Commercial property: High-street rental auctions

03 June 2024

The idea of rental auctions for high-street properties was announced back in 2022 but will finally be progressed in the summer of 2024.

It’s a scheme that allows local authorities to designate high streets or town centre areas that are important to the local economy because of the concentration and footfall of high street users. Properties in these areas can be put up for rental auctions if they have been vacant for at least a year or 366 days in the last two years.  These areas can include shops, offices, restaurants, purpose-built meeting places, community halls, and light industrial units, but not warehouses. 

If the property meets the relevant criteria, the local authority can notify the landlord that it will put the premises up for a high-street rental auction. The local authority must consider that occupation would benefit the local economy, society, or environment. The idea is to tackle the problem of persistently vacant property on high streets. 

The government has invested £500,000 to enable various local authorities to participate in the pilot scheme. The town centres participating in the pilot scheme are Blackpool, Stoke, Hyndburn, Scunthorpe, Oldham, Hull, Blackburn, Grimsby, Tendring, and Hyde. 

The first auctions are expected in September 2024, with the first leases to be completed in October 2024. 

Local authorities will be able to outsource all or part of the auction and marketing process to commercial agents, including the creation and distribution of the auction pack. The auction pack will have to include local authority searches, flood risk, and test certificates from landlords, even though some landlords opposed this in the consultation. 

The government will also include information on business improvement district levies (if appropriate) and asset of community value status in the pack. A report on the condition of the property will be included, as the local authority will be undertaking a survey to ascertain the works it requires, if any, for the property to comply with the minimum energy efficiency standards

Landlords will be given a further grace period and should not rent the property to a tenant of their choosing.  The new leases will be excluded from the Landlord and Tenant Act, 1954.  If a landlord intends to carry out substantial works such as construction, demolition or reconstruction, which affect the premises, or they want to occupy for their own residential business use, then they will be able to serve a counter notice on the local authority once the final letting notice has been served.

Interestingly, the government has concluded that no reserve will be set on the rental value. The thinking was that a reserve price could discourage bids and lead to the property remaining empty.

A sealed bid auction process will be used for high-street rental auctions. This will give the landlord more control by allowing them to select the winning bid, which might increase potential demand.

The local authority will bear the costs of marketing the properties in auction fees, and the tenant will bear the costs of searches and surveys, as well as solicitor’s fees paid by the local authority for lease preparation. 

The property will have to comply with a minimum standard relating to its physical state and condition in order to be let.  Sub-letting will not be allowed, but an assignment of the lease will be permissible; subjects are landlords’ consent not to be unreasonably withheld or delayed.

Tenants will be able to fit out the premises and undertake non-structural works without the landlords’ consent. Work on external parts or structural elements will need the landlord’s consent. Tenants will benefit from a full week-long rent-free period to account for fitting out. Tenants will also have to pay a rent deposit of the greater of £1,000 or three months’ rent.

Tenants will be required to carry out repairs only to the condition shown by a Schedule of Condition.  There will be no service charge unless the landlord opts for it.  There are no exemptions from minimum energy efficiency standards.  Landlords will have some concerns around the choice of tenant potential losses incurred, but the governments have taken the view that if the property has been vacant for a year or cumulatively for more than a year over a two-year period, then the focus should be on acquiring a new tenant. 

Interestingly, superior landlords and lenders are deemed to consent to the new letting in any event. Tenants will not need to have a change of use or a planning perspective for the duration of their leases. Landlords will, however, retain some discretion in terms of the tenant mix.

We will watch this update with interest to see if this creates any fallout or property disputes or whether it is the answer in trying to save the high street.

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