Repurposing distressed assets

Introduction

The UK economy is seeing a wave of distressed assets, principally retail and office properties, coming to the market and investors and developers are circling. The key question that is being asked is: what can I repurpose it for? The answer of course depends on what the current use of the asset is, but there may be a number of different options available. 

Market position

The sale of distressed assets is being driven by a number of factors. 

• In the retail sector, insolvent companies are selling brands, for example, Arcadia and Debenhams, but have been unable to sell the physical assets as part of the deal. 
• Banks are foreclosing on loans; either the borrower has breached LTV covenants or cannot service the loan.
• Owners are selling assets that they no longer have a need for, for example, reducing their office space requirements; or reducing their retail outlets and investing in online sales.

Opportunities

Significant opportunities exist for repurposing these assets, without needing to obtain express planning permission. Such repurposing could be a meanwhile use before a more comprehensive redevelopment is brought forward.

Class E changes of use

New Class E of the Town and Country Planning (Use Classes) Order 1987 came into effect in September 2020. It combines a number of old use classes and includes shops, restaurants, banks, gyms, offices, doctor’s surgeries, creches and light industrial uses. The use of an asset can move between these different uses without needing planning permission. There is no limit on the number of times a change can be made, and no minimum or maximum duration for a use. A change could be temporary or permanent. These changes of use are not “development” for the purposes of Section 55 Town and Country Planning Act 1990 (TCPA90). This is important, because it means that there is a statutory right to change the use in this way, it is not a permitted development right. Consequently, a local planning authority (LPA) cannot remove the right to change the use by promoting an Article 4 Direction (pursuant to the Town and Country (General Permitted Development) Order (England) 2015) (GDPO) as this can only remove permitted development rights. Only parliament can remove the right to change the use within Class E by a further legislative change.

Office to residential conversions

Offices can already be changed to dwellings pursuant to permitted development rights. (Schedule 2, Part 3, Class O, GPDO). Office buildings (in office use before 29 March 2013) can be changed into any number of houses or flats; there is no restriction on the types of dwelling, or the number of dwellings, and the size of the office building is immaterial. If desired, only some floors of an office building can be converted and the rest retained in office use (or changed to another Class E use). Office buildings in conservation areas and national parks can be converted, although listed buildings cannot take advantage of the permitted development right.

This right is subject to a prior approval procedure, but the LPA’s powers are limited to considerations of flood risk, noise, contamination, highways and natural light. A decision has to be made within 56 days; if this period has elapsed without determination, then the developer can send a letter of default to the LPA and start works. From April 6, 2021 minimum space standards will apply to prior approvals submitted after that date.

There is no requirement to provide affordable housing, although the Community Infrastructure Levy (CIL) may be payable unless the building has been occupied for its lawful use for 6 months in the past 36 months. Buyers should check how long an office building has been empty for as part of pre-contract enquiries. Some LPA’s have a zero rate for residential in their CIL charging schedule, so no CIL may be payable even if the office building has been empty for a number of years. Again, this should be checked as part of pre-contract enquiries.

It is often the case that in order to make an office building into a workable and bankable residential development that external changes are required to the building, such as the insertion of doors and windows. These changes will require express planning permission. From August 2020, floor plans have to be supplied as part of prior approval applications to make sure that habitable rooms within dwellings have enough natural light, this may well determine where external changes are required.   

Buyers will also need to check if a LPA has in place an Article 4 direction that prevents the change of use from office to residential in some parts of a LPA’s area. If an Article 4 Direction is in place that affects the asset, then express planning permission will be required for the change of use.

High Street Homes permitted development right

A government consultation ended on January 29, 2021 in relation to a new permitted development right, which would allow Class E assets to be converted to homes without planning permission. It is also intended to apply in conservation areas. It is dubbed the “High Street Homes” permitted development right. In the government’s response to criticisms it stated “We disagree with these criticisms which fail to understand the purpose of these measures. The proposed High Street Homes permitted development right will support the diversification of our high streets and town centres by allowing more flexibility for much-needed housing, while making the most of existing buildings.” The new right seems certain to come forward and probably in the Summer/Autumn of 2021. It is likely that the new right will be subject to prior approval requirements, which may be similar to the requirements for office to residential conversions outlined above.

As noted above, LPA’s can make Article 4 directions that remove permitted development rights. However, it takes time to put these in place as public consultation is required. Albeit, where urgency is required the Secretary of State can make a direction instead. There is therefore likely to be a window of opportunity between the new right coming into force and Article 4 directions being made where prior approval can be obtained under the new right. When the office to residential permitted development right was introduced the Secretary of State prevented LPA’s from making blanket Article 4 directions and required LPA’s to submit their proposals to him of office districts that they wanted covered by directions. A similar approach might be taken here to prevent over-zealous use of Article 4 subverting the purpose for introducing the right.

Buyer beware

Potential purchasers of distressed assets should be aware, however, that if an asset is the subject of an existing planning permission, or an agreement/undertaking pursuant to Section 106 TCPA90 (s.106 agreement), then the terms of these will need to be carefully checked to ensure that the buyer’s proposed use of the asset is feasible.

• Existing planning permissions and s.106 agreements may contain restrictions that would prevent a change of use. Often permissions include words like “this development shall only be used for an office, and for no other use without the express consent of the local planning authority”. Where such a condition exists then the buyer will either need to vary the condition pursuant to Section 73 TCPA90, or apply for express planning permission for a change of use.
• Even when a use is changed within Class E, then the conditions on an existing planning permission, or obligations in an existing s.106 agreement will continue to bite, for example, if there are restrictions on opening hours for a retail shop, then when the use is changed to a gym, these hours will continue to apply to the new use.

Restrictions on changes of use in other documents will also need to be checked, for example, contractual obligations in a lease, or restrictive covenants on title, although it may be possible to remove these via an application to the Upper Tribunal (Lands Chamber) pursuant to Section 84 Law of Property Act 1925. 

Summary and Conclusion

Opportunities exist for repurposing distressed assets, particularly retail and office assets, whether these are meanwhile uses, such as temporary pop up shops, or permanent changes such as residential conversions. The planning system now makes these sorts of changes much simpler; in many cases planning permission will not be required either because the change of use does not involve development, or because it is permitted development, although in the latter case, a prior approval process may be required giving the LPA the ability to consider limited issues relating to flood risk, noise, contamination, highways and natural light. A new High Street Homes permitted development right is likely to come forward later this year allowing Class E uses the ability to convert to residential uses, although there are likely to be prior approval requirements. Buyers may have to move quickly however, to take advantage of these new rights before LPA’s use powers to restrict the new right. Buyers considering purchasing distressed asserts should be careful in undertaking pre-contract due diligence to check existing restrictions on title, in leases, in planning permissions, or s.106 agreements that might restrain their future plans for the property.