Political instability, the aftermath of the Covid-19 Pandemic and successive economic shocks continue to contribute to a unique set of challenges facing the retail sector. 2022 was not without its causalities; made.com, Joules, TM Lewin and M&CO were just a handful of high-profile brands who called in the administrators. Impending legislative developments and a reassessment of business rates due to take place on 1 April 2023 will present yet further challenges for commercial property occupiers and landlords against the backdrop of an ever-changing and evolving high street.
Topics to be answered in this article
Localism and creativity
Reinvention and repurposing will continue to be a major theme of development for commercial property in 2023. Whilst the relative reduction in the presence of major chain brands on our highstreets has led to cause for concern, it has opened new opportunities for smaller businesses and independents to occupy prime commercial space once out of grasp. Our high streets are likely to be populated by a rise in experimental business ventures and start-ups, particularly if we see the introduction of compulsory rental auctions pursuant to the Levelling up and Regeneration Bill 2022 (the Bill) first introduced into the commons on 11 May 2022.
A change in consumer spending habits and an increased demand for services as opposed to ‘stuff’ has also led to a growing rise in independent barbers, beauty salons, nail salons, coffee shops and health clubs populating our highstreets. A permanent change in our daily working habits has further led to a resurgence back to independent retail. With hybrid working set to remain, our local high street is now an important part of our social interaction. This sentiment continues to be championed by Mary Portas who first conducted The Portas Review, a major independent review into the future of our highstreets in 2011. Portas has recently commented ‘the closure of independent retailers would have huge consequences for the communities who spend in those shops and the social infrastructure they provide because shops are about so much more than what is sold’.
The Levelling up and Regeneration Bill 2022
Whilst the Bill has not yet passed through parliament and further guidance is awaited, a key element of this Bill would provide local authorities with the power to carry out compulsory rental auctions of qualifying vacant commercial properties. Only properties in certain designated high streets will be affected and it must be of a local benefit before a statutory notice can be served on a landlord of a qualifying vacant commercial property by the local authority.
In broad terms, to qualify the property must have been unoccupied for the whole of the previous year or have been vacant for at least 366 days out of the previous two years. If passed, the Bill would enable a local authority to serve a statutory notice on the landlord of an unoccupied commercial property which could result in the property being placed in a compulsory rental auction. The landlord would then be legally bound to the grant of a new short-term tenancy to the successful bidder who could in theory offer rent as little as £1 per annum.
The Bill sets out key timescales which must be observed once an initial statutory notice is served and a grace period of 8 weeks will be given to a landlord who must try to relet the vacant property within this time. If the property remains vacant and a final notice is served upon the landlord (who in turn will be given the opportunity to serve a counter notice), the property will then be placed in a rental auction unless the landlord can demonstrate that certain grounds as set out in the Bill have not been met, that it intends to carry out major works or occupy the property for its own business.
Following a successful bid at auction by a prospective tenant, the local authority will be empowered act as the Landlord in granting a new lease in the name of the local authority and deemed consent will be assumed on the part of the landlord, any superior landlord and lender which has led to further cause for concern for property investors. There is some comfort for landlords in that the lease will be contracted out of the Landlord and Tenant Act 1954 and any lease granted must be for a minimum of one year and a maximum of five years.
Unsurprisingly, the concept has been met with concern by the property industry. The British Property Federation has commented that while they fully support the Government’s ambitions to drive local growth, the above measures are not the solution to regenerating our high streets further noting that ‘this is the moment for a system change in how we approach town centre regeneration’. This means fundamental reform of the business rates system and more creative and sustainable solutions, such as the BPF’s proposal for ‘Town Centre Investment Zones’ which would accelerate regeneration through a combination of tax and community incentives, planning freedoms and public-private partnerships.
Further key developments for 2023
It is currently estimated that there are around 58,000 vacant commercial retail units which are vacant and nationally 14% of high street shops are vacant (twice the average seen before the 2008 financial crisis). It remains to be seen if the new measures to relet vacant properties will have any effect, particularly as we are already seeing many commercial landlords offering shorter and more flexible tenancy agreements and lower rents, significant rent-free periods and inducements by way of capital contributions for tenant fit out works. There remains further criticism amongst the property industry in that the Bill does not address other factors further affecting the retail sector such as business rates and rising energy costs. The proposed new measures are undoubtedly controversial and if introduced, will lead to the biggest shake up in landlord and tenant law we have seen for some time.
Olivia Holden is a commercial property associate with a sector focus on independent retail and corporate occupiers
