Phil Parkinson, Legal Director at specialist property solicitors JB Leitch, considers the opportunities and challenges for considering the conversion of commercial premises into residential dwellings…

In the current climate, many landlords may increasingly find themselves with tenants who no longer want to occupy the premises with a business tenancy - or with a prospective tenant looking to acquire the lease and then convert the premises to residential.

A Case for Change?

An initial consideration for landlords is the overarching viability of the conversion. There are many factors to consider. Location is a critical factor. Are the premises located in an area within reach of key amenities? Shops, schools, transport or healthcare settings? Is the local infrastructure accessible and convenient for domestic purposes or are the premises appropriate for conversion and is it served by key utilities? Are there VAT implications for both parties for each supply which would depend upon whether the parties have opted to tax the property and whether the landlord is VAT registered?

Change of Use

Most leases include restrictions on the permitted use of a premises and the circumstances in which consent may be required. A change of use may also be prohibited by statute, planning permission or restrictive covenants on title. There are some instances where planning permission is not required for change of use to residential if it falls within permitted development. However, even with planning permission for change of use to residential, it may be necessary to secure permission for the actual development of the property if the external appearance is to be changed for example.

Reasonableness

Where tenants are seeking consent to convert, the issue of reasonableness is a key factor in providing consent, particularly where there may be implications for the value of the property, its suitability or impact on the environment or similar. As an overview, leases will typically include types of covenant that preclude, prevent or make change permissible:

• An absolute covenant precluding the tenant from doing something.
• A qualified covenant that prohibits a tenant from a particular activity without first seeking the landlord’s consent; which is not to be unreasonably withheld.
• A partially qualified covenant prohibiting the tenant from undertaking a particular activity without the landlords consent however, there is no obligation on the landlord to act reasonably in giving consent.
  
  

In determining what is deemed reasonable, landlords should be aware that many long leases contain qualified covenants which may place an obligation on the landlord no to withhold consent unreasonably.

Deed of Variation or Surrender & Re-Grant?

Providing that the changes to the lease are unsubstantial, a change of use could be dealt with by a Deed of Variation to amend the existing terms of the lease (where required). This transaction would not attract Stamp Duty Land Tax (“SDLT”). A surrender and re-grant occurs if a lease is varied in such a way that the variations cannot be effected without the grant of a new lease. It should be noted that surrendering the lease will release the parties from their respective obligations and any previous breaches, with any covenants expressed to arrive at or upon expiry of the term falling away.

Consenting to a change of use may open the landlord up to issues which usually arise only from residential tenants, such as the right to manage, their statutory right to extend their lease and their ability to challenge the reasonableness of service charges via the Tribunal. If the premises forms part of a mixed-use development, a change of use may classify the premises as “qualifying”; meaning that the leaseholders could make a claim for enfranchisement, which if successful, could even remove a landlord.

Contact details for Phil : p.parkinson@jbleitch.co.uk or to telephone 0151 708 2250 to speak to the team, citing this article.

Go-follow link: https://www.jbleitch.co.uk/services/litigation