Real Estate Focus - November 2024

High Street Rental Auctions

The previous government introduced “High Street Rental Auctions” (HSRA) as part of its commitment to improving and regenerating areas which suffer from economic decline, exacerbated following the Covid-19 pandemic.

On 11 and 12 November, the government made the Local Authorities (Rental Auctions) (England) and Town and Country Planning (General Permitted Development) (Amendment) Regulations 2024 (the Regulations). These bring into force (on 2 December 2024) the powers under Part 10 of the Levelling-up and Regeneration Act 2023 (the Act) for local authorities to conduct compulsory rental auctions of vacant properties in designated high streets or town centres subject to meeting certain criteria. They also provide much of the missing detail about the processes involved.

We take a look at the key features of the regime.

Which premises are in scope?

For a premises to be in scope of Part 10 of the Act, and be considered by the local authority for HSRA, they must be a “qualifying high-street premises”, namely:

• they are situated on a designated high street or in a designated town centre; and
• the local authority considers them to be suitable for “high street use”.

A local authority can designate a street in its area as a high street for the purposes of Part 10 if it considers the street is important to the local authority because premises on the street are being used for “high street uses”. Similarly, a town centre can be so designated by a local authority if it is characterised by a network of streets with a concentration of premises being used for “high-street uses” within those streets. The Regulations provide more detail as to the publication of a designation of a high street or town centre, and what information it must include.

“High street use” is wide ranging and includes (but is not limited to) uses such as shops, offices, restaurants, cafes, bars, public entertainment, community halls and manufacturing. Warehouses are specifically excluded.

The premises also must have been vacant for the whole of the immediately preceding year or 366 days in the immediately preceding two years (known as the “vacancy condition”). In addition, the local authority must be satisfied that the occupation of the premises for a suitable high street use would be beneficial to the local economy, society or environment (known as the “local benefit condition”).

What are the main processes involved?

Notices

Where a premises meets the vacancy condition and the local benefit condition, and are also qualifying high street premises, the local authority may serve an “initial letting notice” (ILN) on the landlord. The ILN period lasts for 10 weeks, during which there are various restrictions placed on the landlord in relation to granting tenancies or licences to occupy the premises.

After a period of eight weeks has elapsed since the ILN, the local authority can serve a “final letting notice” (FLN) on the landlord if the premises remain unlet, or any new letting is consistent with the exercise of the local authority’s powers to enter into a tenancy contract as provided for in the Act. The period of the FLN is 14 weeks (subject to extension) and during this time there are various restrictions on the landlord in relation to both occupation of the premises and carrying out works to the premises.

Landlords have 14 days from the date of the FLN to serve a counter notice of their intention to appeal on specific grounds set out in Part 1 of Schedule 20 to the Act. If the FLN is not withdrawn, the landlord has 28 days (starting on the date on which the counter-notice was received by the local authority) to launch the appeal to the County Court.

The forms of ILN, FLN and landlord’s counter-notice are set out in Schedule 1 of the Local Authorities (Rental Auctions) (England) and Town and Country Planning (General Permitted Development) (Amendment) Regulations 2024 (the HSRA Regulations).

Once the authority is free of any appeal risk, and provided that an FLN is in force, and no tenancy or licence has been granted in relation to the premises (or any new letting is consistent with the local authority’s powers as above), the local authority can arrange the rental auction.

Rental auction

The rental auction process is set out in the HSRA Regulations which refers to a week by week programme lasing approximately 11 weeks. This broadly involves the following:

• prior to any steps to initiate a rental auction, a local authority must instruct a qualified surveyor to carry out a survey of the premises for the purpose of preparing a schedule of works required to raise the premises to the “minimum standard”;
• service of a notice of the local authority’s intention on the landlord and carrying out of searches (regulation 6);
• service of a further notice on the landlord containing (i) requirements for the landlord to provide various information including responses to general pre-contract enquiries, proof of title, utilities certificates, fire risk assessments, and asbestos surveys; (ii) the terms of the proposed tenancy contract and (iii) the proposed terms of the tenancy (regulation 7);
• representations by the landlord on any information provided by the local authority (regulation 8);
• collation by and service upon the landlord of the “auction pack” (regulation 9);
• information regarding how the local authority markets the property, and how a successful bidder is chosen (regulation 10);
• the landlord’s ability to choose and accept any of the bids as a successful bid (regulation 11);
• payment of costs in relation to the rental auction process (regulation 13).

The HSRA Regulations also amend the Town and Country Planning (General Permitted Development) (England) Order 2015, to provide for a new permitted development right, namely a change of use of premises which are qualifying high street premises under the 2023 Act to a suitable high street use, for the duration of a tenancy granted under Part 10 of the Act. This is included to try and circumvent any delays to the auction process by the need to apply for planning permission for such a change of use.

What must the tenancy contract and tenancy include?

Schedules 2 and 3 of the Regulations set out, in some detail, what should be contained in tenancy agreement and tenancy respectively. Key terms to note are as follows:

• the tenancy is excluded from the security of tenure provisions of the Landlord and Tenant Act 1954;
• the tenant will pay a deposit of £1,000 or a sum equivalent to 3 months’ rent, whichever is the higher;
• there will be a rent free period of 4 weeks following completion;
• an obligation for the landlord to undertake, at its own cost, the works set out in the schedule of works (previously prepared by the surveyor instructed by the local authority) to bring the premises up to the minimum standard;
• provisions for landlords works to be completed within 3 months after the date of the agreement for lease (subject to extension determined by a surveyor appointed by the landlord);
• an obligation on the landlord to pay liquidated damages of £55 per day if the landlord’s works are not carried out within the three month period or extended period (as applicable);
• step in rights for the tenant to carry out the landlord’s works if the landlord fails to do so, with the cost of any such works being deducted from the rent payable under the tenancy.

What next?

There are clearly a number of unanswered questions which are, so far, not addressed by the legislation. For example, what is the position where persons are entering into new tenancies (whether following auction or otherwise) which might result in breaches of consent (for example in a superior lease)? And what is happens where a premises needs to be brought up to the minimum standard before being let but the landlord is not able to fund those works or it is not economic to do so?

In addition, given the limited funding available to local authorities generally, it remains to be seen whether or not local authorities will have the means or ambition to tackle such a time-consuming and complex process.

Law Commission Consultation Paper on 1954 Act renewals

On 19 November, the Law Commission published the first of two consultations on its wide-ranging review of Part II of the Landlord and Tenant Act 1954 (the LTA), one of the most fundamentally important pieces of legislation for the commercial property sector since the second world war. Given it was introduced 70 years ago, and has not been updated in 20 years, and with sweeping changes in the commercial property landscape having taken place during that time, reform of the LTA has been eagerly awaited.

But what are the main focuses of the consultation, and how might things change?

Security of tenure

As it currently stands, the LTA gives most business tenants (depending on the type of tenancy) an automatic right to renew their tenancies following expiry of existing tenancies (known as “security of tenure”). The LTA contains an ability for the parties to “contract-out” of security of tenure by following a specified process prior to the tenancy being entered into. This process is commonly used by landlords and tenants of business premises, particularly in relation to tenancies with shorter terms.

The first part of this first consultation concentrates on whether business tenants should have security of tenure and if so, how should this operate.

Four models are proposed:

• No security of tenure – the entire regime would be removed, though this would not prevent landlords and tenants from agreeing contractual options to renew a tenancy.
• Mandatory security of tenure – this would entail a return to a model (prior to the introduction of the ability to “contract out”) where security of tenure is compulsory.
• “Contracting in” – this would reverse the current model and move to a scheme where the default position is that tenants do not have security of tenure, but the parties can choose to contract into a statutory scheme if they wish.
• “Contracting-out” – the model under the current law would be retained with the default position being that tenants will have security of tenure unless the parties contract-out.

The consultation paper also discusses the potential pros and cons of each model, and addresses how a change in model might apply (or not, as the case may be) to existing tenancies. However, the Law Commission does not favour or support any particular approach and is keen to consult widely on the models in order to have as strong an evidence base as possible.

Scope of the LTA

The second part of the first consultation essentially asks: what types of tenancies should be covered by the LTA?

Currently, there are a number of tenancy types which are not afforded protection by the LTA, for example agricultural holdings, farm business tenancies, certain leases of licensed premises, leases which grant “code rights” to electronic communications operators, and tenancies granted for a term of six months or less. Whilst the Law Commission admits that it has heard less about the need to reform the LTA’s scope, it considers this an important point to raise now in order to gauge whether there is appetite for reform in the marketplace.

Survey

Alongside the first consultation, the Law Commission is seeking responses to a survey regarding the current operation of the LTA and its impact on the commercial leasehold market.

What happens next?

The period for the first consultation ends on 19 February 2025. You can respond to the Consultation Paper here, and to the survey here.

Once the Law Commission has considered responses to the first consultation, the intention is to publish a second consultation based on the responses received to this first paper. This second paper will aim to drill down into the more detailed and technical operation of the security of tenure regime.

The UK Net Zero Carbon Building Standard

The UK’s built environment contributes significantly to the UK’s carbon emissions. Reducing carbon emissions from buildings is therefore critical for the government to reach its goal of achieving net zero by 2050 (compared with 1990 levels).

The pilot version of the UK Net Zero Carbon Buildings Standard (the Standard) was published in September 2024 with the aim of providing a consistent approach to delivering net zero carbon buildings and ensure that buildings are future proofed against a changing climate, ready for the transition to renewable energy.

The Standard, which is voluntary, sets out operational carbon and embodied carbon targets along with limits that buildings must meet to classify as net zero carbon aligned. It also creates a unified definition for ‘net zero carbon aligned buildings’, thereby creating alignment between the many existing sustainable building standards used by the real estate sector.

Key features

To classify as a net zero carbon building, the fabric of a building must have very high energy efficiency levels and use renewable or low carbon energy sources. Key features of the Standard include:

• Application – it applies to existing and new buildings in all the UK’s major building sectors. Buildings that cannot be classified into the specified sectors cannot claim conformity with the Standard but can still support its aims by assessing and submitting energy use, carbon emissions and other metrics according to the Standard’s criteria. Note that the Standard will not apply to infrastructure projects.
• An in-use standard – it requires assessment of building performance based largely on measured quantities. As such, conformity with the Standard can only be properly assessed and verified for buildings that have been occupied and in use for a year at the time of being assessed.
• Science led – it is informed by UK carbon and energy budgets remaining on a 1.5°C trajectory and requires actions for the built environment to remain in line with these budgets.
• “Top-down” and “bottom-up” approach – it has been created using relevant national carbon and energy budgets to define what the industry needs to achieve to play its part in a net zero carbon UK (“top-down”) alongside using industry data to create evidence-based performance levels (“bottom-up”).
• Mandatory limits – it sets mandatory limits that must not be exceeded, aimed at enabling the UK real estate sector to stay true to the built environment’s share of the UK’s national carbon budgets. These limits depend on building type and will be updated periodically to remain in line with the UK’s carbon emissions and budgets as they change.
  
  The limits relate to upfront carbon, operational energy use, avoidance of fossil fuel use on site, renewables, and refrigerants. They have been set using a combination of measured performance data and expert professional experience on future performance trends and buildability, which have then been compared against the UK’s existing stock and future build-out rates.

• Reporting requirements – it is underpinned by an evidence-based reporting methodology. The minimum level of information that must be publicly disclosed about a building includes life cycle embodied carbon, operational water use, electricity demand, and heating and cooling delivered to the building.
• On-site renewable energy generation targets – this target applies to both existing and new buildings and will vary according to geographical location and building type. The target can be reduced if there are valid constraints on a building, such as limited roof space, overshadowing or grid connection issues. Additional considerations for existing buildings could include structural and accessibility constraints on renewable generation capacity.
• Optional requirement for offsetting – in addition to meeting all requirements for a net zero carbon aligned building, the upfront carbon and carbon emissions associated with operational energy consumption and refrigerant leakage can be mitigated through offsets or renewable electricity procurement. Buildings taking advantage of this optional requirement can claim to be net zero aligned (with the offsets) thereby remaining in line with the Standard. However, the optional requirement cannot be used as a replacement for the Standard’s mandatory limits and requirements.
• Evolving nature – the intention is for the Standard to evolve over time to include additional reporting metrics, such as life cycle embodied carbon limits, space heating and/or cooling limits across further sectors and building types, electricity demand management limits, energy use intensity, and more.

Further, in future versions of the Standard buildings will undergo verification to demonstrate conformity to the Standard, with the first verification taking place once the building has operated at agreed occupancy levels for at least the preceding 12 months and annual ongoing verification taking place thereafter.

Comment

The UK is currently experiencing a shortage of net-zero carbon buildings with demand significantly outstripping supply both inside and outside the capital. The Standard therefore presents an economic opportunity for developers who will be able to command premium rents and valuations by proving their built assets are net zero carbon and align with the UK’s climate targets. Further, with access to the Standard, the built environment industry should be better equipped to target, design and operate buildings to be net zero carbon aligned, thereby driving the positive change that is needed to meet the UK’s climate goals.

The Standard pilot test scheme is expected to launch in early 2025. Developers with net-zero carbon schemes in the pipeline have until 31 January 2025 to register to participate in the pilot Standard test scheme.