Lease and planning considerations on conversion from office to residential use

It has been widely reported that housing is more profitable than office space. Areas in London such as Mayfair, Soho and Fitzrovia have seen a boom in property prices and as a result developers are now looking to convert less profitable and unused office premises into residential property.

Where a potential developer owns the freehold to the proposed development, matters are relatively straightforward. However, given the complexity of historic freehold and leasehold interests in these Central London areas, matters may not be so straightforward and a potential developer may need to consider what restrictions his lease contains on his right to change the use from office space to residential.

Historically, case law suggested that a landlord could reasonably withhold consent to change of use where that change of use was from offices to residential. The decision in Mount Eden Land Limited v Bolsover Investments Limited (Chancery Division, 20 June 2014) suggests that the Courts will now treat such refusal by the landlord as unreasonable.

The circumstances of this case were that the freeholder, Mount Eden Land Limited, owned a building which had previously been used as office premises. Mount Eden Land Limited’s tenant, Bolsover Investments Limited, held a leasehold interest in the building pursuant to a 999 year lease for which only 100 years had expired.

The lease did not expressly bar residential use, but there was a tenant covenant prohibiting alterations without the consent of the landlord. Bolsover applied to convert the office premises into multiple residential flats. An absolute prohibition on alterations would have prevented Bolsover on developing the building into residential flats but the very fact that the alterations were permissible with the consent of Mount Eden meant that the freeholder was prevented, by virtue of Section 19 of the Landlord and Tenant Act 1927, from unreasonably withholding consent to those alterations.

The Court was called upon to decide whether it was reasonable for Mount Eden to withhold its consent.

Whilst the application for consent related solely to the alterations, many of the arguments to demonstrate that Mount Eden was acting reasonably related to the impact that the change of use would have on the freehold interest.

Mount Eden’s concern was that the alterations would mean that the use class of the building would change from B1 office to C3 residential. The new C3 status would allow those residential tenants the right to purchase the freehold of the building. This right is known as enfranchisement and is allowed pursuant to Leasehold Reform Housing and Urban Development Act 1993. The right to allow the tenants to purchase the freehold or “enfranchise” would mean that Mount Eden would lose its interest in the freehold reversion to the building, albeit for compensation by the tenants.

In order to qualify for enfranchisement at least two-thirds of the flats must be let to qualifying tenants who hold a lease of a term in excess of 21 years. The minimum number of leaseholders that are needed for a successful action must not be less than half of the total number of flats in the building.

The court found that there was little evidence that the proposed flats would be let on long leases and there was no certainty as to whether the requisite percentage of leaseholders would try to launch a claim to enfranchise. The Court judged that the refusal to grant consent was not a decision that a reasonable landlord would make. The possibility of future enfranchisement was not found to be an adequate reason for rejecting the consent to alterations.

The length of Bolsover’s lease meant that Mount Eden control of the reversion to that long lease would not be realised for another 889 years. Arguments were made that the loss of the freehold to the building would impact Mount Eden’s control over other parts of the estate. However, in practice, the enfranchisement legislation allows for reservation of rights over adjoining land. Historically the enfranchisement legislation was seen as draconian in that it deprived a freeholder of its land which could be compulsorily acquired by residential tenants but attitudes have since moved on and, given the long length of this lease, the objection that Mount Eden might have was the financial repercussions in losing the freehold. Such objections may be counteracted by the fact that the enfranchisement legislation obliges tenants to pay the open market value of the land.

To recap, the permitted development rights that have been in place since 30 May 2013, for a limited period of time, potential developers may, without a full planning application, convert B1 premises into C3 residential use. The impetus for this policy arose from the recognised need to increase the rate of house building in England promoting residential development and the regeneration of office space in areas where those offices had been left empty and employing them into productive use.

These permitted development rights circumvented the need for a complex planning application to the planning authority. Instead, the only requirement on a developer now is to obtain prior approval from the planning authority that the development falls within the statutory requirements of the permitted development right. This involves proving to the planning authority that elements of the development are appropriate to the locality, including factors relating to contamination, transport, and flooding. The process of obtaining approval is less involved than a full planning application. If the planning authority does not notify the developer of their decision within a fixed period, the developer may commence the development without further reference to the planning authority.

Permitted development rights do not override any other planning requirements that may be necessary, such as external building work. If a developer is unclear as to whether the proposed development qualifies, they may apply to the planning authority for a legally binding decision. A prudent developer may consider this necessary as the rights are subject to limitations on size, location and height. It is worth bearing in mind that a local planning authority reserves the right to exempt an area from the new permitted development rights by means of an Article 4 direction denying the conversion of B1 offices to C3 residential in certain areas within the planning authority’s jurisdiction.

Whilst the rights are intended to allow developers to proceed without involving the planning authority, it is always best to consult them first as the rights are only for a limited period of time (although there is the possibility of this period being extended). Failure to complete the works within that period of time (in the most part three years from 2013) will render the works in breach of planning legislation and the planning authority reserves the right to take enforcement action against that breach. It is prudent to notify the local planning authority when work has been completed to acquire future evidence that any completed development fell within the permitted development rights.

For further information regarding this topic or any other property and construction matter, please contact the Edwin Coe Property team.

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