This tip suggests some points to consider when structuring the legal interests in mixed use buildings and follows our Tip of the Week last year regarding tenants' rights of first refusal in mixed use buildings.

Let's assume that a mixed use building contains commercial units on the ground floor with floors of apartments above; that it is intended that the freehold of the building will be sold either to the residential tenants (pursuant to their right of first refusal) or a freehold reversion investor; and that the commercial units will be sold as a single interest, by way of a long lease, to a commercial lease investor.

  • Getting the service charge regime right across the whole building is crucial. The service charge provisions should be consistent and, overall, there should be no voids and 100% service charge recovery. To assist with this:
    • Services should be divided between those exclusively benefitting flat owners (such as maintenance of landings of residential floors), those which exclusively benefit commercial occupiers (such as maintenance of commercial loading bays and plant) and those which are shared (such as maintenance of the structure of the building or emergency escape routes)
    • Consider whether an area is genuinely a 'common part' or whether in practice it ought to be demised entirely to the commercial lease investor with only a right of maintenance, access or emergency escape access reserved for flat owners.
  • If possible, agree the commercial lease terms with the commercial lease investor prior to contracting to sell the freehold reversion, or, at the very least, ensure that the commercial lease is drafted in an industry-acceptable form. Try to agree flexibility for subsequent variation of the commercial lease with the freehold reversion purchaser.
  • Finally, bear in mind what will not be covered by the mixed use building's insurance. Typically, it will not include loss of rent insurance suffered by the commercial lease investor. If you are agreeing any pre-lets of the commercial units before selling the commercial interest, you should ensure that additional insurance rent obligations are included in the commercial units' rack rent leases, to cover the cost of loss of rent insurance.