The UK is currently facing a housing crisis. Looking at London in particular, the property market has not been able to support the exponential growth of residents in the capital. Whilst many jobs have been created and despite the hundreds of thousands of empty homes in the city, not enough affordable housing has been built to accommodate London’s growing population.
In recent years the government has sought to address the housing crisis not just in London but across the whole of the UK and has explored the viability of various creative solutions. One of these solutions has been to look at how to use the empty air space above existing buildings. In August 2020, planning law was loosened to encourage the construction of flats on top of existing blocks of flats (as well as commercial and mixed-use buildings), providing more opportunities for developers.
However, constructing additional floors on top of existing blocks of flats can raise a number of legal and practical issues and this article covers several of the legal issues that a developer and its advisers should be considering before proceeding with these types of developments. Many of the issues mentioned below are vast topics in themselves so this article cannot go into any detail but it introduces those concepts and issues so that any developers considering such projects will know what to look out for and seek advice on.
Right of first refusal
The Landlord and Tenant Act 1987 ("1987 Act") provides certain “qualifying tenants” with a right of first refusal if the landlord wishes to make a “relevant disposal” of the building. This could include disposing of any air space above the roof or the roof itself and if the 1987 Act applies, it is essential that the procedure for offering the right of first refusal laid out in the statute is followed correctly as non-compliance can result in criminal sanctions. The definition of “relevant disposal” is widely construed and interpreting it is not always intuitive so even where it may appear on the face of an arrangement that the 1987 Act should not apply, proper advice should be taken on how to structure the transaction to avoid triggering the 1987 Act or, if that is not possible, on how to follow it. Note that whilst the criminal sanctions for failing to comply will only apply to the landlord making the disposal, the developer could be vulnerable to an action taken by the tenants to compel the developer to sell their interest in the building to them.
The Leasehold Reform, Housing and Urban Development Act 1993 ("1993 Act") gives rights to tenants to collectively compel a freeholder to transfer the freehold in the building to a nominee purchaser on behalf of the tenants. This right can, in certain circumstances, extend to the right to acquire any leases that include common parts of the building within their demise, which could include the roof and any roof space. As with the 1987 Act it is essential that developers obtain advice on the application of and risks posed by the 1993 Act to minimise the risk that the roof space could be taken from them by a collective enfranchisement action during or after completion of the development.
Where an extension creates an additional dwelling, it is generally considered to be the construction of a building and is therefore zero-rated for VAT purposes but complex rules apply where part of the original building is included within the new dwelling(s). It is therefore important that developers obtain tax advice before designing their development, in order to minimise any tax liability so that it does not affect the viability of the development.
Rights of other flat owners
The leases of the existing flats in the building could contain provisions relevant to any works to or above the building so the existing leases should be reviewed. The most obvious point is to check that the airspace and roof are not included within the demise of any of the flat leases – if they are the developer would need to convince the relevant flat owner(s) to surrender those parts (presumably in return for some money).
More common are covenants in leases that:
- prevent the tenant from carrying out any structural alterations whatsoever;
- require the landlord to ensure that all flat leases in the building are in materially the same form; and
- require the landlord to enforce the tenant covenants in flat leases.
In the Duval v 11-13 Randolph Crescent Ltd case the Supreme Court held that a landlord giving consent to a flat tenant to carry out certain structural alterations, that were absolutely prohibited in the flat lease, was in breach of the covenant to enforce the tenant covenants in the tenant’s lease.
In most instances it should be straightforward to structure developments on top of existing blocks of flats in a way that avoids the issues that plagued the landlord in the Duval case but it provides a potential trap that a developer who has not been well-advised could fall into.
A developer will also need to consider the impact of the development works on the landlord covenant that will be implied into the existing flat leases (if not included expressly) that the tenant is to be able to quietly enjoy its premises. It is generally accepted that this covenant does not provide an absolute prohibition on the landlord carrying out development works to the building but there have been cases where the manner in which works were carried out were held to be in breach of the landlord covenant even where the lease in question expressly reserved a right for the landlord to carry out certain works.
There are a number of other issues that a developer and its advisers should consider on all residential developments including restrictive covenants, health and safety, fire safety and cladding, rights of any telecoms operators in respect of the roof or roof space, insurance, Community Infrastructure Levy payments and the Party Wall Act.
There is also some concern that the existence or possible creation of a right to manage company under the Commonhold and Leasehold Reform Act 2002 could restrict a developer’s ability to construct additional floors on top of existing blocks of flats – the argument being that the carrying out of the construction works by the developer impedes the right to manage company from managing the roof of the building and should therefore be deemed unlawful. At County Court level an argument to that effect has been rejected (on the basis that the developer could carry out the works taking all reasonable steps to reduce any obstructions to the management functions of the right to manage company) but the Court of Appeal has not yet had the chance to consider the position so that point might be tested soon.
Considering the political opposition to building on green belt, the prevalent NIMBY attitudes to new developments across the country and the shortage of available housing, it is not surprising that the government have encouraged building “upwards” as part of the solution to the housing problem. The planning system is often one of the most obstructive elements of new developments so it is also understandable that the government considered that the way to achieve this was to loosen planning restrictions. However there are numerous other issues that need to be considered in relation to such developments. So, whilst the loosening of planning restrictions will certainly provide developers with some great opportunities, it is essential they are well-advised on the potential issues from the outset.