Compulsory Rental Auctions – will they work?

The Queen’s Speech on 10th May announced the intention of Westminster to grant powers to local authorities to force landlords to let high street premises that have been empty for more than a year. The proposed Levelling Up and Regeneration Bill will introduce the legislative framework to enable the occupancy rights of qualifying properties to be auctioned to potential tenants.

Compulsory Rental Auctions are underpinned by the premise that rising vacancy rates are undesirable and need to be managed. While some vacancy on the high street is necessary to allow existing businesses to grow and shrink, new businesses to find accommodation and for landlords and occupiers to undertake refits, repairs or refurbishment works, policy-makers now identify long term vacant properties as space that has failed to adapt to changes in the market. They recognise that empty retail premises reduce the diversity and vitality of retailing centres, and leave black holes in high streets that contribute to further decline. Hence, the reasoning for a policy intervention to address long term vacancies and the associated negative externalities.

Yet, there seems to be the undertone that unreasonable landlords are to blame for the rise in vacancy rates. Just last week I was asked by a policy-maker why a landlord would deliberately withhold property from the market, the suggestion being landlords are either unreasonable about the rent they expect to achieve and, as a result, cannot let their units, or they are deliberately holding onto empty property until the market improves. Examples of vacant retail units with unrealistic or absent landlords may well exist in the market but these tend to be the exception rather than the norm.

REPAIR research shows that the majority of landlords prefer to let space than hold units empty. The holding costs – business rates, maintenance costs and other associated costs – are a significant incentive to finding a new tenant as quickly as possible. In falling markets, landlords are more flexible over lease terms and, as particularly evident in recent years, prepared to accept low or zero rents to avoid paying the business rates on properties that no longer qualify for empty property relief. Subsequently, many owners are desperate to let properties on short term leases, at least until market conditions improve.

There are other reasons why a retail unit sits empty. For instance, it may be the property is already let to a tenant who is still paying rent but no longer occupies the space because they have moved or gone into administration. In such instances, the existing lease contract means the landlord has to wait until forfeiture occurs before they can terminate the lease and relet.

Another reason for vacant retail premises is that the unit forms part of a site scheduled for redevelopment. Assembling a development site, gaining planning permission, and organising financing can take time. During this complex and risky process it is possible for a development to stall for an array of reasons, one being that the developer is forced to wait for local market conditions to improve to ensure the financial viability of the proposed project. When this occurs there should be scope for public- and private-sector stakeholders to work in partnership to speed up the urban renewal process and avoid empty deteriorating properties blighting a neighbourhood.

One key thing that stood out in the REPAIR interviews with landlords and professional practitioners is the difficulty landlords have to let some properties. A lot of time this is due to unaffordable business rates. While landlords can reduce their rent, and in recent years there have been many instances of eye-watering falls in the rents they achieve, they cannot reduce the business rate liability.  This is a particularly problem in markets where landlords have become reliant on independent retailers and operators to fill vacant retail premises. As a result, the insensitivity of the business rating system to ongoing structural changes in the retail market mean they have contributed to the market failure.

So, going back to the original question – will compulsory rental auctions address the problem of long term vacancy in the retail market?  REPAIR evidence suggests this policy intervention will be a blunt tool and, given the relatively low number of unrealistic landlords, is unlikely to have any significant impact on the market. The terms of these forced tenancies need to have “regard to the terms on which short-term tenancies are typically granted on a commercial basis” but it is unclear how this will work in practice given the increasingly bespoke nature of lease terms that are determined by a process of negotiation. It is also vague who will be responsible for the maintenance of the unit.

The revaluation of business rates on 1st April 2023 at rebased 2021 rents marks a watershed moment for the market. A change that is likely to have a more significant influence on occupier demand for retail space than Compulsory Rental Auctions although this assertion needs to be caveated. It assumes the business rate multiplier will not be substantially increased to compensate for the inevitable drop in town and city centre net rateable values or transition arrangements will not introduced, which may well need to happen to avoid a catastrophic drop in local government income. If so then the situation on the high street is unlikely to get any better although the threat of Compulsory Rental Auctions might accelerate the repurposing of retail space, vacant or otherwise.

– Allison M Orr

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