UK: Mixed Use: Structure And Statute

Last Updated: 20 June 2013
Article by Lisa-Marie Davison and Sarah Frost

Summary and implications

As we have already seen*, mixed-use buildings are increasingly common in the commercial investment market. The potential complications associated with the residential element of such buildings mean that investors in mixed-use properties need to consider the structure and implications of any residential element before they invest.

The acquisition of a mixed-use property needs to be treated with caution even where the residential element looks to be ancillary to the main commercial use. The degree of caution required depends very much on the nature and structure of the residential elements.

There are three common structures for mixed-use buildings comprising long residential leases (generally of 99 years or more) with a commercial rack rent lease:

  • the clean freehold investment;
  • the developer-manager model; and
  • the democratic model.

This article looks at these three structures in more detail and considers some of the statutory rights afforded to residential long leaseholders that can affect the freehold investment.


The residential element of mixed-use buildings will often comprise long leasehold interests which have been sold off at a premium, in order to strip value out of the freehold. In this case, the freehold investor's income will comprise any ground rent reserved under the long leases and rents receivable under the commercial rack rent leases. Proper structuring can reduce the potential issues around this type of investment.

a) The clean freehold investment

In order to create a clean freehold investment, the residential element, structure and common parts of the building are often let to a residential management company on a long lease at a peppercorn rent. In order to achieve a clean freehold investment, it is important that all of the common parts are included in the lease to the management company.

Modern, purpose built, mixed-use properties tend to adopt this approach, in which the long lease (or agreement for lease) in favour of the management company is put in place before any of the long residential leases are granted. You may also find this structure adopted in buildings with a large number of long residential interests where the day to day management can be more efficiently run through a specialist residential management company.

The clean freehold investment

From a management point of view, the freeholder's involvement in residential matters is limited, which is welcome news to a predominantly commercial investor with little residential knowledge. The management company can be required, by way of the covenants in their lease, to collect the ground rent and insurance rent on the freeholder's behalf and pass those sums up to it.

This structure gives a clean freehold investment because it can be sold to a third party without the need to consider the rights of first refusal afforded to residential long leaseholders under the Landlord and Tenant Act 1987 (LTA 1987) (which is considered in more detail below), making this structure an easily transferable interest. Note, however, that the other statutory rights specific to long residential leases will still apply as discussed in more detail below.

The freeholder can retain control of the commercial rack rent space by excluding it from the demise to the management company. The freeholder will then receive the rack rent direct but will need to contribute towards the service charge. However, the service charge element should, if carefully drafted, be recoverable from the commercial tenant.

b) The developer-manager model

The most common structure for mixed-use buildings is one where the freeholder itself grants the long residential leases to the residential long leaseholders, without interposing a long lease to a management company. The freeholder then lets the commercial space to the commercial tenant direct on a rack rent basis.

This structure is often used where a developer intends to build a mixed-use property and retain and manage it themselves. It is not usually the intention that mixed-use properties structured in this way be marketed as a freehold investment.

In practice, a freehold investor faced with this structure will often contract with a specialist management company to provide the services and manage the building on its behalf. Note that this is different to the clean freehold investment structure referred to above as no proprietory interest is transferred to the management company at any stage. The relationship here is purely contractual, usually by way of a management agreement. It is important in this case that both the commercial and residential leases provide for the landlord to provide or procure the provision of services to the building. This ensures full recovery under the residential service charge.

Assuming that the building qualifies and that there are sufficient qualifying residential long leaseholders, the sale of this type of freehold investment is likely to be subject to the right of first refusal afforded to residential long leaseholders under the LTA 1987. This can potentially affect investment values and inevitably creates delay and administrative costs complying with those rights on a sale or other disposal of the freehold.

c) The democratic model

The democratic model

A less common model (possibly because it is unpopular with residential long leaseholders who are generally not interested in managing the building themselves) is to form a special purpose vehicle (SPV) for the sole purpose of managing the property. A share or shares in the SPV are issued to each unit upon sale, until all of the units are occupied.

The SPV will usually be a party to the long residential leases and the commercial rack rent leases for the purposes of contracting with the landlord, the residential long leaseholders and the commercial tenants to provide the services. The SPV will have a corresponding contractual right to collect the service charge from the residential and commercial tenants.

Under this structure, the residential long leaseholders and the commercial tenants will effectively be in control of the management of the property and the freeholder investor will be left with little or no involvement. This may sound appealing to some investors but a prudent freeholder would be advised to retain a share in the management company with voting rights so all control is not lost.

Statutory rights benefiting residential long leaseholders

The significant statutory rights attaching to long residential leases which can potentially impact on the freeholder's investment are the right to first refusal, the collective right to enfranchise, and the right to a lease extension.

a) Right to first refusal

The LTA 1987 gives long residential leaseholders a collective right of first refusal. This means that if the immediate landlord of residential long leaseholders wishes to dispose of its interest in a property, it must give all qualifying leaseholders the opportunity to acquire that interest first. Note that it is not possible to enter into a contract conditional on the expiry of the notices, as exchange of contracts (conditional or not) is a disposal for the purposes of the LTA 1987.

Qualifying leaseholders must be served with a notice of the landlord's intention to sell the property specifying the intended sale price. It is only when those notices expire that the landlord is then free to contract with the third party purchaser for the sale of the property. The length of notice depends on the nature of the proposed sale. For example, a private treaty sale requires two months' notice but a sale by auction requires three months' notice. Any change in the terms of the proposed sale is likely to require fresh notices to be served and the notice period will effectively then be re-set.

Qualifying leaseholders

For the purposes of the LTA 1987, a qualifying leaseholder is a tenant under a tenancy other than:

(a) a protected shorthold tenancy as defined in section 52 of the Housing Act 1980;

(b) a tenancy to which Part II of the Landlord and Tenant Act 1954 (business tenancies) applies;

(c) a tenancy terminable on the cessation of his employment; or

(d) an assured tenancy or assured agricultural occupancy within the meaning of Part I of the Housing Act 1988.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Lisa-Marie Davison
Sarah Frost
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions