High Street Residential Conversions – Things To Consider

With high street retail continuing to struggle, the threat of compulsory rent auctions coming in the government’s latest white paper, and the short supply of housing it may be tempting to convert high street properties to residential use.

However, there are a number of things that you should think about to make sure you don’t land in any pitfalls.

Planning

It is important to remember that for a change of use, you will need planning permission. If intending to convert a property to residential use, you may be able to use permitted development rights if the property has been vacant for a period of time. However, these permitted development rights can be disapplied by local planning authorities and you should therefore take specialist planning advice to see whether you are able to take advantage of these or whether a full planning application will be needed.

ASTs or Long leases

Once you have ascertained that the correct planning permission can be obtained, the next consideration is how the investment will deliver its return.

Assured Shorthold Tenancies (ASTs) provide monthly rental income while a tenant in is occupation. However, these returns are over a period of time (as opposed to the quicker return from selling long leases), come with the risks of voids, and it would appear that the government’s intention remains to abolish no-fault evictions reducing the rights of landlords (it remains unclear as to what measures will be put in place to bolster landlord rights to deal with problem tenants).

Alternatively, selling long leases provides an upfront purchase price (enabling a faster return). Historically these were often coupled with ground rents, service charges, and eventually lease extensions combining to provide for long term investment returns.

Ground rents and Marriage value

From 30 June 2022, ground rents for new long leases of residential premises will be limited to one peppercorn. This doesn’t affect the ground rents of leases already granted and there are provisions dealing with extensions that will effectively remove future ground rents when those leases are extended beyond their original term.

Repeated government consultation papers have discussed removal of “marriage value” from the lease extension process. Marriage value is the term given to the increase in the price payable for an extension that happens when residential leases have less than 80 years left to run. While it is unlikely that this will be abolished in its entirety (as this would almost certainly lead to legal challenges from landlords), it is likely that by the time a newly granted long lease would come up for extension that the basis of value calculation will have dramatically changed.

Rights of first refusal

Long leases of flats also come with rights under the Landlord and Tenant Act 1987, giving tenants rights of first refusal to acquire any superior interest in the property when it is disposed of. The application of these rights can be complex and it is possible to put appropriate legal structures in place to enable parties to more easily deal with the legal interests and the relevant investment vehicles. These structures should ideally be put in place at the outset or, failing that, these rights should be addressed at the earliest opportunity so that transactions are not delayed by months while the statutory processes are followed.

EPCs and future proofing

Finally, once you have decided how the redevelopment is going to work, it is worth considering the energy performance and what energy efficiency improvements ought to be made. While legislation currently precludes the grant of new leases where the EPC rating falls below an ‘E’, indications are that this minimum level will rise as the property industry struggles to improve its carbon footprint. As the costs of installation are far greater when retro-fitted as opposed to installed during development, and with the current high cost of energy, good EPC ratings ought to have a positive impact.

If you have any queries in relation to this or any other subject, please don’t hesitate to contact the Commercial Property Team on 0800 088 6004.