High stakes for construction with high street rental auctions

Councils' powers have changed, essentially allowing them take control of closed high street commercial properties, and get them open again through high street rental auctions.

This includes works being carried out to these properties to make this possible. But it's not quite joined up from the construction side, and this can be problematic. 

What's changed?

One in seven high street shops are shut. So the government has given councils the power to force them open again, under provisions in Part 10 of the Levelling-up & Regeneration Act 2023 that came into force a few months ago.

These powers enable councils to run rental auctions on empty high street properties using an auction process which, after an initial notice period, lasts only 12 weeks from beginning to end.

While councils should work with property owners to get shops open both before and while using these powers, it's possible to proceed if owners aren't cooperating.

What can councils do?

If a non-residential property within a designated high street has been empty for 366 days in the previous 2 years, the council can take certain steps.

The Act gives councils the power to:

• Designate an area as a high street
• Require information about a property
• Gain entry to a property to carry out a survey
• Restrict an owner's ability to let the property by serving an initial notice
• Serve a final notice (8 weeks after the initial notice) to continue this letting restriction, and also restrict the owner carrying out works during the rental auction process
• Conduct a rental auction to provide successful bidders with suitable premises - with any works required to raise the standard of the premises to be carried out by the owner
• Enter into an agreement for lease and lease as if it is the owner, if an owner fails to do so (any consent required from a lender or superior landlord is deemed to be given), and
• Change use - automatic permitted development rights allow properties to change their use to a high street use for the duration of a tenancy granted following an auction.

Owners of empty properties, beware

The Act is very clear that owners are expected to cooperate. Failing to respond to the request for information or giving wrong information is a criminal offence.

Also, after receiving an initial notice, the owner needs the council's consent before it can let the property or carry out works (except for urgent repairs).

Owners can be required to provide information on short notice, such as proof of title, risk assessments, and safety certificates.

And they must choose a successful bidder within 2 working days of the auction's conclusion - potentially ending up with a tenant for up to 5 years, for a rent amount far lower than market standard, using a lease in the form prescribed by the legislation, for a use they do not want. 

Construction challenges

After a successful auction, owners can be required to carry out works to raise the property to the minimum standard defined in the legislation, potentially in very little time, with the legislation requiring these works to be carried out in 3 months or less (although there may be some limited scope to extend this).

Consent from any lender or superior landlord is deemed to be given for the letting, but owners may still need consents for the works as well as building control consent.

Furthermore, while the legislation includes proforma lease wording, provisions around the construction contract are distinctly lacking. In fact, there is no draft wording for a construction contract, no recommended form of contract, and no provision for collateral warranties.

As the construction industry knows, carrying out surveys, scoping and specifying works, obtaining consents, selecting contractors and consultants, agreeing contract terms (including collateral warranties and third party agreements), and undertaking and completing works can all take much, much longer than three months.

And even if it were possible to achieve this, an accelerated programme like this may bring with it additional costs – directly, through having to buy more costly materials simply because they are immediately available; and indirectly, by having less time to negotiate a contract properly and allocate risks appropriately.

Also, it assumes that the owner has the funds to carry out the works in the first place.

Where the hammer falls - key takeaways

How frequently councils decide to use these powers is yet to be seen. The process is new, the prescribed timescales are very tight, and the government is encouraging councils to talk to owners before starting a rental auction process.

But if you are a council thinking of trying this, think carefully, as the £5k government funding per auction may not be sufficient, and you must strictly comply with the requirements and timescales for the process in the legislation.

And if you are an owner and get wind of a potential rental auction on your property, act quickly - particularly if works are likely to be needed, as this could be both challenging to achieve and costly.