As a property advisor in the midst of a London property market bursting with redevelopment potential and a shortage of residential stock for both investors and occupiers alike, a noticeable trend has arisen in the firm’s work, as more and more of our clients are seeking to take advantage of the opportunities to redevelop existing buildings, whether these buildings are vacant or have tenants in situ.
The premium for acquiring a building with redevelopment potential can be significantly less for an occupied building than one which is vacant. These cheaper premiums combined with the loosening of England and Wales’ planning guidelines as to what constitutes “permitted development” are providing significant financial incentives for developers to redevelop existing buildings into new residential stock.
However, whether you are one of the nation’s larger house-builders or just an individual making his/her first foray into the redevelopment, the key to unlocking the redevelopment potential in a building is obtaining vacant possession.
Without assurances in the sale contract allowing for vacant possession on or shortly after completion of its acquisition, a developer will find it much harder to persuade (i) a lender to finance the purchase and/or redevelopment, and (ii) a local planning authority to grant planning permission for the redevelopment.
The firm recently acted for a developer on the acquisition of a central London multi-let office building. Being an experienced developer, the client was very much aware of the need to have a strategy for obtaining vacant possession of the building as a means of obtaining finance for the purchase and in order to obtain planning permission to implement his redevelopment scheme.
The building was fully let with the five of the leases granted to office tenants. There was only one residential tenant in the building who occupied the sole flat in the building.
Although all of the office leases had protection under the security of tenure provisions in the Landlord and Tenant Act 1954, the term expiry dates of these leases all fell in within our client’s development timescale such that in the knowledge of a hostile development notice under Section 25 of the Landlord and Tenant Act 1954 it was relatively straightforward to convince the lender that vacant possession of the office space was an achievable objective.
However, with the residential tenancy agreement, it became increasingly evident from our due diligence that vacant possession would be outside of our client’s control; to the extent that two different lenders withdrew their offers of finance on learning of the security of tenure offered to this tenant.
As most property advisors will be aware, the vast majority of short term residential tenancies will be documented via assured shorthold tenancy agreement (“ASTs”). ASTS offer flexibility to a landlord, as following the expiry of the term they have a mechanism within which to remove a tenant from occupation. As a general summary, subject to the landlord giving the tenant 2 months’ written notice prior to the expiry of the term of the AST, a landlord will be able enforce vacant possession of the flat via Court Order following the expiry of the term of the AST.
However, as alluded to above, not all short term residential tenancy agreements are documented as ASTs. In our client’s case, the tenant occupying the flat was occupying by virtue of a Rent Act Tenancy granted in 1981.
The nuances of Rent Act Tenancies go back to legislation introduced by the Labour government of 1977 - such legislation was named the Rent Act 1977 and applies to all short term residential tenancies created before 15 January 1989. The Rent Act 1977 allows tenants on short term leases a great degree of security of tenure; other than via forfeiture, the only method available to a landlord to remove a rent act tenant from occupation of his/her premises is by providing suitable alternative accommodation - the decision as to whether any alternative accommodation is suitable is at the order of the Court, acting in its absolute discretion.
Factors as to whether the alternative accommodation is suitable include the location, type and size of the new accommodation. No doubt a Court will look harshly on a developer who pleads that he has built a flat in Harlow to accommodate a rent act tenant residing in Central London.
Armed with this knowledge and aware that the redevelopment could not be carried out with the residential tenant in situ, our client was active in communicating openly with the tenant as to his redevelopment plans, and built into his appraisal a separate tranche of monies, which could be used to purchase an alternative flat of similar size in the immediate locality to the flat.
The reader should note that this strategy was still not enough to satisfy two separate lenders who quickly withdrew terms after they became aware of the extent of the residential tenant’s rights and the potential for this tenant to stymie the development.
Our client was fortunate that a third lender was prepared to take a view on this tenant’s security of tenure; such a view was based largely on our client’s appraisal, his open communications with the tenant, and our client’s track record of unlocking value on previous residential development schemes.
As many Rent Act Tenancies were granted more than 30 years ago, we are finding that more and more of the original tenants to these Rent Act Tenancies are deceased. Developers should therefore be wary of claims from spouses and relatives of the original tenant - on the death of the original tenant, similar security of tenure is granted for the lifetime of the said spouse or relative if (i) the tenancy has been transferred to the surviving spouse or relative, and (ii) the surviving spouse or relative having living with the tenant at the time of their death. The evidential burden will be on the developer to disprove these two conditions and without objective or factual evidence, it will be difficult for a developer to satisfy this burden.
The above is only a short summary of potential obstacles that a developer may encounter when seeking to redevelop a building which has tenants in situ. In particular, the reader should note the security of tenure offered to residential tenants and their spouses or relatives who claim under the Rent Act 1977.
Whilst there are no legal mechanisms through which a developer can have certainty that he/she will obtain vacant possession from a Rent Act tenant, armed with money and a plan, a developer will have more leverage with the tenant when negotiating for vacant possession without the need for a Court Order.