Mixed use development and structure (Part 2/2)

Mixed use development and structure (Part 2/2)

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. The first part of this blog looked at whether, for a 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 not included, whether the tenants’ right of refusal would still apply.

In this second part, we ask two further questions: Can we split the demise of the main structure between a management company lease (residential elements) and a long lease (commercial element)?  And, if so, would the tenant’s first right of refusal and right to manage then only apply to the management company lease and the part included in the demise?

Splitting the demise of the main structure

Whether the demise of the main structure of the building can be split as above will depend on the layout of the development. That is, are the commercial and residential elements two separate ‘buildings’?  We also need to consider appurtenances to the residential part of the building.

So, what is a building? The Landlord and Tenant Act 1987 does not define ‘building’.  The term is not confined to the bricks and mortar of which the building is constructed, but extends to the garden and other appurtenances (expressly or impliedly) included in the demise of a flat to the tenant.  That the building is included within one or more registered titles is irrelevant – the extent of the relevant premises must be ascertained objectively, disregarding the disposal concerned.

Following the decision in Long Acre Securities Ltd v Karet, it seems that if the blocks of flats on a single estate are sufficiently independent of one another, ie they are structurally separate and have their own dedicated bin stores, garage blocks, gardens, etc, then each will be a separate building for the purposes of LTA 1987.  Extrapolating this to the mixed use content, if the commercial premises are sufficiently structurally separate then they may be regarded as a separate building and as such a long lease, including part of the separate structure, may be possible.  However, Long Acre has been criticised and caution is advised, as further explained in our Practice Notes LTA 1987 – tenants’ right of first refusal, Exercising the tenant’s right of pre-emption – what is a qualifying building? and LTA 1987 – pitfalls and practical tips.

Extent of tenants’ right of first refusal and right to manage where the demise is split

In these circumstances, would the right of first refusal and right to manage only apply to the management company lease and the part of the building included in the demise? This again depends on the nature and layout of the scheme.

We discussed the first right of refusal above. The right to manage applies to premises if:

  • they consist of a self-contained building or part of a building, with or without appurtenant property,
  • they contain two or more flats held by qualifying tenants, and
  • the total number of flats held by qualifying tenants is not less than two-thirds of the total number of flats.

Also important is whether the residential element, as contained in the management company lease, are self-contained, or appurtenant property that none of the commercial element incorporates property appurtenant to the residential element.

A self-contained building is one that is structurally detached. A part of a building is self-contained if:

  • it is a vertical division of the building,
  • the structure of the building could be redeveloped independently of the rest of the building, and
  • the services are provided independently to those for the occupiers of the rest of the building or could be, without significantly interrupting the provision of services to the occupiers of the rest of the building.

With regard to appurtenant property, the Court of Appeal in Gala Unity Ltd v Ariadne Road RTM Company Ltd, held that the right to manage extended to the access road and common parts of an estate.  This included land over which the tenants of the premises had rights in common with tenants of other buildings, regardless of the fact that those buildings did not form part of the premises subject of the claim.  The wording of the legislation here was clear – there was no requirement that the appurtenant property should appertain exclusively to the self-contained building which is the subject of the claim to acquire the right to manage.

Further reading on this topic can be found in our Practice Notes The right to manage, The right to manage – what are qualifying premises and The right to manage blocks of flats – establishing the right.

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