letting for some reason, it could withhold relevant information and may not co-operate as effectively with tenants who have been granted a lease pursuant to a HSRA.
    
Many prospective, sophisticated, commercial tenants may take the view that the risks associated with taking a lease from an unwilling landlord are not worth the potential benefits, given that there is a ready supply of retail premises on the high street.

Impact on the local market

In theory, a prospective commercial tenant could bid on a premises and offer £1 per annum in rent and, if they are the only bidder, would be awarded a lease of the premises.
    
This would have a very significant effect on rental values on the area in question, if tenancies that were awarded pursuant to HSRA could be included as comparable evidence for the purpose of statutory lease renewals and, to some extent, rent reviews. (The effect on rent reviews being mitigated by the fact that most leases provide for upwards-only rent reviews.)
    
In this context, landlords, property developers, and other stakeholders’, willingness to invest in the high street could be adversely affected, if the current downward trend on rental values is accelerated and deepened, which seems to be a likely consequence of the Government’s proposals.
    
Landlords are also likely to think twice about carrying out significant renovation and improvement works, if their property is in an area which could be subject to HSRA.
    
Further, HSRA may simply encourage landlords to press ahead with repurposing their stock – e.g. from commercial to residential – rather than having the effect of reviving the high street per se. This may, of course, be one of the Government’s objectives for HSRA (albeit one that has not been expressly stated).

Conclusion

The Government’s objective for HSRA may be to incentivise landlords to do deals with potential tenants, in circumstances where stagnation may have taken hold of the market. Landlords, on the other hand, will argue that the reason why high-street properties are lying empty is not the levels of rent being sought, but instead, broader, social and economic factors.
    
The general consensus, however, appears to be that the HSRA process will fail to tackle the real issues affecting high-street retail as it continues to feel the effect of high business rates and digital retailing. It is worth noting that the new legislation merely gives local authorities the option to implement HSRA. Given the potential for litigation arising from the exercise of these new powers, and the existing resourcing pressures on local authorities, whether local authorities will choose to use them or not is another matter.

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