Change of Use in challenging circumstances

With a number of recent changes to planning policy around Change of Use, we have been considering how developers are weighing up their options for managing risk. When it comes to permitted development this could be an easy option in some cases, but after receiving a recent enquiry from a developer, we examine other factors around Planning and Change of Use in our latest case study.

The scenario

Recently we were approached on behalf of a developer who was due to submit a planning application to the local planning authority for building works and change of use. The developer wants to change the use of the property to a retail counter, and extend the existing building to store the goods they wish to sell from the retail counter.

Why were we involved?

The new development application is for a retail counter, but there is a ‘restrictive covenant’ on the legal title, which has been imposed by the local authority stating that the property and land can only be used for research, development and industrial processes (Classes B1(c) and B1(b) of the TCPA Use Classes Order). The retail counter would include storage and distribution of goods and would not fall within the restricted use class. The developer and their lawyer were concerned that by submitting a planning application to extend the building, the local authority would be alerted to the fact that they were going to be in breach of the restrictive covenants, which may prevent the project from going ahead.

What is the solution?

We are able to provide an insurance policy, which enables the developer to manage the financial risk of submitting their planning application for the extension and change of use of the building.

We presented the client with the two options, both of which would limit the developer’s financial exposure. These options provide cover for diminution in market value of the site if the covenants cannot be dealt with in a way that would enable their retail counter to trade. In addition, cover extends to abortive costs, such as architects, surveyors, legal fees etc. and cost of works that the developer is contractually liable for, which relate to the building being used as a trade counter.

Financial certainty for the developer around the revised use of the building was key to the success of the project:

Option 1

The developer pays a one-off premium for cover with no excess. This option excludes the costs of the developer negotiating a settlement fee with the local authority to release the covenants (the cost of a settlement could range from nominal consideration to a large figure). The policy cover is for residual costs and losses in the event that the developer is unable to reach settlement or discharge the covenants and the trade counter is unable to trade as a result.

Option 2

The developer pays a premium and an excess. Should the local authority come forward to assert their right to enforce the covenants we ‘the insurer’ would step in to defend the developer’s use of the land, negotiate a release of the covenants with the local authority, or apply for discharge or modification of the covenant. The developer would be liable to pay the excess, which would in a normal negotiation form part of the settlement fee payable to the local authority. Any costs over and above the excess are covered by the insurer, as are losses in the event that the developer is unable to reach settlement or discharge the covenants and the trade counter is unable to trade as a result.

Why did they come to us?

The legal representative for the developer approached us directly after they had sourced quotes from other insurers, but the options provided were on a post-development basis i.e. available once the extension was in place and the retail unit had been trading for 12 months, thereby breaching the Restrictive Covenant for 12 months. They were also dependent on the developer having made or received no approach from the local authority. These alternative terms available from the rest of the market meant the client had to take the risk on themselves in the first instance, leaving them open to financial risk and uncertainty.

We were able to provide the developer with a practical solution, giving them choice according to their risk appetite, and managing their financial exposure on this site.

Whether refurbishing, financing, developing, buying or selling, Legal & Contingency is here to support your current and future real estate projects.