commercial property leases user chnage property management guideThis is a hidden-gem of legislation that can help unlock value in commercial property that are held on long leasehold interests – getting very technical on the legal side, but worth it if you’re in this situation.

This has recently come to light in a legal case called Shaviram Normandy Limited v Basingstoke and Deane Borough Council [2019] UKUT 256 which has a good legal explanation here.

In short, this covers a situation where the “owner” of a commercial property holds it through a long lease rather than freehold, like when your “own” flats in a block. This lease may well restrict what you can use it for, and in this day and age of needing to look at alternative value-driven ways this can therefore cause you a problem with proposed changes.

However, help is through Section 84 of the Law of Property Act 1925 which gives power to legally discharge or modify a restrictive user clause in a long lease of a commercial property when you apply to the Upper Tribunal. The lease has to have 40 years left to run, and at least 25 years into it.

This is usually considered in two other ways. Firstly, with freehold property, where there is restrictive covenants lodged with Lang Registry, and the second with residential property where there is already legislation helping to change long leases for the better.

But this will cover commercial properties with long leasehold interests like in this case where an office block is held on a long lease, and in this day and age turning them into flats is more profitable. Although the planning system may encourage this, a clause in the lease saying it can only be used as offices does cause problems.

The Principles

Without getting into too much legal detail, here are a few particular points to note about this opportunity and from the recent case law on it:

1. There needs to be one of four grounds existing to pull this off, with multiple ones able to be claimed. They basically boil down to issues of obsolete use, reasonableness, parties agreeing, and not injuring the benefiting party. The literal ones are:

(a) That the covenant is now obsolete due to changes in the character of the property/neighbourhood or other circumstances;

(aa) That the covenant impedes some reasonable use of the land and either does not secure any practical benefit of substantial value to the benefitting party or is contrary to public interest;

(b) That the party entitled to the benefit of the covenant has agreed (either expressly or by implication) to it being discharged/modified;

(c) That the proposed discharge or modification will not injure the party entitled to the benefit.

2. This is all about the use of the property, but other issues may have a knock-on effect to this, for example the ability to sublet, ad levels of rent.

3. You have to look at the whole lease in general and see what’s trying to be achieved. So in this case, it helped that there was an obligation on the tenant to fully let the property which helped the argument to look at alternative uses to fulfil this.

4. The successful angle in this case was money, and the fact that even the landlord was better off as well as the tenant. This actually meant looking at what the current use could be and not actually was, and comparing to the intended use. In short, what refurbished offices were worth compared to new flats, and interestingly the capital value was considered which increased with residential, even though the immediate rental value actually decreased.

The Opportunity

Although these situations are not very common and getting very technical, it’s worth noting when you’re managing property to spot a great value-releasing property asset management initiative.

Being able to change say an office block into residential units to sell or rent is a whole different ball game than usual offices even if they are more along the lines of serviced offices.

This will of course have a knock-on effect to the property management of the building and setting up thing correctly right from the start.

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