The previous Government's Levelling-up and Regeneration Act 2023 introduced new powers for local authorities to force landlords of empty shops to rent them out.
Last year, a consultation was launched to consider how this would work in practice. The results of this consultation were never published and with little fanfare, the Labour Government has now passed regulations for these rules to come into effect on 2 December 2024.
The regulations set out more detail of how the auction process will work in practice and government guidance has also now been published.
How will this work?
The guidance makes it clear that local authorities are expected to engage with landlords in the first instance, rather than immediately resorting to an auction. If an auction is taken forward, it is best for landlords and local authorities to work together (if the landlord is willing to do so).
The first step in the auction process is for local authorities to designate a high street or town centre as being important to the local economy due to a concentration of "high-street uses". This is defined as including shops, offices, provision of services to the public, food and beverage, public entertainment and certain other uses.
If premises have been vacant for at least a year and their occupation for a "high-street use" would benefit the local economy, then the local authority can issue an "initial letting notice". For the next 10 weeks, the landlord cannot let the premises without the local authority's consent.
If after 8 weeks (of that 10 weeks' period), the premises are still vacant, the local authority can serve a "final letting notice". During a further period of 14 weeks, the landlord cannot let the premises or carry out any works without the local authority's consent.
The landlord has the right to appeal against a final letting notice on specified grounds, including if the landlord intends to redevelop the property or occupy the property itself for a business.
Rental auction
During the 14 weeks' final letting notice period, the local authority can carry out a rental auction. The regulations set out a detailed week-by-week timetable for this process.
The local authority is to commission searches and the landlord must provide title information, replies to enquiries and certain other information if available (e.g. EPC, electricity test certificates and asbestos survey). It is a criminal offence punishable by a fine if the landlord fails to provide this information or provides false information.
The local authority must send the landlord a copy of the draft lease and agreement for lease. The landlord is allowed to make representations about the terms of these, which the local authority must take into account (but is under no obligation to accept).
Landlord's works
At the start of the auction process, the local authority must commission a survey of the property. If the property does not meet the "minimum standard" of repair and condition, then the landlord must carry out works to the property at its own cost before the lease is granted. However, the guidance does acknowledge that properties with significant issues (e.g. serious condensation or damp issues) are likely to be outside the scope of the new rules due to the cost to the landlord.
"Minimum standard" is defined in the Act and includes no significant water ingress; all fire safety requirements are in place; and mains water, gas and electricity are connected (or capable of reconnection without significant expense to the tenant).
The regulations set out the terms of the agreement for lease, including payment to the tenant of liquidated damages of £55 per day if the works are not finished by the landlord within three months.
N.B. This "minimum standard" is not to be confused with the minimum energy efficiency standard. Last year's consultation said the previous Government were considering disapplying the minimum energy efficiency standard for tenancies entered into under these rules.
No such exemption has been included in the regulations, so the landlord will also be required to carry out energy improvement works if the premises have an EPC rating of F or G. The landlord will be able to rely on a temporary exemption if there is an agreement for lease, which will give them a six-month breathing space. The landlord may then be able to rely on a full exemption which lasts for five years, such as lack of tenant consent to the works.
The bidding process
The local authority markets the property for a five-week period. Any interested parties must submit a bid to the local authority by the end of the tenth week, stating their annual rental bid and proposed use of the property and include a signed copy of the tenancy contract.
There is no minimum rental figure set out in the regulations, so it seems a bidder could offer a nominal sum well below market value.
The local authority must give the bids to the landlord, who then has only two working days to decide which bid to accept.
The regulations do not give the landlord the right to ask for any financial information or references from the bidder. The local authority has the right to ask for proof of the bidder's identity only, although the guidance does acknowledge that local authorities should encourage bidders to submit business plans.
If the landlord fails to choose a bidder, the local authority may (but is not obliged to) choose to accept a bid. If the local authority does choose to do so, then it must choose the bidder offering the highest annual rental value.
If the landlord refuses to grant the lease, the local authority has the power to enter into the agreement for lease and lease on the landlord's behalf.
The local authority can require the successful bidder to pay for the survey, search fees and local authority's legal costs (but not the landlord's costs). If there is no successful bidder, it seems the local authority will need to meet its own costs, which may make the auction process less attractive to local authorities.
Terms of the lease
These are set out in the regulations and are largely sensible and institutionally acceptable. The guidance annexes a standard template lease which is intended to speed up the letting process.
- The local authority decides on the length of the lease, which must be between one and five years.
- The lease is automatically excluded from the Landlord and Tenant Act 1954, so the tenant will not have a statutory right of renewal at the end of the term.
- There is a fixed four weeks' rent free period.
- The tenant must pay a rent deposit of the higher of £1,000 and three months' rent.
- The tenant's repairing obligations are limited by reference to a schedule of condition, which the tenant prepares and the landlord then approves.
- The tenant may assign the whole of the lease with the landlord's consent. The tenant must provide an authorised guarantee agreement where reasonably requested by the landlord. All other dealings are prohibited.
- There is no absolute prohibition on structural alterations by the tenant, but this is subject to the landlord's consent (not to be unreasonably withheld).
Comment
It is questionable whether cash-strapped local authorities will have the time and resources to take this further, although the guidance notes refer to funding being available of over £5,000 per auction, which the Government believes will cover the local authority's costs.
Many landlords will feel disgruntled if they are forced to go through the auction process: there is no minimum rent; no scope for the landlord to reject a bid from an undesirable tenant; and they may be forced to carry out costly repair works for a one-year term.
Town centres are struggling because of wider economic issues, the effect of the pandemic, high business rates and the rise of internet shopping. Although the Government claims the new rules will "stop disengaged landlords from sitting on empty properties", this only seems to apply to a minority of landlords. However, it may be that the threat of this new policy is enough to give any "disengaged landlords" a push and that in practice, local authorities will not need go ahead with auctions.