Are High Street Rental Auctions coming to Rugby?

06 Aug Are High Street Rental Auctions coming to Rugby?

Rugby Borough Council is currently undergoing a consultation with residents, businesses, and property owners in relation to the High Street Rental Auction (HSRA) powers included in the Levelling Up and Regeneration Act 2023. Following the consultation the Council may then seek to exercise these powers on commercial properties.

Background

For years, the UK high street has been in decline. Whether caused by high rents, business rates, challenges from online competitors, or changing consumer habits, we have increasingly seen more empty units and closures of well-known retail brands.

The power to hold High Street Rental Auctions flows from the Levelling Up and Regeneration Act 2023. The rationale was that prolonged vacancy of shops and buildings on high streets was negatively affecting our towns and cities and by enabling local authorities to force landlords to let their properties we will see a resurgence in the life of UK high streets. Whether that will turn out to be the case, and whether the impact on the commercial property market is worth it, is yet to be seen.

In short, these powers allow a local authority to hold an auction and to subsequently let high street and town centre premises without requiring consent from the owner, any superior landlords, or any mortgagees.

These powers may be concerning for owners of vacant premises, whose control of the properties may be stripped from them as they are forced to let their property, and to their lenders, whose security may be devalued as a result. Ultimately, the results of these auctions could depress comparatives for other properties in the area and drive down rents on properties on negotiated new leases and renewals. Good news for occupiers but not so much for the landlords or their lenders.

Which properties are affected?

To be subject to the HSRA process a property must be:

• Within a designated high street or town centre. Rugby Borough Council have recently set out their proposed designated area (a plan of which is available on their website).
• Suitable for high street use. This is not limited to retail uses but includes (without limitation) offices, restaurants, bars, community halls, manufacturing facilities, etc. It does not include warehousing or residential uses.
• Vacant for the required period. The property must have been vacant for one year or for 366 days within the last two years. The occupation must be substantial, sustained, and involve regular presence of people at the premises – this is different to the test for business rates and empty property relief.
• (if occupied for a high street use) beneficial to the local economy, society, or the environment.

What is the process?

The HSRA process is detailed and complex and this serves only as a summary of that procedure. There are several deadlines that are tight must be adhered to. The process will take several months and may be delayed further if a landlord appeals. Finally, it is worth noting that there is no guarantee that at the end of the process the property will actually be let.

Designating an area of the town

The local authority must publish a designation proposal and representations can be made regarding it. The designation takes effect as a local land charge and anyone interested in the property should be made aware of the designation.

Identifying suitable properties

It should be noted that the current legislation does not permit the local authority to subdivide premises into smaller separate sections (although this may be changed in the future).

Serving an initial letting notice

The local authority may serve an initial letting notice on the landlord for a suitable property. This will be the person entitled to possession of the property that can grant a tenancy of one year or more. The notice is valid for 10 weeks but the notice can be withdrawn at any time.

The purpose of the notice is to alert the landlord to the HSRA process and to give the landlord an opportunity to let the property. However, any lease granted while the notice is in effect will require the local authority’s consent (unless pursuant to an agreement exchanged before the notice was served). There are certain obligations on the local authority to give consent in a reasonable time and in certain circumstances.

Serving a final letting notice

After 8 weeks from serving the initial letting notice (but before it expires after 10 weeks), the local authority can serve a final letting notice. Serving the notice opens a 14 week window to allow for the auction process. Once a final letting notice has been served the landlord cannot let the property without consent. Additionally, the landlord cannot carry out works to the property (except for certain works such as emergency works) without local authority consent.

It is at this stage a landlord can appeal. If the landlord does so, it must serve a counter notice specifying a permitted ground of appeal set out in the legislation. The appeal will then delay the statutory timetable for the rest of the process.

Survey

The local authority must arrange for a survey to ascertain what works are required to bring the property to the minimum standard (to be safe, stable, and secure – more detail is contained in the legislation). Please note this is different to the minimum energy efficiency standard (see below). The landlord will be under an obligation to use reasonable endeavours to carry out those works within three months from the date of an agreement for lease entered into as part of the auction process.

Holding the rental auction

The auction process is subject to a 12 week timetable. This starts at serving notice on the landlord of the intention to hold the auction and undertaking specified searches (to form part of the auction pack) and includes:

• Week 1: Preparing information
• Week 2: Proposing the terms of the tenancy and serving them on the landlord
• Week 3: An opportunity for the landlord to make representations
• Week 4: Service of the auction pack
• 5 weeks of marketing with all valid bids being served on the landlord after the 9th week (but before the end of week 10).
• Exchange of contract for the new lease by the end of week 12.

The auction must be by a sealed-bid auction. The landlord is not required to choose the highest bid but may choose any bid submitted. If the landlord fails to accept a bid, the local authority can accept the highest bid (from the bidder with whom it is reasonably practicable to enter a contract – in case there are higher bids from parties that are not suitable).

The auction process is finished by the local authority exchanging an agreement for the grant of the lease with the tenant. The agreement must contain the details of the proposed tenancy and may include provisions relating to works to be carried out by either party. This agreement is binding on the landlord and if the landlord fails to grant the lease, the local authority may do so on the landlord’s behalf. The legislation also deems consent for any superior landlord or mortgagee.

Granting the new lease

The new lease will need to be outside the protections of sections 24 – 28 of the Landlord and Tenant Act 1954 (frequently referred to as the security of tenure provisions) and can be granted for between one and five years.

It is worth noting that the auctions are not subject to a reserve (i.e. minimum rent) and therefore there may be little protection to landlords where only nominal bids are received. Leases will also include a rent free period of up to four months to take account for any fit out required by the tenant.

Tenants will be able to carry out general fit out works without landlord consent but external or structural works will require consent not to be unreasonably withheld or delayed. Tenants may be able to remove or retain existing non-structural items of the existing fit out without landlord consent (or structural items with landlord consent).

Repair will be subject to a schedule of condition to be prepared by the tenant at its cost.

Subletting (either whole or part) will not be permitted but assignment is permitted subject to the landlord’s consent.

The local authority is not required to provide a guarantee for the tenant but the tenant must provide a rent deposit of £1,000.00 (or three months’ rent if greater).

Service charge arrangements will be limited but should be appropriate to the property (i.e. should mirror a superior lease, mirror existing arrangements, or the landlord is given the choice to provide a limited list of services).

There will also be permitted development rights to change the use of the property to the suitable high street use determined by the local authority. This does not extend to physical works unless they would already otherwise benefit from other permitted development rights.

Clearly, some of the terms above may not be acceptable to secured lenders. However, their consent to the lease will be deemed. It is as yet uncertain as to how the imposition of these leases (potentially in breach of the terms of the landlord’s mortgage) will be seen by lenders or how they are expecting to react.

Costs

There are a number of costs involved in the grant of the lease:

• The cost of marketing the properties and the auction fees are borne by the local authority.
• Costs relating to property searches and surveys, and any solicitors’ fees are payable by the tenant.
• If there are any works required in order to make the property safe, stable, and secure then the landlord must carry out these works at its cost. The local authority can impose liquidated damages of £55.00 per day on a landlord that fails or chooses not to undertake those works (although landlords can make representations regarding such works).
• The HSRA process grants no exemptions for the purposes of the minimum energy efficiency standards (MEES) required under the relevant legislation. This means that if the property is substandard (i.e. has a rating of “F” or “G” at present) then the landlord will be in breach of its obligations unless it improves the property or registers an exemption before the lease is completed. Although the timeline is not certain, we expect that the minimum level will increase and therefore more (potential) landlords will fall into this problem in the future.

Next Steps

The current consultation runs until 11 August 2025 and comments can be sent to estatesandproperty@rugby.gov.uk. The Council have noted that they are looking for comments about whether the proposed area is supported but that while they will note comments on the general principle of the auctions they won’t be included in the consultation responses.

After the consultation the Council proposes to identify properties within the designated area that satisfy both the vacancy and local benefit conditions and will then engage with the property owners to begin the surveying process.

We look forward to hearing the outcome of the consultation.

If you are a landlord and are concerned about the impact of high street rental auctions, or you are concerned about any notices you have received relating to them, please contact us on 01327 301 771 or email mgoldfinch@rollasons.com.