On 1 September 2020, new regulations implementing major reform of the use classes planning system for land and buildings across England came into force.
The government’s “Project Speed” infrastructure plan, which was launched in June 2020, included a commitment to address the need for more types of commercial premises to have “total flexibility to be repurposed” and to provide “greater freedom for buildings and land in our town centres to change use without planning permission”.
July 2020 subsequently brought the announcement of an expedited response to the 2018/19 public planning reform consultation (following an initial response in May 2019) which included confirmation that, in order to better suit the changing face of the high street and the retail industry generally, the long-standing regulations governing the categorisation of use classes were to be amended to provide for a radical new system.
Commentary released by the government alongside the details of the new regulations describes their primary aim of “creating vibrant, mixed use town centres by allowing business greater freedom to change to a broader range of compatible uses which communities expect to find on modern high streets, as well as more generally in town and city centres”.
This article covers:
1. What were the original Use Classes?
The Use Classes Order 1987 provides the structure for grouping different uses of land and buildings into ‘classes’, within which a change of use does not require the grant of planning permission and by reference to which landlords can manage the use of their assets by their tenants and occupiers. The previous system generally operated with the following four main use classes each with their own subclasses:
2. What are the changes to the Use Classes Order?
The devastating economic impact that the COVID-19 pandemic has had on our high streets, which were already suffering from a retail meltdown, has clearly intensified the need for immediate reform. The new use class regulations recognise that property and business owners need to be far more flexible and able to diversify at speed in order to meet the needs of fast-changing consumer demand and, in some cases ensure the very survival of their business.
The new regulations are intended to amend and simplify the old use classes system to allow businesses to react quickly, although there is some complexity in the detail of the changes that have been introduced. They essentially revoke the previous Use Classes A1-A5, B1, D1 and D2, and introduce changes and replacements as follows:
Importantly, properties can now change to other uses within the new Class E without the need for planning permission (unless they are subject to other specific planning controls) as this would no longer equate to “development”.
A table summarising the previous and new Use Classes can be found at the end of this article.
3. Key considerations for commercial landlords
Complex commercial decisions faced by landlords in relation to the permitted use of premises, especially when dealing with portfolios or mixed-use buildings, are nothing new. A balance must be struck between keeping tight control over the tenant mix and avoiding the dampening effect that this degree of control can have on annual rents.
Whilst the use class changes are likely to come as good news to many, for example those with void or struggling units, as the industry starts to work with the new system, landlords in particular may find themselves having to quickly adapt their policies and processes. It will be of critical importance to ensure new relevant clauses within leases are drafted to strike the right balance and enable a landlord to both successfully manage its asset in the long term, and deal with adverse market conditions by attracting new and diverse tenants.
There is a lot to think about and, although each case will turn on its own facts, we set out below some key pointers for landlords and their professional teams:
i. Drafting Permitted Use clauses
To date, the approaches taken to defining the ‘permitted use’ in a commercial lease differ widely, ranging from a very rigid single use (for example, “use as an Italian restaurant…”) through to a relaxed and wide-ranging definition (for example, “any use within Use Classes A1 and A3…”). Recent market practice has been for the definition to comprise consent to the initial tenant’s specifically proposed use by reference to the use class that it falls within, with the possibility of a change of that use during the term subject to obtaining the prior consent of the landlord.
Under the new regime, the definition of permitted use within any commercial lease must be carefully reviewed. A landlord might be prepared to grant the tenant access to the flexibility of the new Class E for example, but if not then it would be advisable to define the permitted use by express description rather than relying on use class reference.
It should not be assumed, by either a landlord or a tenant, that the changes mean there is an automatic right for a new or existing occupier to put their premises to a new use. Reference to the Use Classes Order in existing leases completed before 1 September 2020 will often fix the definition of permitted use to the legislation as was in effect at the date of the lease, and not later re-enacted. In these cases, the use provisions will likely be set in time under the exact drafting of the clause and will not be affected by the later changes in regulations.
ii. Dealing with tenant applications to change use
Landlords will need to look closely at their leases in terms of processes and obligations around a tenant’s right to change the use of the premises. It is common for a tenant to be able to do this, subject to obtaining the landlord’s prior consent (and compliance with any other statutory or contractual requirements to enable the use proposed) and regard to the particular definition of the permitted use. If a lease does allow for change of use with consent then, unless there is also an express requirement for the landlord not to unreasonably withhold that consent, the landlord has unfettered discretion in making their decision (ie. there is no implied statutory requirement for the landlord to act reasonably). If the landlord is required by the lease to act reasonably when considering a tenant’s application, and wishes to refuse the grant of consent, this will require detailed consideration and dialogue with the tenant in terms of the legitimate rationale for withholding consent.
There is a significant amount of case law and general debate around ‘reasonableness’ in these circumstances. From the landlord’s perspective, it is advisable for the relevant lease covenant to be drafted to clearly carve out circumstances in which the landlord retains absolute discretion on consent to proposed changes. For example, this could be where the new use would conflict with restrictive covenants on the landlord’s title, or lease covenants of the lease in question or another lease at the site, be contrary to the principles of good estate management, or in the landlord’s opinion is undesirable having regard to the landlord’s overall property interest.
iii. Rent review implications
The Royal Institution of Chartered Surveyors’ (RICS) professional statement, Code for Leasing Business Premises (“Lease Code 2020”) is effective from 1 September 2020 and covers a mix of mandatory requirements and best practice for RICS agents, members or regulated firms. Under the Lease Code 2020, landlord controls over changes of use should be no more restrictive than is necessary to protect the value of the premises and adjoining premises owned by the landlord.
However, if the use permitted by a lease is too restrictive then it may have a negative effect on rent review, largely due to the tenant’s perceived limitation on its ability to assign or underlet the lease. Opening a wider range of uses or a new use for a property is likely to affect the valuation for rent review purposes and will generally increase the rental value. Landlords should be carefully considering the valuation impacts of the commercial agreements they may be proposing to reach with tenants and taking the specialist advice of rent review surveyors where appropriate before heads of terms are signed-off.
iv. Pre-1 September 2020 Planning Applications
Although the use classes changes take effect from 1 September 2020, there is a “material period” under the regulations running from 1 September 2020 to 31 July 2021, which allows transitional phasing of changes relating to change of use permitted development rights.
Applications for planning permission which were submitted before 1 September 2020 and which refer to the previous use classes are to be determined by reference to the old system. Whether that use, once implemented, falls within the new classes pursuant to the regulations may be determined by any controls, or lack of controls, in the specific planning permission.
v. Non-Structural Alterations
Often when a tenant applies for a change of use there will be an accompanying application to carry out work at the premises, and this may be even more likely if a radical change of use is proposed. If the user clause in the lease requires landlord’s consent to a change of use, but the tenant is not proposing any structural alterations to the premises (ie. they are undertaking non-structural works only), then it is worth a reminder of the impact of section 19(3) of the Landlord & Tenant Act 1927. This is essentially that in those circumstances no fine or sum of money “in the nature of a fine” – which includes for example a rental increase, or a requirement that a tenant agrees to a break clause – will be payable in consideration for the grant of the landlord’s consent.
This does not prevent a landlord from requiring a payment of a reasonable sum relating to damage or diminution in value of the property or the landlord’s neighbouring property, or from receiving payment of their legal fees or other expenses.
vi. Risks of anti-competitive policies
Finally, competition law (governed by the Competition Act 1998) is an area to keep in mind when preparing and imposing tenant mix schemes and restrictions on use, particularly in the retail sector. Although it is generally considered rare that property agreements are affected by competition law, landlords are well advised to keep their tenant mix schemes up to date and thoroughly researched, with independent evidence available in case needed.
4. Final thoughts
When announcing the use class reforms on Twitter on 21 July 2020, Robert Jenrick MP said:
“Today I have introduced new laws to support the recovery and reimagination of our high streets and towns. As we protect and grow our economy post #COVID19, we must think flexibly about how best to support our high streets and town centres. Through reforming and simplifying the use classes order, we are supporting small businesses to innovate while protecting local amenities like theatres and pubs. This gives high streets and our town centres the best chance of adapting and thriving.”
Only time will tell whether the new system can live up to these expectations. It will be interesting to see how planning authorities deal in practice with applications for very flexible uses, including the detail of the planning conditions that may be imposed, the amount of review and assessment that has to be undertaken in order to satisfy wide-ranging possible impacts of flexible development (including section 106 and community infrastructure levy implications) and whether it will ultimately be preferable for applicants to narrow down their initially proposed use, benefitting from the flexibility later once the permission is implemented.
Landlords should remember that, notwithstanding laudable government intentions and legislative changes, they will often still hold the key to the use and occupation of their buildings both in terms of leveraging their own development strategies and, via well drafted user clauses, controlling their tenants’ ability to unilaterally diversify.
Contact us: if you have questions about the new Use Classes Order and its impact on you as a landlord or tenant, please get in touch with the author or your usual Fox Williams contact.
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