In many UK towns and cities, the management of some high streets and shopping centres are becoming an ever increasing challenge for landlords and tenants alike. COVID-19 has brought this into even sharper focus. At the Government’s initiative 1st September 2020 will see the biggest ever shake up of the Town & Country Planning (Use Classes) Order 1987 with far reaching implications.
The old use Class A (essentially retail) will largely disappear. So will the former use Class B1 (offices, research and light industrial). In their place will be a new and much wider use Class E (broadly covering all commercial, business and services), a new use Class F1 (learning and non-residential institutions) and a new use Class F2 (local community uses). The implications of these changes will be significant for landlords and tenants alike. Potentially they will impact on rent, (on rent reviews and lease renewals), 1954 Act renewal rights generally, the ability to assign, sublet and to raise finance, and the ability for tenants to carry out alterations.
The impact of the new use Classes E and F on Existing Leases
- For the duration of the Existing Lease the user clauses will continue to apply as originally drafted. So if the user allowed is “Class A1” for example, the pre-1st September 2020 use class will continue to apply because that user was agreed and crystallised when the Existing Lease was entered into.
- Where the Existing Lease already allows for an alternative use with consent, it is considered that potentially landlords may benefit from these use class changes on rent review.
- Conversely, where an alternative use is not allowed with no provision for consent, it is anticipated tenants may benefit on rent review.
- If an alternative use is allowed with consent not to be unreasonably withheld, then dependant on the facts the landlord may potentially gain on review.
- On assignment, and dependant on the specific alienation provisions, it may now be harder for landlords to control and enforce a tenant mix policy. So where tenant mix is a concern, landlords may still try to agree a specific and narrowly defined use on any new lettings, although this may also impact on rent.
- Where an alternative use is allowed with or without consent, a tenant’s ability to carry out more far-reaching alterations to take advantage of the new use classes E and F may now be increased.
Impact of the new use Classes E and F on Renewal Leases
- Updating the Renewal Lease on account of changes in the law can be a legitimate ground for seeking to change existing lease terms on renewal.
- But, generally the terms of the Renewal Lease should be no more onerous for the tenant. Therefore, where a tenant wants to retain the former and more tightly drafted user clause in order to minimise the new rent, dependant on the specific facts the court may be willing to retain the existing user clause.
- Conversely, where the current user refers for example to “the use classes order, as amended and replaced from time to time”, dependant on the specific facts the likelihood is the court will be more willing to re-write the user clause in the Renewal Lease.
- If the court will not re-write the user clause in the Renewal Lease, this may now depress the rent on renewal and at future rent reviews. However, it may now also make it harder for a tenant to assign the Renewal Lease.
- Almost inevitably, and dependant on wider economic factors too, the new use Classes E and F will increase the number of opposed 1954 Act lease renewals, especially where the landlord does not want to be constrained by the original more narrowly defined user clause in the Existing Lease for asset valuation purposes or wishes to take advantage of the wider use Classes itself.
For many decades The Use Classes Order 1987 has been a long-established and predictable area of planning law for landlords and tenants alike. This major shift in approach by Central Government towards land use is clearly intended to encourage flexibility in property use, and will have wide-ranging implications for landlords, tenants, developers, funders, and Local Authorities alike. The strong likelihood is also that the user clause will now be one of the more contentious areas in lease negotiations, on renewal and on a rent review. Following these changes increased 1954 Act litigation is considered inevitable.