Our high streets are facing unprecedented challenges. More than one in every seven high street shops is vacant; in some areas, it is one in five. This is not a new phenomenon. In 2011, Mary Portas led a high-profile, but unsuccessful review that advocated easing regulation and introducing free town centre parking. Other proposals have similarly foundered, including a root and branch overhaul of business. The latest initiative, effective from 2 December, involves an ambitious and controversial scheme to compel landlords to let vacant high street properties to the highest bidder.
Rental auction
Local authorities are to be encouraged to identify streets with premises that have been vacant for at least a year. Whereas the emphasis is likely to be on shops and restaurants, any “high street use”, such as offices, leisure and light industrial, is within scope. Still, premises on industrial estates and out-of-town developments are not. If it chooses to do so, the local authority may then initiate a “rental auction” where, on behalf of the landlord, it invites bids from prospective tenants. Engaging first with the property owner is recommended, and if the premises are structurally unsafe or earmarked for imminent redevelopment, a rental auction won’t be suitable.
How does it work?
The scheme is complex and highly regulated. It begins with the local authority serving notice on the immediate landlord (as well as any lenders or owners higher up the chain that the local authority knows about). The landlord has up to eight weeks to find a suitable tenant of its choosing, but if it fails to do so and cannot show why it should be exempted from the process, the local authority may initiate the auction process. It will first need to set the permitted use that it is willing to allow and liaise with the landlord regarding the terms of the proposed tenancy and the legal pack that will need to be provided to interested tenants. This process must be completed within four weeks and a six-week marketing period begins. The minimum term of the letting is 12 months, and the maximum is 5 years. All tenancies are to be contracted out, so the tenant will not have security of tenure.
A marketing brochure and auction pack (which will include the form of tenancy, search results, EPC and details of the landlord’s legal title) need to be prepared and made available to prospective tenants via the local authority’s website and Rightmove (or similar). When the bids are in, these are served on the landlord, who must decide, potentially within a matter of days, which tenant it wishes to choose. Importantly, and controversially, no minimum rent is stipulated, so there is nothing stopping a tenant submitting a very low offer.
Who pays?
The allocation of costs is an important consideration. The local authority will inevitably incur costs in advertising the property and managing the auction process. If a landlord refuses to cooperate, the local authority may need a court order requiring them to do so. These costs may (for the first three years of the scheme, at least) be recouped by a grant from central government of up to £5,223 per property. Other costs, such as legal costs and commissioning searches and surveys, maybe passed on to the successful bidder if the local authority wishes. If the landlord needs to carry out works to bring the premises up to the minimum standard, it must bear these themselves, and if it fails to do so, the tenant has the right to step in and offset the costs against the rent.
Will it work?
The scheme is nothing if not ambitious. In its guidance, the government is careful to counsel local authorities against using the scheme without first engaging with landlords who, inevitably, may resent being forced to let their property to an unsuitable tenant at a below-market rent. If a high street property has been vacant for more than 12 months, it is likely because there is no demand for it or the costs of an upgrade are too high. 27% of Arcadia’s units are still vacant four years after they went bust. Landlords do not willingly sit idly by, forgoing rental income and assuming liability for insurance and empty rates. Foisting a tenant who lowballs a landlord into accepting an unreasonable rent does not sound like a solution to our failing high streets.
The very complexity of the scheme may prove its undoing. It requires the local authority to invest considerable time and resources, which are unlikely to be adequately compensated by the government grant. There are time deadlines at each stage that are ambitious (and in many cases unrealistic) and yet, if missed, may prove fatal. Ultimately, it is difficult to imagine the scheme actually being used very often. So far, four local authorities have expressed a fixed intention to implement it. The real intention behind the legislation may be more cynical: to concentrate landlords’ minds, with the threat of being served with a notice sufficient incentive for landlords to agree terms with a prospective tenant even though they may not tick all the boxes.
