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Mixed Use Properties Are Not Without Risk

Reasons to choose Wilson Browne

As the spaces of our towns and cities adapt to the changing needs of society developers and investors are increasingly looking for mixed-use developments.

It is well documented that mixed-use developments provide differing advantages from diversification of assets (for investors spreading risk) to increased social interactions and reduced commuting and travel times (for occupiers) and the consequent environmental benefits (for everyone else).

The new “Use Class E” for commercial, business, and service indicates that these benefits are intended to be used more frequently and when considered together with the permitted development rights to convert office to residential we can see a potential direction of travel for our town centres. However, mixed-use properties and developments are not without risk and come with a variety of additional tenant rights that must be considered, including in particular the “right of first refusal” contained in the Landlord and Tenant Act 1987 (LTA’87).

Where premises are mixed-use, the right of first refusal will apply if the following conditions are satisfied:

  • The premises consist of the whole or part of a ‘building’;
  • The premises contain two or more flats held by ‘qualifying tenants’;
  • The number of flats held by qualifying tenants exceeds 50% of the total number of flats contained on the premises; and
  • Any part or parts of the premises are used for non-residential purposes and the internal floor area of that part or those parts (taken together) does not exceed 50% of the internal floor area of the premises (taken as a whole).

Where the right of first refusal applies, landlords must not dispose of the property unless they follow the statutory procedure (failure to do so is a criminal, not merely a civil offence). This involves serving notices on tenants and offering the Property to be disposed of to them first. If the tenants accept then the landlord must proceed to sell to them or if they do not accept then the landlord may proceed with their initially envisaged transaction.

There are considerable challenges involved in identifying qualifying tenants together with practical challenges of serving (and evidencing service) the relevant notices. Additionally, the statutory process inevitably leads to commercial delays and it is therefore important when considering any disposal to engage with legal advisors early to ensure that the transaction is not unduly delayed by these processes.

Unsurprisingly, the various definitions are set out in the LTA’87 in considerably more detail. However, it is these details that enable appropriate legal structures to be put in place to mitigate against these procedural constraints. These structures are most easily put in place before development (e.g. by configuring the property so that the number of qualifying tenants does not reach the 50% threshold). It is therefore best to discuss with your legal advisors how you intend to physically develop the property so that practical and legal structures can be put in place to enable you to mitigate against triggering these statutory requirements and avoid delays with potential future sales to investors.

Michael Goldfinch

Posted:

Michael Goldfinch

Solicitor

Michael is a solicitor in the Commercial Property Team based in the Kettering office. He has a wide variety of experience in real estate transactions. Michael also acts for commercial property lenders, property investors and landowners.