Levelling Up and Regeneration Act 2023

Part 10 of the Levelling-up and Regeneration Act 2023 allows local authorities to carry out mandatory rental auctions of empty properties and came partially into force on 31 March. The auction process introduced by the Act can compel landlords of certain properties to grant a new lease to the successful bidder.

While the Act provided a framework, the specifics of what is meant to happen in practice were left for future regulations. The government consulted on high street rental auctions and the results of the consultation, which closed in July 2023, have finally been published. These are likely to form the basis of new regulations, though the progress of those regulations may depend on the outcome of the upcoming general election.

The key points earmarked for future regulations are set out below.

Auction pack and marketing

Despite concerns being expressed by 91% of local authority respondents, the government confirmed that they will be required to pull together an auction pack within a three-to-four week timescale, including a marketing brochure, copy of the agreement for lease, energy performance certificate, various searches and replies to enquiries.

There will then be a mandatory five-week (and recommended six-week) marketing period, during which local authorities must list the properties on their website, advertise online and provide photos and details of floor areas.

Reserve price

The lack of any reserve price in the scheme left landlords concerned that this could reduce rents. Nonetheless, the government has confirmed that there will be no reserve prices, for fear that this could result in no bids being received. Competitive bidding was seen as most likely to achieve true market value.

Safeguards for landlords within the legislation include the requirement for the property to be empty for over a year and the fact that any lease granted is limited to five years.

Sealed bids

As expected, the government’s proposal for a sealed-bid auction process will be used, with interested parties stating the rent they are willing to pay and providing evidence of their ability to pay it. Landlords can then select the winning bid, which does not have to be the highest – the decision may instead be based on covenant strength and other factors.

Who pays?

Local authorities will pay the marketing costs and auction fees, and will recover search and survey costs and legal fees from tenants.

Condition of the property and repairs

Landlords will be required to carry out works to bring their properties up to “a condition which is safe, stable and secure for the tenant, and where occupational risks are either removed or managed”.

If they do not, the tenant can complete the works and set the cost off against the rent or deposit, ask the courts to compel the landlord to do the work, or terminate the agreement for lease and recover its costs from the landlord.

Landlords will face liquidated damages of £55 per day for any delays.

The tenant’s repair and maintenance obligations will be tied to a schedule of condition prepared after those works are completed.

Alienation

Given concerns that subletting could allow tenants to profit from auctioned properties, this will not be permitted. However, tenants can assign their leases subject to landlord consent, not to be unreasonably withheld or delayed.

Subdividing

Where a property forms part of a larger building, the tenant will take an internal demise with the landlord retaining the structure and exterior (save for shopfronts).

The consultation explored whether large properties in single ownership could be divided and auctioned separately, calling large empty BHS and Debenhams stores “a blight on the high street”.

Owing to the complexities of this, the government confirmed that “subdivision will be excluded from high street rental auctions at this juncture”, but did not rule it out in future.

Tenant fit-out

Tenants will need landlord consent for external or structural alterations, but can carry out non-structural fit-out works (such as internal partitioning, shop fittings and equipment) without consent, provided they are removed at the end of the term. More controversially, tenants will be given a four-week rent-free period in which to do such works.

Rent deposit

In an attempt to balance the interests of all parties, while acknowledging that no one will be “wholly content”, tenants will be required to pay a deposit of £1,000 or three months’ rent (whichever is greater).

Service charge

Leases will not contain service charge provisions unless the landlord opts for them – whether to reflect the terms of a superior lease or to match an existing regime for a unit in a parade of shops.

MEES

The government initially suggested exempting auctioned properties from minimum energy efficiency standards.

While this had some support, concerns were raised about undermining the wider policy, the disparity between properties and landlords falling back on the auction scheme rather than carrying out works to bring their property up to standard.

There will, therefore, be no exemption from MEES requirements for auctioned properties.

The future of high street rental auctions

With 74% of local authority respondents describing the process as “too burdensome”, the £2m government fund seems unlikely to persuade them to use the scheme, which seems aimed at absent or wholly disengaged landlords, rather than those who are struggling to let their properties in a difficult market.

Therefore, despite being a high-profile and eye-catching reform, rental auctions look set to be a last resort for local authorities, rather than a powerful tool for reviving the UK’s high streets.

An earlier version of this article appeared in the EG on 23 May 2024.

Authored by Mathew Ditchburn and Lucy Redman.