Permitted Development and Change of Use Under Leases
In Back to the Future, Marty McFly may have fantasised about how rich he could become with a Sports Almanac from the future.
The property industry's version may have been a copy of the Town and Country Planning (General Permitted Development) Order for England and Wales. The changes allowed by the Order can have dramatic effect on land value.
The Permitted Development Order allows for certain changes of use to be undertaken without requiring full planning permission. The Order is amended from time to time, sometimes leading to windfalls in land value.
One of the permitted rights is to convert agricultural buildings to dwellings giving rise to thousands of self-builders' dream homes and many TV series off the back of it. Less romantically but perhaps more financially rewarding, has been the permitted development right to convert offices to residential.
The office to residential right has been around for a few years now and this has proved popular in many city centre locations. This has no doubt invigorated the city centre apartment market and had the positive consequence of saving the embodied energy in many old office buildings, that might have otherwise been demolished.
Many office blocks are held under long leases by an investment owner. This is especially so in locations where the freehold is or as owned by a local authority, who have tended to favour sales by long lease rather than a sale of the freehold. A leaseholder with a 99 year lease of an empty, old office may be tempted to convert it to residential. However, just because they are allowed to do it by planning legislation doesn't mean that they are not restricted by the terms of their head lease.
Most head leases (of any length) will restrict the permitted use of the building. For commercial buildings this tends to restricted to a particular class of use: offices, retail etc. It may not have been in the parties' minds at the time of the initial lease, that the building/land would ever usefully be put to any other use. Of course the Permitted Development Order then opened up valuable opportunities.
A lease may allow a change of use with landlord's consent. Where that consent is qualified so that the landlord may not unreasonably withhold permission, things become interesting. Does the landlord's interest in the freehold (which may be subject to a head lease with decades yet to run) justify restricting the tenant to office use when there is a much more valuable use available?
From the landlord's point of view, why would they grant consent, only to see the value of the land released by such a change of use benefit the tenant alone?
In considering whether or not it is reasonable to withhold a change of use, the landlord is allowed to take into account the effect on its own interest. The landlord will need to show detriment, not just that it wishes to share in the windfall.
We acted recently for a landlord with a large freehold site in a city centre location. Part of the site was an old office building. The tenant of that building wished to take advantage of permitted development rights and convert it into over 100 flats. Change of use was allowed under the head lease (approx. 80 years remaining) but only with the landlord's consent, not to be unreasonably withheld.
We argued that the owners of the completed flats would be able to force our client as freeholder to grant new longer leases under housing legislation. This would mean that our client would lose the ability to redevelop its whole site in 80 years' time. On that basis we withheld consent.
The tenant made a substantial offer for the purchase of the freehold of their building. Our client was then able to realise a big financial return on its investment approximately 80 years before it would otherwise have been able to.