Pitfalls of converting commercial to residential

Commercial property owners faced with increased vacancies, high business rates for unoccupied property and a housing shortage may consider converting commercial premises to residential units. Katharine Barney explored this topic in some detail in last week’s issue. However, such conversions are not always straight forward. Here are some issues to consider.

Is planning permission needed? 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”. Legislation will be introduced to back up this principle but authorities will have an opportunity to seek exemptions where they believe such rights will have an adverse economic impact. Full details of the legislation have not yet been published.

Remember, this only deals with change of use - planning permission is likely to be needed where the conversion involves building works.

What about the Community Infrastructure Levy? 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 planning permission is granted. If it has, the Community Infrastructure Levy could be triggered even if the 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 that the government recently announced. Also, consider building materials - covenants requiring conversions to remain in keeping with the surrounding area are common and this may have cost implications.

Consider location Is there 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 (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 costs and time implications). A 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 - these could impact on 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? Do new ones 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 before the contract is entered into. This may, however, lead to a price increase that could make the conversion unviable (as the seller may need to provide for a possible claw back claim from HMRC).

Consider on-going 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 while 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 require on-going management.

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

Martin Codd is a partner at Penningtons Solicitors