Forced Rent Auctions: What Property And The Government Need To Know About How This Will (And Won’t) Work
A potential new policy that could upend hundreds of years of private property rights was floated by the UK government last week: If a high street retail property has lain empty for more than six months, the local authority could step in and force the owner to rent it out.
The new rules could form part of a bill to be brought before Parliament by Levelling Up Minister Michael Gove later this year. Details of how the auctions might work are scarce, but Bisnow spoke to industry experts to find out how they were expecting this to function in practice, some of the hindrances the new policy might face, and whether it will have the intended effect of revitalising failing high streets.
In a word, they answered the last question with a resounding no.
How the proposal would be implemented is unknown, but in a so-called Dutch auction, the local authority might start the bidding for a property at a level of, say, £50 a SF. If there is no taker for the space at that rental level, the price might drop to £45 a SF, until the rent drops to a level where someone is willing to rent the space.
Do Dutch auctions get higher prices?
Academics that have written about auctions have found Dutch auctions fetch higher prices than English auctions in which bids start low and get higher, and typically don't involve things that are rare or unique, which is arguably the case with empty high street retail property. They are good for "price discovery" and reeling in higher amounts for commodity-like goods because Dutch auctions can end suddenly — and if someone buys the good at a certain price, there is no chance to rebid.
On the other hand …
Those canvassed by Bisnow point out a major potential flaw in the system when it comes to leasing empty retail property: In many cases, it's already known the price of empty retail space is zero.
“The policy presupposes there are queues of tenants out there who want to rent retail property but can’t because the rent is too high,” British Property Federation chief executive Melanie Leech said. “In our experience, landlords are already willing to do zero-rent deals if tenants are willing to pay business rates and other costs.”
The government might also need to take a hit to make this work
Leech’s point highlights how such a policy might seem good in theory, but could quickly run headlong into the reality of retail leasing right now.
According to the government, the policy was designed to allow organisations like charities or community groups to access underutilised high-street property. But rent is not the only cost these bodies would need to take on. There are also business rates, insurance and the cost of fitting out the space. The government is asking landlords to lease out space at a level set by the market, but Leech is sceptical it would also be willing to reduce business rates for these same organisations and cut into its tax take.
How are local authorities going to be able to force landlords to rent out a property if they don’t want to?
The devil is, of course, in the details. But there is an argument to be made that any attempt by local authorities to force landlords to rent out property they own would upend hundreds of years of private property rights as well as the notion that once you own a property, you can do what you like with it as long as it is legal.
The UK, the U.S. and other countries have attempted to incentivise owners to rent out empty property by putting a heavy tax burden on it. But forcing them to lease it out has not been tried in many western democracies in the past century.
“You are almost saying the local authority would need to have some sort of compulsory purchase order power, but without purchasing the property,” Forsters partner and head of retail Andrew Denye said. “If, as is being suggested, the landlord is effectively being forced to lease out their property, unless you are talking about changing landlord and tenant law, the landlord will still have to enter into some sort of contract or agreement, unless you are taking the ownership away from them.”
If the latter is true, would local authorities truly be keen to put their limited cash into buying empty retail assets?
Will these leases benefit tenants?
If a landlord and tenant have entered into some sort of contractual relationship via the mechanism of a forced auction, it raises questions of how longstanding and collaborative that arrangement is likely to be. Denye said tenants will want short, flexible leases that allow them to pull out of space if they need to. Will landlords be offered the same flexibility? If so, there is a chance they simply break the lease if a better offer happens to come along, leaving the existing tenant in the lurch.
Will these leases even be legal?
“It will be a brave local authority that does pursue this. Central government puts the policy in place, but local authorities take all the risk,” Leech said, adding it is not beyond the realm of possibility to expect a legal challenge to these proposals.
Will the policy achieve its effect?
“We totally agree with the government’s objective of trying to revitalise the UK’s high streets,” Leech said. “But it’s an incredibly complicated, long-term issue, that is going to require numerous, sophisticated interventions. This smacks a bit of political short-termism.”
Forsters’ Denye agreed.
“I keep coming back to this idea of levelling up,” he said. “For those areas that do need levelling up, I’m not sure they will get anything from this because there just isn’t the demand for retail premises in these areas — it doesn’t change the fact that there is just too much retail.”
Denye said it is likely to cost many millions of pounds to create the infrastructure needed to execute these auctions, which may only result in a few properties being let due to lack of demand. It's also money that could be better spent on other initiatives.
Leech pointed out that forcing investors to lease out their properties in an auction would disincentivise them from buying assets in areas that need regeneration, actually hindering efforts to bring investment into the areas that need it most.