High Street Rental Auctions

On 2 December 2024, new statutory powers came into force which allow local authorities to auction one to five year tenancies of vacant high street and town centre properties for “suitable high street uses” where considered to be of benefit to the local economy or society.

Before putting a property to rental auction, a local authority must first have designated the relevant high street or town centre for this purpose. It must also seek to resolve the vacancy by engaging with the property owner (landlord). Ultimately though, if high street properties remain vacant, local authorities now have the power to let them without the owner’s consent, or that of any superior landlord or mortgagee, through a detailed auction process set out in the new legislation.

The intention behind these new powers is in some ways commendable, to encourage councils and landlords to talk to each other and work collaboratively with the intention of getting persistently vacant town centre properties occupied and “breathe new life into high streets”, with an auction intended to be the remedy of last resort where collaboration fails. But whether that will turn out to be the case in practice remains to be seen.

Some relevant points to look out for from a lender’s perspective:

A lender holding a legal mortgage over a property has a right to enforce security by way of possession of the property which, if exercised, would see it step into the landlord’s shoes. And if the lender wishes to exercise a power of sale, it might find potential buyers put off from buying a property that is occupied by a tenant under an auction tenancy who might be paying below market rent. 

In particular, property owners and their lenders should aware of the following:

Terms of the tenancy contract:

1. There is no minimum level of rent below which a bidder cannot make an offer. A successful bidder could therefore end up paying a nominal rent for the property, which might adversely affect the property’s market value as well as its potential for rental income, and the extent to which rents set by an auction might impact on other high street rents is as yet unclear.

2. The tenant will not be under a ‘full repairing’ obligation in respect of the property. It will only be obliged to keep the property in no worse state of repair than that shown in a schedule of condition.

3. If any works are required to bring the property up to the “minimum standard” as prescribed by the new legislation, the landlord will be required to carry them out, at its own cost. And it will only have three months in which to do so, or face daily liquidated damages or tenant step-in rights.
   
   

Change of use under Permitted Development Rights:

The General Permitted Development Order has been amended to allow the existing use of a high street or town centre property to be changed to a different (suitable) high street use as determined by the local authority for the purpose of the auction lease. However, such change of use will be temporary and will not continue after the rental auction lease has expired.

Local authority can contract on landlord’s behalf:

If the landlord fails to contract with a bidder where legally required, the local authority may do so in its place.  And if the landlord then fails to grant the tenancy, the local authority may grant it in the landlord’s name (with the tenancy then having effect as if it has been granted by the landlord).  This can be done without a lender’s express consent, as such consent will be deemed to have been given.

Redevelopment:

It is often the case that developers will leave properties vacant on purpose where seeking planning consent for redevelopment. Neither they nor their lenders will want such properties being let by the local authority where the goal is to start demolition and construction work on site. And both lenders and borrowers will want to avoid any action by the local authority which could adversely impede or delay its redevelopment, with landlords being prohibited from carrying out any works to their property without the local authority’s written consent during the final 14 weeks of the auction process.

Criminal offence:

A landlord who fails, without reasonable excuse, to provide information about a property to the local authority where required, or who provides false information, will commit a criminal offence and be liable for a fine. This might then place a lender’s borrower in breach of its continuing warranties to a lender.

Some practical points for lenders to consider:

• How many vacant high street or town centre properties do you have in your portfolio?

• How long have they been vacant (more than a year)? To qualify for the new auction process, a property must have been unoccupied for the whole of the previous year or at least 366 days during the previous two years.

• What is the likely reason why they haven’t been let (e.g. no occupier market - so how likely is it that the local authority will have more success letting a property - or do landlords need to be more incentivised to find a tenant)?

• Do you believe such properties could be let to avoid becoming subject to the new auction process? And what steps need to be taken to let them - greater marketing push, review of the rent and commercial letting terms being sought?

Top Tips and Action Points:

• Ensure that both the lender’s and the owner’s property contact information at the Land Registry is up-to-date for any registered high street / town centre properties, so that if the local authority serves any auction notice, that notice will be received.

• Discuss with a borrower letting relevant property for a temporary use (such as by a charity or “live in” guardians), particularly ahead of carrying out any redevelopment. However, to avoid remaining “vacant” for auction purposes, any such occupation must be “substantial”, “sustained” and “involve the regular presence of people at the property”.

What's TLT's opinion

Leo Wilson, Legal Director (Real Estate Finance): "The new legislation is intended to address concerns regarding empty and derelict shops, not only on high streets but generally throughout town centres. However, any intervention by the local authority to let such properties may have adverse consequences for property owners and their lenders, and interfere with private property rights and the commercial property market as a whole."

TLT has extensive experience in advising on real estate finance  matters. If you would like to discuss further, please get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.