Amari Rajendran, a senior associate in Thrings’ Development of Land team, highlights some of the factors that developers need to consider before purchasing a building for redevelopment.
Developers may look at a tenanted building and see potential for change of use and redevelopment to increase the asset value. And in addition to finance, planning and any restrictive covenants on the title, a key early consideration is whether vacant possession of a building can be obtained, and how long this will take.
A prospective developer should take legal advice on what kind of tenancies, or licences, the purchase is subject to, and how to terminate them. Taking a mixed-use building as an example, there may be commercial premises on the lower floors, with residential flats above.
Commercial leases
Any commercial lease will need to reviewed to establish when the fixed term is coming to an end, whether the lease benefits from security of tenure under the Landlord and Tenant Act 1954 or whether it excludes this protection, and whether the occupier is the named tenant, or a third party, such as an unauthorised subtenant.
If a lease is excluded from the protection of the 1954 Act, a landlord will be entitled to recover possession at the end of the fixed term.
If a lease is within the protection of the 1954 Act, the lease will not automatically come to an end on expiry of the fixed term. Further, the tenant is entitled to a new lease under the statutory lease renewal procedure, which can be instigated by either party on serving the relevant notice. Until such a notice is served, the lease will continue and the tenant will hold over in occupation following expiry of the fixed term. Specific notice provisions and periods apply.
A landlord may only refuse to enter a renewal lease, if it is able to rely on one or more of the statutory grounds within the 1954 Act for terminating the current lease, and refusing terms for a new lease. The grounds are categorised as either “fault” grounds or “non-fault” grounds. Broadly speaking, the non-fault grounds trigger the payment of statutory compensation to the tenant on termination of the current lease.
The most relevant ground in this scenario is likely to be “ground f”, known as the redevelopment ground, where the landlord is refusing a renewal lease on the basis that it intends to redevelop the demise. This is a non-fault ground, which will trigger compensation payable to the tenant. A landlord will need to be ready to prove the intention to develop. A tenant may request evidence of progress in terms of funding, planning applications, and board minutes of decisions. If a ground cannot be made out, the tenant will be entitled to a new lease, and a landlord would then be tied into another fixed term, with security of tenure.
As part of negotiating lease terms with a tenant, if there is a future intention to redevelop, a landlord could request a redevelopment break in the new lease. There is also scope for commercial negotiation, outside of the parameters of the statutory process, to attempt to agree a new lease excluded from the protection of the 1954 Act.
Residential leases
The most common type of short-term residential tenancies are assured shorthold tenancies (ASTs) under the Housing Act 1988. A developer would need to consider whether there is a ground available under the 1988 Act to terminate a fixed term AST early on account of a tenant breach.
Many of the grounds are discretionary and a tenant could remedy a breach which would then prevent the landlord from recovering possession. More likely, a developer will be considering whether it is possible to serve a Section 21 Notice to terminate the AST on or following the end of the fixed-term. The Section 21 Notice procedure is referred to as a “non-fault” eviction because the landlord does not need a reason to terminate. This process has become increasingly complex with new legislation coming into force over recent years, and there are several strict requirements that a landlord must have complied with before being able to serve a valid Section 21 Notice. These include providing an EPC certificate, a gas safety certificate, protecting any deposit paid, and providing the tenant with various documentation and prescribed information, all within strict time limits.
When purchasing a building subject to ASTs, there will be a raft of information and documentation that you will need to request from the seller to establish whether the necessary pre-requirements have been strictly complied with.
As a result of the current Covid-19 pandemic, tenants are being afforded additional protection from being evicted even where landlords have a right to possession. In short, it could currently not be possible, or take several months longer than usual, for a landlord to recover possession of a property let on an AST. The changes have often been rapid and last minute, with more changes and extensions of time periods possible over the next few months.
Further government reforms in relation to Section 21 Notices are also being considered - something else for developers to keep an eye out for over the next year.
Although less common than ASTs, you may find yourself dealing with older tenancies such as Assured Tenancies or Rent Act Tenancies, which afford greater protection to tenants and may have succession rights, or long leases with enfranchisement rights.
This is an overview of the key considerations when purchasing a building for redevelopment in the context of recovering possession.
Our top 5 tips are:
- Review tenancies early and flag any potential issues at the outset. Doing so may have an impact on whether a project is viable, the purchase price if you are taking on any risk, and the cost of not easily being able to recover possession;
- Check that the actual occupiers are the named tenants in any documentation;
- Factor in realistic timescales for recovering possession, and bear in mind the impact of the current pandemic on these timescales;
- Consider the timing of termination - weigh up terminating any tenancies too early against maximising the current rental income for a long as possible before possession is required;
- Consider negotiating - given the statutory processes and timescales, a tenant might be willing to negotiate a surrender.
To discuss anything covered in this article, please contact Amari Rajendran or another member of Thrings’ Development of Land team.
