UK: Departments To Apartments

Introduction

The Government has recently announced a change to the planning system which could have far reaching consequences, both for developers and local authorities.

At present, planning permission is usually required for the change of use from office to residential. However, as part of a package of measure to improve growth and stimulate the economy, the Government will in Spring 2013 introduce a new permitted development right for a change of use from B1(a) offices to C3 residential without the need for a planning application. This change will occur for three years and there will be a review of the benefits from the policy at that point.

There will be restrictions in place to curtail developers' powers. A prior approval process will need to be followed that covers significant transport and highway impacts, and development in areas of high flood risk, land contamination and safety hazard zones. Further, local authorities can apply for an exemption from the permitted development for specific parts of their authority. Also, planning permission will still be required for certain works, such as external alterations.

Numerous comments have been made about this policy, and below we address a number of these. In addition, developers looking to convert existing offices to residential use will have to consider a swathe of legal issues, and a number of these are commented on.

Arguments in favour of the change

Since the recession, development has stagnated. The economic consequences of this are far reaching. Amongst other things (such as a continuing lack of available finance), one hurdle to developers is the burdensome and often expensive planning process. The ability to convert offices to residential use without the requirement to struggle through the planning system will be of large appeal to developers. The costs savings to developers will likely be significant and it will no doubt enable developers to start work on a project sooner.

The Government also anticipates that increasing the number of office to residential conversions will stimulate the economy by increasing construction projects. If the scheme is successful, the Government is of the opinion that unemployment will decrease and further housing will be provided. Given the low supply of available housing stock in certain parts, this is surely to be welcomed.

Also, in many parts of the Country there is low demand for office space. Obsolete buildings are costly, especially when one takes into account vacant property rates and the risks (and associated costs) of unlawful squatting.

Encouraging office conversions will also benefit the natural environment. There is a concern that there is too much development on â€Ügreenfield' sites when instead developers should be focusing their efforts on â€Übrownfield' locations. Encouraging development efforts to abandoned office buildings is to be welcomed.

So why have commentators raised so much concern over the change?

The contraction of development has not been caused by a restricted office to residential planning system. It is perceived that there are far greater concerns that need to be rectified such as the lack of available finance to developers. Recent Government initiatives to increase lending may assist; however, many do not feel the Government has done enough. The Government may need to offer further financial incentives or smaller social contributions to ensure the repurposing of many redundant assets.

There is also doubt in relation to the overall impact of this relaxation of planning. Developers tend to prefer traditional housing developments that can be constructed on a phased basis. The obvious benefit is that completion on earlier phases of the developments can be matched against future purchase considerations. At present, there are hundreds of acres of well-located residential land with planning consent that is being offered to housebuilders. It is unclear to the extent, at least in part, that developers will move away from this traditional basis.

There are also economic concerns with the Government's proposal. Most notably in Central London, demand for quality residential premises has increased dramatically. A fundamental reason for this is foreign buyers purchasing investment property in the City. Given that London is seen by many as a safe haven for investment and the continuing favourable exchange rates for foreign investors, such investment is likely to increase for the foreseeable future. Many are concerned that increasing available flats, especially in the City, will spur more foreign investment, thus pushing up prices. Throw into this the fact that no affordable housing will need to be provided by developers, and it is clear that there are legitimate concerns as to the extent this change will benefit the general population.

Local authorities are also aware of this issue. The City of London Corporation and Westminster City Council (amongst others) have long opposed the plans, fearing the loss of valuable commercial space to developers keen to build expensive luxury flats. Many local authorities have therefore requested exemption from this permitted development from the Government to safeguard office premises.

In addition, lower levels of available commercial premises will increase the costs of office space. This is bad news for businesses and the knock on effects, including the need to increase the prices of goods, is not to be welcomed. Further, many fledgling businesses rely on lower priced secondary location offices. A lack of these offices will be a real deterrent to such businesses.

Furthermore, in many areas there is still a large demand for available office premises. Replacing such premises with high value residential flats will unlikely contribute much to the UK economy.

Property law issues in relation to office to residential conversions

Developers should be aware that converting existing offices to residential use will often involve resolving additional legal obstacles. Whilst it is not possible to address all of these in this article, a number of key concerns are considered.

Office buildings are frequently owned by way of a lease. Therefore, landlord and tenant issues will need to be addressed. The vast majority of leases in respect of commercial property will put limitations on the tenant's ability to alter the property, change its use and in respect of subletting. The landlord's consent will almost undoubtedly be required for any of these actions, and if such consent is not obtained before the tenant takes such action, the landlord will almost certainly have the right to bring a claim against the tenant.

It is common to find that in respect of structural alterations and change of user that the landlord can absolutely refuse to give consent, even if such refusal in unreasonable. In this situation, no such works or change of use can occur unless consent is obtained and the landlord will have a large degree of leverage against the tenant. As a result, in giving its consent, the landlord may look to share in the profit generated by the conversion. This could have a large impact on the profitability of the development.

Additionally, the need for planning should not be ignored. Whilst there may be permitted development rights for change of use from office to residential, other works may well require planning permission. For instance, works to the exterior of the building are likely to require consent.

Further issues arise as the development will result in residential use. New residential purchasers will mostly finance the acquisition through a mortgage, and the Council of Mortgage Lenders' Handbook ("CML Handbook") will be important. If the developer is looking to purchase an existing leasehold interest, the developer's solicitor should ensure that the lease complies with the CML Handbook. This is to ensure that the new purchasers will be able to obtain finance. What is considered normal in an office lease can be very different to what a lender will expect in a residential lease, and issues in respect of service charges and alienation (amongst others) should be considered in depth.

Residential leasehold law can be complicated and it is ever changing. There are a number of pitfalls where a developer could fall down, and these must be considered. As an example, residential service charges need to be administered in a certain way. Otherwise, the developer/landlord may not be able to recover in full the service charge from the residential tenants, which may mean it itself faces a large outlay.

There are also concerns in relation to the tenants' rights of enfranchisement and their ability on a sale of the freehold to have a right of pre-emption in respect of it.

Conclusion

Will the changes to office to residential conversions have the desired outcome of stimulating economic growth, increasing housing numbers and reducing construction on greenfield land - probably.

However, there are valid concerns that such development will increase the prices of residential property, especially in London, will decrease the number of available office premises (and in doing so increase the price of office premises) and will not assist the wider economy as there is no requirement for social housing. These concerns are predominantly focused at the London market, and it is felt that office to residential conversions in other parts of the Country, especially in suffering town centres, will be positive.

In any event, when converting office premises to residential use, there is a plethora of legal issues to contend with, and it is important to take legal advice early on.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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