Lending Focus - February 2023 – 1 / 6 观点
The Levelling Up and Regeneration Bill (the Bill) is proposed new legislation aiming to give effect to aspects of the government's levelling up agenda. The levelling up agenda aims to reduce economic, social and environmental disparities between and within different parts of the UK and to regenerate local communities.
In pursuit of these aims and with the intention of restoring a sense of local pride and belonging, the Bill confers new powers on local authorities to hold rental auctions for vacant commercial premises situated in high streets and town centres. The Impact Assessment for the Bill, published on 6 April 2022, stated: "The desired outcome is an attractive and lively high street with footfall and activity that attracts people and businesses, increases pride in place, and avoids long term presence of vacancy".
The measures involve an interference in the rights of landlords, not often seen other than in extreme circumstances; for example the rights afforded to tenants during the COVID pandemic. It is anticipated that they will have an effect on property investors due to the impact that the auction process is expected to have on rental income paid by incoming tenants and the deemed mortgagee consent provision, explained further below. In this article, we condense key takeaways for lenders and borrowers to assist both in preparing for the potential impact on their activities.
Premises situated on high streets or town centres which have remained vacant for the previous year (or for at least 366 days in the previous two years) could become subject to a compulsory rental auction initiated by the local authority.
The local authority would have the ability to contract with a successful bidder on behalf of the landlord to grant a tenancy of one to five years with no security of tenure.
Any tenancy granted will be deemed to have been granted with a mortgagee or superior landlord's consent, bypassing agreed provisions and covenants in superior leases and loan and security documents.
The Bill has passed through the House of Commons and currently sits in the House of Lords. Should it pass the remaining scrutiny, we expect the Bill to become law at some point in 2023. Despite the stages it has passed, the relevant part of the Bill in circulation relating to high street rental auctions for commercial premises remains in substantially the same form as it was introduced, so far with no real deviation or notable amendments.
To be caught under the remit of the Bill, a commercial premises must be a Qualifying Premises, which requires it to be the following (all explained further below):
Located in a designated high street or town centre
The Bill allows local authorities to designate:
Suitable for high street use
The Bill gives examples of shops, offices, bars, cafes, restaurants, communal halls, premises of public entertainment and those used for the provision of services to the public. Premises used as a warehouse are excluded.
The Benefit Condition
The local authority considers the occupation of the premises for a suitable high street use would be beneficial to the local economy, society or to the environment.
The Vacancy Condition
The local authority may serve the landlord of a Qualifying Premises with an initial notice giving it a minimum of 8 weeks to let the premises, with the notice expiring after 10 weeks. Once served, an initial notice prevents a landlord from granting (or agreeing to grant) any agreement resulting in another person becoming entitled to possess or occupy the premises without first obtaining the local authority's consent (to be given or refused within a "reasonable time"). Without consent, any tenancy or occupation so granted is void. However, a landlord is not prevented from granting a tenancy pursuant to an obligation that bound the landlord before the initial notice took effect.
The local authority must give consent to let if the three conditions below are satisfied:
If the landlord is unable to let the premises within the 8 week period from the initial notice, the local authority can serve a final notice within up to 10 weeks of serving the initial notice. The final notice starts a 14-week period where:
Counter-notice and appeals
The landlord can serve a counter-notice, which must be received by the local authority within 14 days of the day on which the final notice takes effect, on the following grounds:
If the local authority does not revoke the notice, any time up to 28 days from receipt by the local authority of the counter-notice the landlord may appeal to the County Court, which must confirm or revoke the final letting notice.
Rental auctions and power to contract for and grant tenancy
The controversial proposals do not only interfere in an owner's rights over properties but affect any lending transaction secured, or to be secured, on high street premises which are or may become vacant. They bypass a lender's ability to review the credentials of a prospective new tenant before granting consent, ignore agreed covenants and potentially trigger default scenarios under any finance documents. Where any real estate investment finance is secured against a property or a portfolio of properties and the requisite income generated from those assets, the identity and covenant strength of those occupational tenants will be of vital importance. The Bill does not set out any special requirements about a tenant's financial strength.
A final word
Factors affecting the retail sector such as business rates, demand, planning permission and wider market forces, such as economic decline and shifting consumer habits in a post-COVID world, are all reasons why high street or town centre premises can remain vacant. The Bill assumes landlords of vacant properties are unwilling to seek tenants, but landlords of vacant properties lose rental income, face higher insurance premiums and are liable for full business rates after three months of vacancy. Where lettings are already offered at a peppercorn or nominal rent and still remain vacant, it is unclear how much effect the Bill will have in practice. This goes without mentioning the fact that enactment of the auction process is ultimately reliant on the ability, time and resources of the already stretched local authority.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team.