We are seeing an upsurge in the number of landlords looking to overhaul their commercial spaces (such as shopping centres and business parks) to rejuvenate areas or embrace new uses of their properties.
In an ideal world landlords will not want to shut down their entire commercial space during the development as they will be keen to retain rental income where possible; this leads to a phasing approach to developments (i.e. developing the land in stages). As a result, there are some initial important questions for landlords considering this type of development:
Can my existing tenants disrupt my development plans?
If a landlord intends to develop parts of its property whilst tenants remain in occupation, they must consider the terms of their tenants’ leases and the rights granted to the various occupiers.
Tenants of shopping centres or business parks commonly have a right of access over the centre/park to get to and from their property or to exercise any other rights, such as parking, granted in their leases. Any hindrance of such rights could lead to tenants claiming breaches of their leases by their landlord. Any claims could substantially disrupt or delay redevelopment plans, even if the position can be resolved by agreement.
Landlords should seek legal advice as to whether a tenant’s rights under their lease can be suspended in the case of works affecting the access or even varied (for example, to see if a landlord can change the point of access onto the shopping centre land or business park).
What if my current tenants have security of tenure?
If a landlord cannot carry out the development whilst tenants remain in occupation, they must consider how they can obtain possession of a tenant’s property.
Whilst a lease exists, a landlord cannot determine it unless they have a break right or negotiate a surrender by the tenant of its lease. Any conditions for the exercise of a break must be met for it to be effective. The tenant is likely to demand a payment for surrendering its lease, which will be an additional cost to the landlord.
Otherwise, a landlord must wait until their tenant’s lease ends but will be subject to the tenant’s statutory rights granted by the Landlord and Tenant Act 1954 (the ‘1954 Act’). Briefly, if a tenant has security of tenure under a commercial lease, they have a right to continue to occupy their property after the end of the contractual term on the same terms as their current lease. They also have a right to apply to the landlord for a new lease (subject to conditions).
In the situation we have outlined, a landlord has the right under the 1954 Act to object to the grant of a new lease if they have an intention to redevelop the property. How landlords demonstrate this intention has been tested in the courts over the last decade, with the outcome of different cases settling that:
If a landlord is able to demonstrate this intention, they may still have to pay the tenant compensation (based upon the rateable value of the property) which can increase the costs associated with the development exponentially. It is crucial that the landlord fully considers and plots out their proposed development or they could fall foul of the court and be required to grant their occupying tenants new leases, which may effectively end any redevelopment plans.
Are there any title issues which would stop me from doing what I want to do?
Before making any appointments or committing material expenditure, landlords should revisit their title to their property to make sure there are no issues which could stop any development before the process even gets going. Such issues can include:
Landlords may consider indemnity insurance as protection against potential losses for breaches of covenant, with the minimum level of indemnity needing to be the gross development value of the land. However, insurances will not stop a third party enforcing their rights against a developer but merely covers financial losses incurred by the landlord as a result of the enforcement of the covenants. Other limitations to indemnity insurance are that cover may not be available before planning permission is granted and any judicial review period passed, and insurance may be expensive to obtain if the covenants were created within the last 30 years.
This is not meant to be an exhaustive list of issues that a landlord faces in considering a development but does highlight just some of the points that need to be contemplated. If they are not and landlords commence development without taking these matters into account, then works could come to a grinding halt and costs spiral out of control before spades have even gone into the ground.
The drive and enthusiasm for redevelopment of existing estates is currently rife as the revival of communities and largely defunct areas is a Governmental and local priority so as to create new sources of income for landlords but also benefit the local community. However, this has to be done in the right way for such schemes to succeed.
If you are a landlord looking to redevelop your land or have any initial questions about redevelopment generally, please reach out to the Real Estate team at Greenwoods Legal LLP.
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