Mixed use development and structure (Part 1/2)

Our previous blog post on the topic of mixed use developments: 6 structures for reducing risk in mixed use developments referred to a number of potential issues, including statutory residential rights and service charge difficulties, which can arise when a proposed mixed use development includes a residential element.  Our Practice Note Common structures for leasehold mixed use developments sets out how such issues can be avoided or reduced by careful ownership structuring at the outset.

This two-part blog examines questions that might arise in relation to structuring a mixed use development as a variation on clean freehold investment structure, as outlined below.  In particular we look at whether, for the buffer lease to be effective, the main structure of the building needs to be included in the demise of the management company lease, and if it is not included will the tenants’ right of first refusal still apply?

Putting in place a ‘buffer’ lease

One structure that is commonly used for buildings mixing long residential leases and shorter rack rent commercial leases is the clean freehold investment model.  This structure aims to create a ‘buffer’ lease between the residential leases and the freehold to achieve a clean investment freehold with minimal responsibilities for management of the lease.

A variation on the clean freehold investment structure is for the freeholder to carve out the internal demise of the commercial units from the management lease and to retain direct control of the commercial premises.  The main objective in putting in place some kind of buffer lease(s) is to mitigate the effects of the residential tenants’ right to buy under the