The power of permitted development rights
Law of unintended consequences: Planning, enfranchisement and leases
Every once in a while changes to legislation result in unintentional consequences which no one anticipated. One such change has been the relaxation of the permitted development rights enabling office uses to be converted to residential use and its impacts on leasehold enfranchisement.
Planning legislative changes
The relaxation of the planning regime in recent years has supported more flexibility in the use of premises through the expansion of permitted development rights which has encouraged office uses to be changed to residential uses. It has also had the effect that, even where permission is required, applications are more likely to be approved as they have to be considered in light of the default position where authorisation would be forthcoming under permitted development rights. These changes in the planning position allowing more flexible use of the premises than would have been the case in the past, have resulted in changes which landowners need to have in mind when leasing premises.
Enfranchisement
I don’t profess to be an enfranchisement lawyer and only set out in the briefest of terms the position in relation to enfranchisement in order that a recent Court of Appeal decision relating to development proposals affecting 51 Brewer Street in London can be placed in context. The initial purpose of enfranchisement legislation was to protect miners in South Wales from the injustice of losing their homes at the end of their long tenancies. The law gives rights to acquire the freehold of buildings and rights to the grant of a new lease for a term extended by 90 years provided certain criteria are met. Some buildings are excluded from these rights and the most common exclusion relates to buildings where a proportion of the building is used for non-residential purposes (“Exception”). Quite often in mixed use buildings with commercial/retail and residential uses, it is this Exception which prevents the building from being enfranchised (and the freehold being acquired).
Case of Rotrust Nominees
The Court of Appeal decision in April 2018 in the case of Rotrust Nominees Limited v Hautford Ltd (A Company Registered in the British Virgin Islands) makes for interesting reading in that it effectively provides confirmation that the planning legislation may be used to circumvent the Exception to the enfranchisement rights as set out above.
Facts
Rotrust Nominees is the freehold owner of a terraced building at 51 Brewer Street. The property is subject to a 100 year lease from 25 December 1985 and Hautford is the tenant under the lease. The relevant provision of the lease contained the following covenants:
- that the premises could be used for “one or more of the following purposes (a) retail (b) offices (c) residential purposes (d) storage (e) studio”; and
- not to apply for planning permission without the prior written consent of the Landlord, such consent not be unreasonably withheld
The planning permission for the building authorised the basement and ground floor for retail uses, the first and second floors for office/ancillary uses and the top two floors for residential uses.
Hautford sought the landlord’s consent to apply for planning permission for change of use of the first and second floors of the property to residential use, which the landlord refused on the basis that such a change of use would increase the prospect of successful enfranchisement under the Leasehold Reform Act 1967. The tenant did not deny that it was looking to improve its position vis-a-vis enfranchisement.
Decision
The Court of Appeal ruled that the landlord’s refusal of consent to allow the tenant to apply for planning permission was unreasonable. In considering whether the landlord’s refusal (to grant consent to the making of the planning application) was reasonable one had to consider what the intentions of the original parties were when they entered into the lease. In this case the court held that the prospect of enfranchisement was not one of the grounds upon which the original lessee would have expected to refuse such consent. The user provisions in the lease permitted the entire building to be used for “one or more” of the various uses and therefore, would have permitted the entire building to be used for residential use. The court also noted that in reality any party can make a planning application and that in those circumstances the tenant would be able to rely on the permission obtained.
Lessons
The case highlights the ever-changing need to review the terms on which properties are leased with an eye to the environment of related legislation such as planning changes. In addition it also becomes apparent, with the benefit of hindsight, how important careful drafting of lease provisions remains if landowners are to continue to protect their property interests in the long-term.