The Levelling Up and Regeneration Bill – how is the High Street Rental Auction Process going to work?

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Background

In our previous article, we examined the Levelling Up and Regeneration Bill (the Bill); the proposed new legislation aiming to give effect to aspects of the Government's levelling up agenda.

We considered the powers that it is proposing to confer on local authorities to hold rental auctions for vacant commercial premises situated in high streets and town centres (the High Street Rental Auction Process), which will enable local authorities to tackle persistently vacant property by empowering local authorities to bring vacant premises back into use. We analysed the impact of the exercise of such powers, including the potential consequences for lending transactions secured on high street premises which are or may become vacant.

The Department for Levelling Up, Housing and Communities has recently published the scope of its Consultation on the High Street Rental Auction Process (the Consultation) in which it sets out potential options as to how the High Street Rental Auction Process may be operated and invites those responding to the consultation to provide their views on them. We analyse the proposals within the Consultation in this article and focus on how they may address some of the concerns that we identified in our previous article.

Key tenets of the proposed legislation

The key tenets of the proposed legislation are set out in detail in our previous article, and are summarised below:

The property must be located in a designated high street or town centre and suitable for high street use, plus it must be beneficial to the local economy, society or environment for it to be occupied for high street use.
Premises that have been vacant for the whole of the previous year or for at least 366 days of the previous 2 years will fall within the scope.
A clear timetable needs to be observed in terms of the process: The local authority may serve the landlord of a "Qualifying Premises" with an initial notice, which starts a period of 8 weeks within which the landlord may let the premises.If the landlord fails to let the premises, the local authority can serve a final notice within 10 weeks of service of the initial notice. The service of the final notice starts a 14-week period within which the local authority can run a rental auction to find a tenant.

A process for service of a counter notice by a landlord is also established by the legislation.

Aims of the High Street Rental Auctions policy

The powers are intended to be used where vacancy rates are a significant issue and either landlord cooperation is low, or the landlords are engaged but struggling to find a tenant and would benefit from local authority assistance.
The powers are not aimed at landlords who work constructively with local authorities to fill vacant properties. As discussed in our previous article, where a property has been vacant for a significant time, there may be other factors at play including lack of demand, planning permission and wider market forces such as economic decline and shifting consumer habits post COVID. Landlords of vacant properties lose rental income, face higher insurance premiums and are liable for full business rates after three months of vacancy therefore there are many landlords who are actively seeking to fill vacant properties.
The Government has given consideration to the interests of investors in drafting the proposed legislation and does not wish to impede commercial property from being an active area for investment.
In terms of content and process, the Department for Levelling Up, Housing and Communities is committed to a transparent, consistent and fair process. Some of the hallmarks of this can be found within its proposals including the creation of a standardised lease framework, the setting of a minimum standard relating to the physical state and condition of the property to which the landlord must ensure the property is compliant, and the creation of clear regulations and guidance on the key aspects of the auction process to ensure that all stakeholders understand it, local authorities and landlords know what is required of them, and that sufficient safeguards are in place.

Open consultation on High Street Rental Auctions published 31 March 2023

The Department for Levelling Up, Housing and Communities has published the scope of its Consultation in which it is seeking views on matters that form part of this policy. The Consultation will run for 12 weeks from 31 March 2023 to 23 June 2023. The Consultation invites ideas on many different aspects of the High Street Rental Auction Process, a number of which are discussed below.

Who is the Consultation aimed at?

The Consultation is described as being "open to everyone" but it notes that it is "technical in nature", and "primarily aimed at commercial landlords, tenant businesses, community groups and local authorities". The Consultation is an invaluable part of the development of secondary legislation in this area: once it has closed, the results will be analysed, key findings published, and the findings used to develop further policy detail to inform secondary legislation in relation to the Bill.

Relevant aspects of the proposed legislation that the Consultation covers

The Consultation covers a wide range of issues associated with the High Street Rental Auctions, including the following:

Contents of auction packs – these packs will be produced by the local authority, using information obtained from the landlord and other sources (including the Land Registry), which may assist in valuing the property and providing information to help bidders to pitch their bid. Determining the extent of the information required to be included will involve a balancing act between the need to provide bidders with as much relevant information as possible, and the costs and time involved in production of the information by the local authority.
Marketing process–marketing of the property is important to maximise interest with the aim of ensuring receipt of the best possible price for it. Expectations and requirements to market the property effectively will be included in the regulations. The Consultation asks for input on the types of marketing that should be mandatory and optional and what the minimum marketing period for each High Street Rental Auction property should be.
Reserve price – the question of whether a reserve price should be used in the High Street Rental Auction Process, and if so how it should be set is to be considered. This would provide that, if a minimum rental bid is not met following the auction, the landlord is not required to enter into the leasing arrangements. The Government is of the view that there should be no reserve price for the auction element of the process given it may result in reduced demand, time pressures and complications as to how to set such price but is inviting views on this.
Standardised documentation – a successful bidder will enter into an agreement for lease and a lease. A standardised framework is proposed for each document to avoid lengthy negotiation, and inconsistency between such documents generally.
Costs – the Consultation asks for input on responsibility for costs involved in surveying and marketing the property and running the auction, plus for associated fees including search and survey fees and solicitors' fees for preparing the auction pack and required legal agreements.
Minimum standard – the Consultation asks for input on what the standard should be to which the landlord must ensure the property is compliant and whether the proposed list of works strikes a fair balance between what a landlord is expected to do and what the tenant will be required to do after the auction process.
Rent deposit – it also asks whether the proposed rent deposit (3 months' rent or £1000, whichever is greater) is appropriate.
Minimum Energy Efficiency Standards – the Consultation asks whether the proposal to disapply the Non-Domestic Private Rented Sector Regulations (the MEES Regulations) to lettings made through High Street Rental Auctions is a sensible and proportionate measure. This proposed disapplication results from the fact that many buildings in the High Street Rental Auction Process may be of a low energy efficiency standard as they may not be in a good state of repair.
Properties requiring significant repair – the Consultation notes that premises affected by significant issues such as cladding or severe damp are likely to be outside the process as any works to bring them up to the standard required of properties within the regime, would be excessive.

Key takeaways from the Consultation

In our previous article, we considered the potential impact of the proposed legislation on lending transactions secured, or to be secured on high street premises which are or may become vacant. Our key concerns were that the operation of the proposed legislation may:

permit a lease to be granted without regard to a tenant's financial strength, bypassing a lender's ability to review the credentials of a prospective new tenant before granting consent
require significant input in terms of costs and time from already stretched local authorities
ignore agreed covenants in existing finance documents and potentially trigger default scenarios
result in a lender being unaware that the High Street Rental Auction Process has been started in relation to a property over which it has security, as there is no required notification procedure in relation to a lender or mortgagee.

The proposals within the Consultation look to go some way to address the first two concerns above, for example:

The potential setting of a reserve price would assist where there is only one bid in the auction for the property and avoid the property from being let for a minimal sum. The potential inclusion of a requirement for a deposit of 3 months' rent or £1000, whichever is greater, would also assist (although set quite low) in letting only to tenants who are able to provide this sum.
It asks for input on responsibility for costs involved in surveying and marketing the property and running the auction, plus for associated fees including search fees and solicitors' fees involved in preparing the auction pack and required legal agreements. Depending on the results of the Consultation, and how this is addressed in the proposed secondary legislation, this may assist stretched local authorities in relation to some of the costs associated with this process.

With reference to the concerns we have in relation to agreed covenants, potential defaults and the absence of a notification to lenders, we wait to see if these points will be addressed in future proposed secondary legislation or otherwise. In the absence of provisions to address them we would repeat our previous guidance that once the legislation comes into force, where a lender has provided financing secured on a property that may be subject to the High Street Rental Auction Process, the covenants in the loan agreements should be reviewed to determine the default scenarios that may be triggered on a letting by the local authority without lender consent, and further, lenders should build notification obligations in to any lending facilities where the operation of the High Street Rental Auction Process may affect them.