Changing permitted uses: office blocks today, apartments tomorrow?
With the rise of online shopping and decreasing demand for large office space, these are trying times for our high streets and town centres. The adoption of more flexible ways of working by businesses means smaller, serviced offices are becoming increasingly popular, where employees are not already adopting flexible working. As businesses try to adapt to a new digital future, some landlords of city centre shops and offices have resisted alterations to the permitted use of their premises, which could undermine their rental income. However, a recent legal case featuring an office block here in Basingstoke highlights that long lease restrictions preventing changes in use can be altered despite lease provisions to the contrary.
In recent years, the skyline of Basingstoke has changed as vacated office blocks built in the 1960s – 1980s have been converted into flats. The former IBM building at Alençon House, for instance, was granted planning permission in 2006 for its conversion and extension to become Skyline Plaza. More recently, the old Barclays building at Churchill Plaza has also been remodelled to provide hundreds of new flats. Unlike other conversions, the change of use at Churchill Plaza fell under what are called general permitted development rights, which meant no planning permission was required. However, changing the use of business premises is not always so straightforward.
There are two broad restrictions on how commercial premises can be used. When a non-residential building is constructed, the local council usually limit how it can be used, to avoid disturbing other members of the public who live or work nearby. Under leases, landlords also limit use by lease restrictions or covenants (legally binding promises) so they can retain control over the premises. This is done by restricting use to one or more use classes, but to avoid making a lease unattractive these have some flexibility. Generally a lease will only permit use within one or two use classes, with an absolute restriction on any other uses. For instance, a shop could be converted from a sandwich bar to an undertaker or a hairdresser and still remain within the sole use class of A1 (shops). However, when a building’s use becomes obsolete, this can create a problem. This was shown in a recent case ruling on the former IBM building at Normandy House, close to the rail station.
Since IBM vacated the 76,000 sq. ft. building in 2013, it has stood empty and attracted both vandalism and arson. Possibly due to the high cost of refurbishing the 1980s office block, commercial tenants have not been forthcoming and it instead attracted the attention of a housing developer, Shaviram Normandy Ltd. Shaviram acquired the 150-year long leasehold of the office in 2015 for £5.25m, with a view to converting it into mainly one-bedroom flats. In April 2018, Basingstoke Council determined that the building could be converted into residential use under permitted development rights. However, the Council were also the landlord of the building and refused to grant consent to the change of use under the 1985 headlease (the superior lease of the building), which restricted its use to offices. Shaviram then took the matter to court at the Upper Tribunal (Lands Chamber) (UT). It should be mentioned that the UT was only able to make such as ruling as the lease ran for more than 40 years and more than 25 years had elapsed.
On 30th August and despite strong objections from the Council, the UT ordered the lease restriction changed to permit residential use. After comparing the likely capital value and returns for offices against and residential use, the UT held that the restriction gave no practical benefit of substantial value or advantage to the Council.
The court’s ruling did not change the law, but will remind developers of the strong negotiating position they can be in under long leases. They can potentially unlock leasehold land to be released for development against a landlord’s wishes.
One interesting point for the future of Basingstoke is that the UT found that altering the lease restriction would not undermine the strength of similar restrictions in the headleases of other office blocks nearby owned by the Council. With new office space increasingly available at Chineham Business Park, it remains to be seen whether development of other vacant town centre office blocks may follow suit.
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Commercial Real Estate Executive