Use classes must be considered by anyone entertaining a new lease, both tenants and landlords. Both the local authority and the lease itself can define what kind of use a tenant can engage in. We have included a case study of a recent case in which our senior commercial property partner, Robert Galloway, acted and this was an issue. We have also included a guide to the principles of class uses.
Class use example: Our client was a major security company dealing with supply of cash to cash machines. The premises was a purpose built cash storage facility which held up to 600 Million GBP in untraceable cash at any one time. The Planning Consultants instructed were of the opinion at the outset that the usage was B8, warehouse and distribution. The goods stored were cash so the local authority stated that it was sui generis, an exception, and therefore not a class B usage. This could have resulted in the landlord demanding a higher rent in the lease which was still under negotiation. Robert Galloway’s position in negotiation was firm. He stated that he had instructed his client to walk away from the deal unless the new landlord agreed to enlarge the permitted use provisions in the lease. The landlord capitulated, and the lease was signed on terms favourable to the client.
Use Classes – an Introduction
Within any commercial property transaction, it is important to be aware first of the existing use allowed by the Planning Acts, and any changes that may be required to acquire a new Use Class. Use Classes are determined under the Town and Country Planning Use Classes Order 1987, as amended in 2006. This order introduces and classifies a number of specific uses, e.g. a retail shop, under one or other of the Use Classes. In some cases, a property may appear to have one use class, but turn out to have another. An example is an Estate Agent in a shopping centre or shopping parade. This would be classified as class A2 (financial services), even though the majority of its neighbours on the same shopping area would be under class A1 (retail shops). In a shopping centre, it is quite common to see premises from each of four or five separate use classes. This is especially important because if the correct enquiries about whether the type of business can be carried out at that premises, a new business can face being shut down, or more likely there business being hampered or delayed after having opened while waiting for a reclassification from the local authority. Of course, if a lease has been signed before this point, the fact that the local authority will not allow the business to operate during that period does not prevent the landlord from claiming the rent.
Reclassification of Use Classes Permitted by the Local Authority
Generally speaking, a planning consultant will make the application on behalf of the client to the local planning authority (lpa), and will not need the assistance of the lawyer unless the classification is particularly unusual or the project very large (See case study above).In most cases, it is relatively easy to obtain a change from one class A use to another class A use, for example from a Travel Agent (A1) to an Employment Agent (A2).
Use Classes for New Leasehold Premises permitted by the Landlord
As far as use classes are concerned, a commercial property lawyer’s input is much more important when a business is dealing with leasehold premises. Where only one use class is allowed in the proposed lease, but a prospective tenant wants to run a business from that property which is under a different use class, a property lawyer should be particularly aware of this danger when reading the landlord’s proposed lease. If there is such a problem, a good lawyer should negotiate for flexibility as to use with the landlord’s solicitors. Where one use is intended by the business at the outset, a lawyer should still ensure that other form of use within the same class (e.g. class B) cannot be reasonably withheld by the landlord. There can, however, be an impact on rent reviews if the use is too wide. This can be more relevant for longer leases with rent reviews (e.g. 25 year lease with 5 yearly reviews). A balance has to be struck between the possibility of increased rents as against the need for tenants to keep their options open as to flexibility of use in the long term.
Changes to Permitted Use in an Existing Lease
Normally, an existing lease will provide a fairly strict category of permitted use. If, therefore, you wish to institute a different use, then the landlord’s consent must be obtained, and that consent must be contained in a formal license, taking the form of a sealed document. For example, if a business is selling its lease to a restaurant, it may have to not only obtain a license to assign the lease, but also have to obtain a license for a change in use class.
The lease will generally make reference to whether the landlord has to be reasonable (this is an objective test meaning based on what the ‘average person’ would think is reasonable) in granting a change of use or not. Whether a landlord may want to restrict use may depend on what effect a change may have on other tenants or the property’s value etc. If there is no mention of a landlord having to be reasonable in considering a request for a change in class uses, then the landlord has the right to say no to any request by the tenant. With this in mind, it is usually a good idea to have your commercial property lawyer read, advise and negotiate on the lease on your behalf at the outset if you are a new tenant. If you are a landlord, the goal is to make the lease more restrictive, without being seen to ‘stitch up’ the client, of course while maximising rent.
A well negotiated lease at the outset can ensure that the client is protected. A commercial property solicitor’s job is to be firm in negotiation and dogged until terms are agreed which his client is happy with. Sometimes clients do not appreciate how important this can be at the outset, and it is they, not their lawyers who weren’t aggressive enough on their behalf, who suffer the consequences.