Commercial property owners faced with increased vacancies, high business rates for unoccupied property and a housing shortage may be considering converting commercial premises to residential units.  Such conversions are not always straightforward and there are a number of issues to consider. 

Is planning permission needed?

Possibly. The Government’s stance on change of use from commercial to residential has been in a state of flux.  Currently, the position is as follows:

  • from 1 October 2012, existing permitted development rights (which dispense with the need for planning permission) are extended to allow space above shops and other town centre uses to be converted into two (rather than one) flats;
  • Paragraph 51 of the National Planning Policy Framework encourages the grant of planning permission for change of use from commercial to residential unless there are ‘strong economic reasons why such development would be inappropriate’.  New legislation will be introduced to back up this principle but authorities will have an opportunity to seek a local exemption where they believe such rights will have an adverse economic impact.  Full details of the legislation have not yet been published so watch this space    

Remember that the above only deals with change of use.  Planning permission is likely to be needed where the conversion involves building works (eg access reconfiguration, shop front alterations, new windows, roof alterations, new vehicular parking and pedestrian access arrangements). 

What about the Community Infrastructure Levy (CIL)?

This could be triggered if planning permission is required and there is an increase in floor area as a result of the development.  Check whether there is a charging schedule in place.  It is worth noting that, due to technical rules, when calculating whether there has been an increase in the floor area, it makes a difference whether the premises have been vacant for more than six months before the planning permission is granted.  If they have, CIL could be triggered even if the building works don’t actually result in more floor area.  

Consider costs

Is conversion actually cheaper than a new build?  Additional building regulations apply to residential premises and the cost of making the converted premises compliant should be factored in, as should the 15% increase in planning fees recently announced by the Government and the cost of complying with any conditions attached to the planning permission. 

Also consider building materials.  Covenants requiring conversions to remain in keeping with the surrounding area are common and these could have cost implications.

Consider location

Will there be enough outdoor amenity space to make the converted unit attractive?  What about parking?  Check with the local authority whether there are traffic arrangements/zoning restrictions which might make access and parking difficult.  Not all commercial premises will be suitable for residential use.  For example, it is unlikely that a sustainable residential development could be achieved within a business park.

Check legal documentation

These may contain restrictions or require consents to be obtained from third parties (there could be cost and time implications).  Landlord’s consent to alterations may be required where the property is held under a lease.  Also check whether adjoining premises can exercise rights over the property to be converted as these could affect how the conversion works are carried out.  Easements benefiting the premises need to be considered.  Is the new use outside the scope of existing easements?  Will new rights/easements need to be obtained?

VAT implications

The VAT treatment of commercial and residential premises is different and should be considered at the outset.  Developers will not want to pay VAT on the purchase of commercial premises which they intend to sell off as residential premises.  They are advised to give the seller a certificate confirming their intention to convert the premises to residential use before the contract is entered into.  This may, however, lead to a price increase which could make the conversion unviable (as the seller may need to provide for a possible claw back claim from HMRC).  

Consider ongoing management

The potential for nuisance actions/neighbour disputes could increase with more people living over commercial premises or in commercial areas.  Residential occupiers might complain about noise/smells from neighbouring commercial units whilst commercial tenants may have security concerns.  Any conversion should be sensitive to this issue, especially where the converted premises may be held as an investment and could require ongoing management. 

Above are just some of the issues that need to be considered when converting commercial premises to residential use.  Seek specialist, planning, tax and legal advice throughout the process