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The Levelling-up and Regeneration Bill 2022-23 – Letting by local authorities of vacant high-street premises

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The Levelling-Up and Regeneration Bill (Bill) was laid before Parliament on 11 May 2022.

There are various proposals affecting the property sector. Perhaps one of the most controversial is the proposal to empower local authorities in England to hold rental auctions and contract to let vacant high street and town centre premises without requiring the prior consent of the owner, superior landlords or mortgagees.

Designation

Local authorities will be given the power to designate a street as a high street and an area as a town centre, if certain criteria are met.

Properties within such designations will be qualifying high street premises if the local authority considers that they are suitable for high street use.

This not only covers retail but also, for example, offices, restaurants/cafés/bars, public entertainment and manufacturing, but there is no specific limitation save that warehouses are specifically excluded.

Initial Notice

A local authority will have the power to serve an initial notice on a landlord (in this case meaning the person entitled to possession of the property and who can grant a tenancy of the premises for one year or more, so not simply the freeholder, but may be a tenant under an existing lease) in relation to qualifying high street premises if both of the following conditions are met:

  • vacancy condition: this requires the property to be vacant and to have been vacant for the whole of the immediately preceding year or for 366 days in the immediately preceding two years. So even if there have been tenants during the 2 year period, the property may still be considered vacant for this purpose. As to what constitutes “occupation” in this context, it requires the regular presence of people on the premises, so not quite the usual definition for commercial property. This could bring into the definition properties which are let under a continuing lease; and
  •  local benefit condition: this requires the local authority to be satisfied that occupation of the property for a suitable high street use would be beneficial to the local economy, society or environment. This is very wide – one could easily argue that any traditional high street/town centre property would benefit the wider community if occupied, so may bring into play all properties in designated areas.

The initial notice period is 10 weeks. During this time, the landlord will be restricted from letting the property (including granting licences to occupy or entering into arrangements entitling others to possess or occupy the premises, so includes any agreement for lease, option agreement etc.) without the consent of the local authority.

There is an exception where the landlord is bound by an obligation to let which pre-dates the initial notice. The local authority is required to grant consent to a letting or licence which fulfils certain criteria so the landlord has a window of opportunity to let the property but only if such letting (or licence) meets certain conditions and this is only available during the initial notice period.

 

Final notice

A final notice can be served by the local authority if:

  • there is an initial notice in force in relation to the property and eight weeks have elapsed since it took effect; and
  • the property has not been let etc. in the interim (this would require the letting etc. to have fallen within the criteria above).

The final notice must be served in time for it to take effect before the initial notice period expires.

Landlords will have 14 days from the date of the final notice to serve a counter-notice stating that they intend to appeal and specifying the ground of an appeal. There are seven permissible grounds for appeal. If the final notice is not withdrawn, the landlord will have 14 days to launch the appeal to the County Court on the grounds specified in the counter-notice.

These are very tight timescales and so landlords served with an initial notice will have to ensure they do not sit back – they will have to start planning for the final notice stage as soon as possible.

During the final notice period, the landlord will not only be subject to restrictions on letting the property (including granting licences to occupy or entering into arrangements entitling others to possess or occupy the property) without the local authority’s consent, but will also be subject to restrictions on works without that consent.

The final notice period is 14 weeks. During that time, the local authority may hold a rental auction to find persons who would be willing to take a tenancy of the property and ascertain the consideration they would be willing to pay.

Prior to the auction, the local authority must specify the suitable high street use for the premises and any subsequently imposed letting will be for this use only. The details of the rental auction process are to be set out in secondary legislation.

Power to contract to let

The local authority’s power to contract to let (and so bind the landlord to the letting) arises where the following conditions are met:

  • a final notice is in force and at least 42 days have elapsed since it took effect;
  • a rental auction has been carried out; and
    the property has not been let etc. in the interim.

The purpose of the contract is intended to allow for works to be carried out to the property before the tenancy is granted.
If the landlord subsequently defaults on the obligation to let, the local authority can grant the tenancy on the landlord’s behalf.

There are some indications as to the terms on which a local authority may let e.g.:

  • it must be for the high street use designated prior to the rental auction
  • it must be for a term of at least one year but no more than five years
  • it will be outside security of tenure
  • it must satisfy certain other criteria laid out in Schedule 16 of the Bill

However, there is currently insufficient detail for landlords to be reassured that they will be getting a fair deal. Although there is an obligation that if the successful bidder at the rental auction has indicated the amount of premium or rent they are willing to pay, the local authority cannot agree a lesser figure without the landlord’s consent, but are no provisions prescribing a minimum rent.

While the local authority must have regard to representations made by landlords as to the terms of the tenancy, the local authority is not bound by those representations.

Instead, there is a catch-all reassurance that, in making regulations prescribing further details as to the terms of imposed tenancies, the Secretary of State must have regard to the terms on which short-term tenancies are granted on a commercial basis.

The contract to let and subsequent tenancy will be deemed to have been entered into with the express consent of any superior landlords and/or mortgagees. This means that the usual provisions in legal charges and head leases requiring consent and imposing conditions on the terms of lettings will not apply. For example, what about rental levels if less than a head lease, guarantors or rent deposits?

Of course, everyone would wish to see the traditional high streets and town centres regenerated and flourish, but have the shopping habits of the nation changed forever, with the popularity and convenience of online shopping (brought even more to the fore during the pandemic)?

Can the high street culture be revived? Clearly, landlords (and tenants who are not in occupation as defined in the Bill) will need to consider carefully how they deal with their properties which may be standing empty.

What effect will the provisions have on property prices and rental values in designated areas? What effect will they have on lending criteria in those areas? How will local authorities cope with the administrative burden?

It will be interesting to see how the Bill progresses.

If you need any Commercial Property advice, contact our team.

Ika Částka

Posted:

Ika Částka

Partner

Ika is Head of the Commercial Property team and has been advising individuals and businesses across Northamptonshire since 1986, specialising in commercial, agricultural and rural property matters for both businesses and individuals.