The Government has published the draft Levelling Up and Regeneration Bill 2022. As well as bringing in wide ranging planning reforms, the Bill requires commercial landlords to let vacant high street properties under a new compulsory rental auction process. The draft legislation is only a starting point: it has yet to pass through Parliament, and further regulations and guidance must be published so that the industry can understand the mechanics of the Bill, which is fairly light on detail. However, these changes are unprecedented and it is important for commercial landlords be aware of the potential impact.
Which premises would be affected?
Broadly, any premises located in a “designated area” could be affected by the new proposals. A designated area will be a street or area which the local authority deems to be important to the local economy because of a high concentration of “high-street uses” (such as shops, offices, restaurants, pubs and others). The premises must also meet the following two conditions:
- Vacancy condition: it has been unoccupied for the whole of the previous year or for at least 366 days out of the previous two years (it is not stated that this should be 366 consecutive days).
- Local benefit condition: the occupation of the premises for a suitable high street use would be beneficial to the local economy, society or environment.
Occupation requires the “regular presence of people at the premises” – but further guidance will be welcome on the precise meaning of occupation. For example, would a property count as unoccupied if it is currently vacant for site assembly purposes pending a redevelopment, or if it is undergoing a major refurbishment? It is also not clear how the local authority will obtain occupancy information (perhaps relying on business rates information, or requesting information from landlords).
How will the Government require landlords to let qualifying high street premises?
The local authority may serve an initial notice, giving the landlord a 10 week period in which to let the premises – although the landlord will need the local authority's consent before it can actually grant (or agree to grant) a lease or licence to occupy. It is worth noting the following points in relation to the requirement to obtain local authority consent:
- No consent is required for the grant of a lease further to a contract that bound the landlord before the initial notice took effect (such as an agreement for lease which was entered into before the notice was served), but there is no equivalent exception for an agreement to grant a licence to occupy (which landlords may sometimes agree to do under the terms of a share purchase agreement).
- The local authority must give consent to a lease or licence which is for one year or more (without any landlord break right in the first year), commences within eight weeks of the initial notice taking effect and would be likely to lead to the regular presence of people at the premises.
- If the landlord grants a lease or licence to occupy without local authority consent, the Bill states that the arrangement will be void. It is unclear how this would work in practice.
- Notices are binding on a purchaser, so buyers of potentially affected premises should, once the legislation is in force, ask the seller whether it has received any notices under the Bill.
If the landlord is unable to let the property within the initial notice period, the local authority may serve a final notice on the landlord, which starts the rental auction procedure.
How would a rental auction work?
The final notice starts a 14 week window during which the local authority is entitled to run a rental auction to try to find a tenant for the premises. The landlord cannot grant or agree to grant a lease or licence during this period without the local authority's consent. There is a process for the landlord to appeal the service of a final notice.
Further regulations are needed to understand the exact auction process and, in particular, how the successful bidder will be identified and the extent of any input the landlord may have. For example, it would seem unreasonable simply to offer the premises to the prospective tenant with the highest rental bid, without consideration for other matters such as covenant strength, business experience, tenant mix, or legal obligations which bind the landlord (for example, where a landlord owns multiple properties on the street, it may have agreed a covenant in one lease which restricts the landlord from letting to a particular type of tenant). It is also important to understand whether there will be a minimum acceptable rent level, or what would happen if there is only one bidder.
How is the tenancy granted to the successful bidder?
In a departure from established property law, the Bill provides that the local authority has the capacity to enter into an agreement for lease with the successful bidder on the landlord's behalf, at the end of the auction. The landlord will then be required to grant the lease and if it does not, the local authority will do so on its behalf. This is not something that we have seen before in English property law but appears to confer statutory rights for a local authority to act in the name of the landlord, akin perhaps to those rights granted to certain insolvency professionals.
The lease is deemed to be granted with the consent of any mortgagee or superior landlord. It must logically follow that the landlord will be protected from any breach of covenant claims from its superior landlord or mortgagee but we await further clarity on this.
What will be the terms of the agreement for lease and lease?
The terms of the agreement for lease and lease can be decided by the local authority (having regard to any representations made by the landlord): the Bill sets out the types of covenant that must be included in the lease, but the detail of the clauses is due to follow in further regulations. All leases will be contracted out of the Landlord and Tenant Act 1954, but it is not clear whether the usual notice and declaration procedure would have to be followed. The contractual term of the lease will be between 1 and 5 years, depending on the length of the landlord's own interest.
The Bill has already proven controversial, with the British Property Federation leading a chorus of industry voices in expressing opposition to the new proposals and scepticism about whether they will have the desired effect. They highlight, in particular, that few landlords like to see their properties sitting empty and that the biggest obstacle to letting properties is high business rates, which landlords are required to pay on unlet premises. For local authorities, running rental auctions and deciding terms of commercial leases puts additional pressure on already-stretched resources. The Bill will potentially introduce some of the biggest changes to the commercial landlord and tenant landscape we have seen for some time. If you need further advice or information on the proposed changes, please contact one of our partners.