The decline in high street retail has prompted the Government to introduce the Levelling Up and Regeneration Bill. We examine some of the key provisions of the Bill and its impact on the high street property market
The following paper was written by Michael Duncan, with assistance from Rachel Heveran, and first published in The Journal of Building Survey, Appraisal & Valuation (Vol. 12, 2023-24) by Henry Stewart Publications
The British Retail Consortium has reported that high street retail vacancies improved slightly in the final quarter of 2022, with the average vacancy rate across the UK falling to 13.8% (a 0.1% improvement on the previous quarter). Whilst it is encouraging that vacancy rates are falling – or, at least, not worsening – they have not yet improved to pre-pandemic levels. The picture across the UK is mixed, with the North-East of England having vacancy rates that are significantly higher than the national average. Vacancy rates are expected to remain challenging throughout 2023 and structural changes to the retail sector mean that it is probable that there will be an over-supply of traditional retail premises for some time to come.1
As a result, and in a drive to reduce the number of vacant units on high streets in England and Wales, the Government has introduced the Levelling Up and Regeneration Bill (the "Bill"). Amongst other things, the Bill gives local authorities the power to put empty high-street premises into mandatory rental auctions2. They are 'mandatory' because local authorities will be able to put properties into auctions without the landlord's consent. As of the date of this paper (22 June 2023), the Bill had passed through the House of Commons and is at the Report Stage in the House of Lords.
Landlords are strongly opposed to the proposals in the Bill and view them as a fundamental interference with their basic property rights. It has also been suggested that the proposals will do nothing to cure the vacancy rate issue, as business rates and changing consumer habits are the primary cause of the decline in demand for high-street premises.
The following is a summary of the high street rental auction process ("HSRA") as proposed in the Bill, together with a consideration of the impact that the Bill may have on the commercial market if enacted in its current form.
Summary of key provisions proposed in the bill
Designation of "high streets" and "town centres"
The initial power afforded to local authorities by the Bill is the ability to designate an area a "high-street" or "town centre", i.e. for the purpose of HSRA.
Under the Bill, an area may be designated a "high street" or "town centre" if it is important to the local economy because of a concentration of premises with "high-street uses"3.
The range of high-street uses set out within the Bill is wide and includes the following4:
- use as a shop or office;
- use for the provision of services to persons who include visiting members of the public;
- use as a restaurant, bar, public house, café or other establishment selling food or drink for immediate consumption;
- use for public entertainment or recreation;
- use as a communal hall or meeting-place; and
- use for manufacturing or other industrial processes of a sort that can (in each case) reasonably be carried on in proximity to, and compatibly with, the preceding uses.
As well as being within a "high street" or "town centre", the premises must also be vacant in order to be eligible for HSRA. The "vacancy condition" is satisfied if the premises are currently unoccupied and either: (i) were unoccupied for the whole of the preceding year; or (ii) during the preceding two years, the premises were unoccupied for at least 366 days5.
On the face of it, whether premises have been occupied or not for the relevant period is a simple question. However, the Bill does not specify what amounts to "occupation". For example, would it be sufficient for the landlord to store chattels in the premises (in circumstances where warehouses and storage units are not included in the Bill's list of "high-street uses")? Or, are premises "occupied", if landlord has granted a right to occupy to a third party, but the premises are not in fact being traded from?
Local benefit condition
The Bill also provides that, before premises can be put into HSRA, the "local benefit condition" must be satisfied – i.e. the authority must consider that the occupation of the premises for a suitable high-street use would be beneficial to the local economy, society or environment6.
Again, this is an area that is likely to be controversial – e.g. if the character of an area is already changing (say, from retail to residential), should property in that area be eligible for being put into a HSRA?
Engagement with landlords
Once the local authority determines that a high-street property fulfils the above conditions, the local authority may serve an "initial notice" on the landlord. Once an initial notice has been served, the landlord cannot grant, or agree to grant, a tenancy or licence of the premises without the written consent of the local authority7. Any tenancy or licence that is granted without consent would be void8.
However, where a landlord has agreed a proposed tenancy which is to commence within 8 weeks of the initial notice and the tenancy has a term of at least 1 year, and the local authority is satisfied that the proposed use of the premises will attract the regular presence of people, the local authority must give its written consent9.
If the property remains vacant 8 weeks after service of the initial notice, the local authority can serve a "final letting notice" on the landlord. If no final notice is issued, the initial notice will expire after 10 weeks10. The final letting notice expires 14 weeks after it has been served.
As with the initial notice period, during the final letting notice period, the landlord cannot grant, or agree to grant, a tenancy or licence of the premises without the written consent of the local authority11. Moreover, while a final letting notice is in force, the landlord cannot carry out any works to the property without the written consent of the local authority. However, such consent cannot be unreasonably withheld12.
It is not clear from the Bill the grounds on which the local authority could reasonably withhold consent to the landlord carrying out works and further guidance is expected to be published in due course. However, it is understood that if the local authority were to refuse consent, it would, at least, have to set out the reasons why consent was being withheld.
Steps that landlords can take to oppose the HSRA process
The property owner can serve a counter-notice on the local authority against a final letting notice on any of the following grounds13:
- the vacancy condition was not met;
- the premises are not suitable for the proposed high-street use;
- the local benefit condition was not met;
- the local authority failed to give consent to a tenancy where required to do so;
- the landlord intends to carry out substantial construction, demolition or reconstruction works and cannot do so without possession;
- the landlord intends to occupy the premises for business; and
- the landlord intends to occupy the premises for its residence.
The counter-notice must be received by the local authority no later than 14 days after the date on which the final letting notice takes effect14.
Upon service of a counter-notice, if the local authority does not withdraw the final notice, the landlord can appeal to the County Court and seek an order that the final notice be revoked. Any such appeals must be brought within 28 days of service of the counter-notice. Landlords will have a relatively short window, therefore, within which to take steps to try and prevent their properties from being put into a HSRA.
Putting premises into auction
Under the Bill, local authorities can conduct a HSRA, if a final letting notice is in force and no tenancy has been granted15. The suitable "high-street use" (e.g. shop, restaurant, community hall, etc.) must be specified by the local authority before the auction; and local authorities appear to have the freedom to specify more than one use.
Following the HSRA, the local authority would enter into a "tenancy contract" (i.e. an agreement for lease) with the successful bidder. The proposed lease must have a term of at least one year, but no more than five years. For the purpose of entering into the tenancy contract, the local authority would effectively step into the shoes of the landlord16. Further, if the landlord fails to grant the tenancy as required by the contract, the local authority may do so on the landlord's behalf17.
Any tenancy entered into pursuant to the Bill will also be deemed to have obtained any necessary consents from superior landlords or mortgagees.18
These are very unusual provisions and it is unclear how they will work in practice. For example, what will the terms of the lease be, i.e. beyond the headline rent? Under the Bill, the tenancy must include provisions relating to repairing obligations, the supply of utilities and insurance. However, in most cases, the Bill does not specify whether the relevant obligation should fall on the landlord or the tenant. This issue is addressed in further detail below as part of the consideration of the practical implications of the Bill.
Given the above, it is probable that once landlords know that their property is going to be subject to a HSRA, they will want to be involved with the letting process, if possible.
Landlord and Tenant Act 1954
Landlords can take some comfort in the fact that any tenancy granted pursuant to HSRA will be excluded from Sections 24-28 of the Landlord and Tenant Act 1954 ("1954 Act") (i.e. the tenants will not have security of tenure)19.
The effect of this provision appears to be automatic and, therefore, it seems unlikely that leases granted pursuant to the Bill would have to be contracted-out of s.24-28 of the 1954 Act in the usual way. That said, it would be sensible to ensure that it is recorded somewhere in the lease that it has been granted pursuant to a HSRA and that, therefore, Sections 24-28 of the 1954 Act do not apply to it.
Practical implications of the bill
The proposals in the Bill are novel and radical. As such, it is difficult to predict what impact they will have, if they are implemented. The following paragraphs consider some of the likely consequences of the Bill both on an individual, case-by-case, basis and in the context of the wider market. It is not intended to be an exhaustive list, but rather an aide to further reflection and consideration of the Bill's likely outcomes.
The Government's stated purpose of the Bill is to "drive local growth, empower local leaders to regenerate their areas, and ensure everyone can share in the United Kingdom's success."20 Therefore, this is the standard by which HSRA should be judged.
Local authorities will be empowered to grant tenancies to a "successful bidder". However, no guidance is given in the Bill 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 forms 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 Bill, 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 Governments objectives for HSRA (albeit one that has not been expressly stated).
The Government has recently announced a 12-week period of consultation on the provisions in the Bill relating to HSRA21.
The consultation period commenced on 31 March 2023 and is scheduled to end on 7 July 2023. The focus of the consultation is on the practical implementation of HSRA, rather than whether HSRA are, in principle, a good idea. This will no doubt frustrate landlords and other stakeholders who remain sceptical as to whether HSRA will have any kind of positive impact on the high streets of England and Wales.
Some of the key issues that the consultation has requested views on include:
- How the auction process should be run (including the method by which successful bidders should be chosen);
- The allocation of costs relating to any works that are required to the premises to bring it up to a lettable standard;
- Standardised terms for any leases that are granted pursuant to the auctions process; and
- The legal interface between HSRA, Minimum Energy Efficiency Standards, and Permitted Development Rights.
The thrust of the consultation suggests that the final version of the Bill may be even more radical than the version that was initially published.
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.
Whilst it is inevitable that further legislation will need to be passed to provide guidance on how HSRA will work in practice, the general consensus in the market appears to be that HSRA will fail to tackle the real issue affecting high-street retail, which are persistently high business rates and the now well-established move to digital retailing.
The British Property Federation has suggested that, instead of imposing HSRA, more appropriate solutions would include:
- Introduction of Town Investment Zones, where local authorities would have the power to enhance economic and planning powers to boost social, environmental and economic productivity in specific areas; and
- Insertion of provisions within the Bill, which differentiate between landlords seeking a tenant, and those unwilling to do so, i.e. by allowing a landlord to demonstrate active marketing for at least 9 months during the preceding 24-month period, as a way of opting out of HSRA22.
Finally, it is worth noting that, even if the Bill is passed, it 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.
2. The powers extend to local authorities in England and Wales but not Scotland and Northern Island – see ss.221(8) of the Levelling Up and Regeneration Bill
3. Levelling Up and Regeneration Bill, cl.181
4. Levelling Up and Regeneration Bill, cl.182
5. Levelling Up and Regeneration Bill, cl.183(1)
6. Levelling Up and Regeneration Bill, cl.184
7. Levelling Up and Regeneration Bill, cl.186(1)
8. Levelling Up and Regeneration Bill, cl.186(5)
9. Levelling Up and Regeneration Bill, cl.187(2)
10. Levelling Up and Regeneration Bill, cl.185(2)
11. Levelling Up and Regeneration Bill, cl.189(1)
12. Levelling Up and Regeneration Bill, cl.190(4)
13. Levelling Up and Regeneration Bill, Schedule 18
14. Levelling Up and Regeneration Bill, cl.191(2)
15. Levelling Up and Regeneration Bill, cl.193
16. Levelling Up and Regeneration Bill, cl.194(2)
17. Levelling Up and Regeneration Bill, cl.197
18. Levelling Up and Regeneration Bill, cl.198
19. Levelling Up and Regeneration Bill, cl.199
22. British Property Federation, BPF Written evidence to the Public Bill Committee on the High Street Rental Auctions, and Compulsory Purchase Orders (CPO) of the Levelling Up and Regeneration Bill, June 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.