By Jeremy Spooner, Partner, Commercial Property, William Sturges LLP
“Mixed Use Buildings” refer to properties that combine commercial and residential use within the same structure – from shops with flats above, to parades with upper parts, to large town-centre blocks containing several commercial units below and residential floors above. Each element is governed by its own distinct legal framework, creating complex layers of ownership, management and compliance.
These properties can therefore be challenging for buyers, sellers and investors alike. There are many “ifs” and “buts” to consider and raise lots of questions. This is by no means a complete list, but perhaps a useful thumbnail sketch for the investor.
1 – If the residential upper parts are held on one or more long leases
a. Have the leases been extended under the 1993 Act? If not, can they be extended now?
b. Is there an extant or potential claim for enfranchisement under the 1967 Act?
c. Do the flats constitute more than 50% of the floor area of the building, thereby bringing the 1987 Act into play, giving the lessees right of first refusal over any sale or purchase? This potentially acts as an obstacle to marketability and therefore the value of the whole, but also impinges on dealings with the commercial accommodation — even (counterintuitively) short-term lettings.
d. Have the tenants exercised the right to collectively enfranchise or seek the Right to Manage under the 1993 Act?
e. Is the whole or any part of the upper parts an HMO needing licensing?
f. Whither leasehold in any event? Changes have been trailed but there’s no indication of when they will be enacted or what the final content will be.
2 – If the residential upper parts are held on tenancies
NB: The Renters Rights Act has now received Royal Assent. Not all of it is in force, but the various parts are expected to come into force soon.
a) Assured Shorthold Tenancies no longer exist, and nor does ‘no fault’ eviction on notice. All eviction must be with Court Order.
b) Is the tenancy an Assured Periodic Tenancy, a Company Let or Rent Act protected?
c) What is the state of repair of space and water heating (the landlord’s responsibility whatever the tenancy agreement says), and mould on the walls? (Awaab’s Law now applies to private sector tenancies.)
d) Are the flats occupied under Service Occupancies (no security of tenure) or Service Tenancies (some security)?
e) Landlords must in general consent if a tenant asks to keep a pet and can require insurance against pet damage.
f) Landlords cannot discriminate against tenants with children or those claiming benefits.
g) Rent can only be increased on notice and the tenant can refer any proposed increase to the First Tier Tribunal for determination.
3 – If the building is bought or sold as a going concern (rental business)
a) There has to be a professional apportionment of value to the residential element for VAT purposes.
b) No apportionment is required for SDLT, which is payable on the gross sale price, albeit at the non-domestic rate.
c) The previous scheme where pubs with flats over attracted VAT at 90% of standard rate has expired.
4 – Building Safety Act
If the building is of a certain size, does the Building Safety Act apply — and if so, what’s the state of the cladding?
5 – Lettings and Lease Renewals
a) Will the proposed law outlawing upwards-only rent review affect investment value and mortgageability?
b) Will all future leases be for 5 years or less, rendering rent review a thing of the past c) It’s proposed that leases of 2 years or less will not attract protection under the Landlord and Tenant Act 1954.
d) How will short fixed-term leases for 5 or 2 years affect mortgageability and credit considerations?
e) RPI indexation of rent may cause difficulties as that index will be abolished shortly — should you use CPIH instead?
f) If premises are vacant and suitable for ‘High Street Use’, might the Local Authority auction them?
g) If the lease was excluded from the 1954 Act and the tenant remains in occupation after expiry, what is their status?
h) Will Court proceedings or disputes be inherited?
i) What are the landlord’s environmental responsibilities and how recoverable are associated costs?
6 – Works to the Building
If works are needed to either part, can they be accomplished without derogation from grant or breach of quiet enjoyment?
7 – Energy Ratings
Is the energy rating of each part legal and how likely is it to remain so? Will ‘qualifying ratings’ change?
8 – Asbestos
Is there asbestos in the structure? Who is responsible for managing or fixing it?
9 – Fire Risk Management
a) Is the alarm system linked and compliant?
b) Is it compliant with the requirements of the insurers?
10 – Statutory Compliance
What is the status of compliance for any commercial use — e.g. food safety or hygiene?
Conclusion
In an increasingly complex property landscape, understanding the intersection between residential and commercial law is essential for anyone involved with mixed-use buildings.
The Commercial Property team at William Sturges LLP provides clear, pragmatic advice to investors, developers and landlords navigating these issues. For tailored guidance on any commercial property issue, contact Jeremy.Spooner@williamsturges.co.uk.