Flog It? The (Current) Government's Latest Proposals for High Street Rental Auctions

Only three weeks ago, the government announced that new powers for local authorities to regenerate high streets and fill empty shops via High Street Rental Auctions, part of the Levelling-Up and Regeneration Act 2023, would be operational by the summer. However, a lot can change in the space of three weeks…

Should Labour come into power, it is reported they would axe the term "levelling up". Given High Street Rental Auctions are part of the Conservative's levelling up initiative, it seems unlikely Labour would implement the scheme without any changes. However, a potentially similar concept, giving communities a "right to buy" community assets to revamp empty shops, pubs and community shops, is included on Labour's 5-point plan for Britain's high street. 

As such, we may yet see a regeneration programme for the high street in some shape or form, regardless of the result in the general election. In this article, we highlight five key issues with the government's recent response to the consultation it launched back in March 2023 on High Street Rental Auctions, which the next government (whichever party that is) might want to consider when formulating and progressing their future plans for high street regeneration.

What are High Street Rental Auctions?

As a brief reminder, High Street Rental Auctions would allow local authorities to auction off the rental rights of commercial high street property that has been vacant for longer than 12 months in a 24-month period. Successful bidders will enter into an agreement for lease with the landlord upon completion of the auction, and then a lease of between one to five years following completion of any pre-tenancy works.

What are the potential issues with the government's response to the High Street Rental Auctions consultation?

1. Burden on local authorities

74% of local authorities responding to the consultation feel that the High Street Rental Auctions process would be too burdensome. Given many local authorities are limited in time and resources, it is sensible that the government in its response confirmed that it will allow local authorities to outsource the auction and marketing process to third-party property agents. However, even with outsourcing (details of which are yet to be confirmed), some burden will still be placed on local authorities in terms of identifying areas within a town to designate as a high street for the purposes of High Street Rental Auctions and appointing, and liaising, with any third-party agents.

No doubt to help with this, the government has announced £2 million of funding for High Street Rental Auctions and that eight local authorities (yet to be confirmed) will adopt them in their areas as soon as the policy is brought into force. Nevertheless, there is general scepticism as to whether local authorities will use them which, as outlined in the other four issues, might be good news for landlords.

2. Policy based on misplaced presumption that landlords not already trying to fill their empty properties

Vacancy is an issue felt on many high streets and tackling the problem of prolonged vacancy would undeniably be beneficial for regenerating our high streets. However, the policy design and consultation response seem to be built on the presumptions that:

1. landlords and their agents are not themselves already trying to fill their empty properties; and
2. local authorities, or the third-party agents they appoint, will have more success in being able to quickly find tenants to fill these spaces. Indeed, the government in its response confirms the minimum marketing period for these properties will only be five weeks.

A rushed marketing process could result in fewer bids being placed. In fact, the government's response acknowledges the proposed marketing and auction process means landlords may receive rents lower than they would ordinarily seek.

3. No minimum rent

There will be no reserve price for a property that is subject to a High Street Rental Auction. The landlord will be given a choice if multiple bids are received but if, for example, there is only one bidder with a low bid, the landlord will have to accept that low rent for a lease term of up to five years. The government's response states that no reserve price encourages competition between bidders, however given it is proposed the auction will involve a sealed-bid process, it is unclear how such encouragement will be achieved.

4. Landlord cost for both landlord and tenant works

Before the lease is granted, the landlord must carry out, and pay for, any works that are required to bring the property up to the government's proposed Minimum Standard (a condition which is safe, stable and secure and with significant occupational risks removed or managed). The local authority will have the option to provide for liquidated damages (set at £55 per day) to be paid by the landlord in the event of delay subject to their consideration of the landlord's representations.

The tenant is allowed (but not obliged) to undertake fit out works for their particular use (without the landlord’s consent if internal works and with the landlord's consent (not to be unreasonably withheld or delayed) if external or structural works). Although the tenant would have to pay for such fit out works, the government proposes a rent-free period of four weeks to account for the time these works are conducted.

This means the landlord may have expended costs before the grant of the lease, but may not receive any rental income for the first four weeks of the lease term.

5. MEES obligation

The government originally proposed that properties leased under the High Street Rental Auction policy would not be required to comply with the current legal obligation for properties to have an Energy Performance Certificate (EPC) of level E and (proposed) future requirements for levels C in 2027 and B in 2030. However, the government has changed its stance on this and confirmed in its response that auctioned properties will still have to comply with the Minimum Energy Efficiency Standards (MEES). The government states its decision is partly based on the concern that landlords might deliberately await a High Street Rental Auction to avoid the costs of compliance with MEES, which is indicative of the mistrust the government has in landlords.

This means if a local authority identifies an empty property that does not meet the minimum EPC rating but that it wishes to auction, it will be able to include an obligation in the agreement for lease for the landlord to carry out the necessary energy improvement works within a specified timeframe. A landlord may not have the funds to complete such works (on top of potential Minimum Standard works), particularly given its premises has been vacant for at least 12 months in the previous 24-month period. If the landlord fails to carry out the works and the premises does not meet the required standard, or does not have a valid exemption, the landlord could face financial penalties for non-compliance.

Conclusion

We wait to see if High Street Rental Auctions survive the general election. If they do:

• hopefully some of these issues will be addressed by the detailed guidance which the government promised will be published ahead of any High Street Rental Auctions becoming operational; and

• it will be interesting to see how they are used in practice given the general scepticism as to whether local authorities will use them.

If they do not survive, it will be interesting to see what other proposals are brought forward to encourage the occupation of vacant shops on the high street. This could include Labour's "right to buy" proposal or their proposal to replace the current business rates regime (another part of its 5-point plan for Britain's high street), which the BPF has also earmarked for reform in its recent manifesto for retail property.