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Airspace Development Schemes

Airspace Development Schemes

Since August 2020 freeholders have been able to develop the airspace above the roof of the building without full planning permission under permitted development rules.

This new rule allows up to two additional storeys, where the existing building consists of two or more storeys; or one additional storey, where the existing building consists of one storey.

The initial building must have been constructed between 1st July 1948 or after 28th October 2018. For the most part and for comfort, prior approval will be sought first.

Freeholders (which we shall describe as the building owners in this note as that description could include a leaseholder with a pre-existing interest in the rooftop) with appropriate buildings ripe for such development will want to consider how they can maximise the value in their rooftop. If they feel bold or have prior experience then they might look to build the extra storeys themselves.

If not, they will look to other options.

The easiest and cleanest method is to sell their interest to a third party who does have the relevant expertise and financial backing to build the extra storeys. However, this may mean selling the reversion to pre-existing tenancies which will mean a loss of the ground rent income. The benefit of this route is that the building owner does not have to police the development and mediate between a new rooftop leaseholder and the existing leaseholders who may not welcome development. A sale of the building owner’s interest might either mean selling their property or, if the property is held by a company, selling the shares in that company.

Alternatively, rooftop and airspace leases are becoming more common. Coupled with other necessary rights such as licences to alter and scaffolding rights, a grant of a lease to a developer creates a leaseholder of that developer and grants the ability for the developer to build on the rooftop.

An alternative is that the building owner might seek to grant a developer rights to build the extra storeys. If this method is used then thought will have to be given as to how the developer will receive the financial benefit of having done so. One option is securing a joint venture agreement prior to the development in which the building owner and the developer agree what will happen with the additional storeys once constructed and how the profits will be split. Alternatively, the building owner and developer might consider a promotion agreement directing that the dwellings created by the additional storeys are marketed, sold and the profits dealt with in accordance with that agreement. Ultimately, if the developer has no proprietary interest in the rooftop, it will have to be the building owner that grants any leases to the end user.

Such a variety of options creates opportunity for the contracting parties to decide how to structure the deal financially. A developer might pay the building owner for the deal in advance of construction or sale or, alternatively, the building owner may defer payment by agreeing to be paid out of the sale proceeds.

If you have any questions on how to structure a rooftop development deal, please contact Meaby & Co at nc@meaby.co.uk or on 020 7703 5034.

We also have a website dedicated to this area of law: Rooftop Law

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The Impact of the Landlord and Tenant Act 1987 on Rooftop Development

The Impact of the Landlord and Tenant Act 1987 in the context of Rooftop Development

The Landlord and Tenant Act 1987 requires a landlord, in the event that they decide to sell to their interest on the open market, to offer it to the existing leaseholders before any sale to a third party.

Ownership of the freehold by residential leaseholders can be a good thing, of course. But if the leaseholders do not want to or cannot buy their freehold then this can cause delays in commercial sales.

The existing leaseholders’ right of first refusal applies provided that there are two more residential flats in the landlord’s building held by qualifying leaseholders and, of those flats, that they constitute more than 50% of the flats so contained. However, this obligation does not apply if the total extent of the commercial part of the building is more than 50% of the internal floor area.

The non-residential status of parts of the building might include an intention to convert from residential to non-residential in the future and this may be a way to circumvent the right of first refusal procedure although this would probably take longer than the right of first refusal process as only two months need to expire from receipt of those notices.

There are various exempt landlords but these are unlikely to be private landlords as exemption includes bodies such as housing trusts.

Avoidance techniques include putting a head lease in between the freehold and the leases of the residential long leaseholders but this requires advance planning. It is worth bearing in mind that the permitted development rights for rooftop extensions apply to buildings constructed between 1948 and 2018. Given that any existing residential flats are likely to have already been sold, unless thought was given before the sales of the residential flats to qualifying leaseholders then it is likely that the right of first refusal process will need to be followed as earlier blocks are unlikely to have a head lease in place to take advantage of this loophole.

Other exemptions include disposals by way of a gift to members of the landlord’s family. So, for example, if it is proposed that there is to be a lease of the rooftop and airspace and the reversionary interest is owned by a private individual than that private individual might grant a lease to a family member and that family member might assign it to the proposed developer.

Another loophole is the grant of a rooftop/airspace lease to an associated company of landlord. This is similar to a transfer to a family member before selling on to the third-party. However, both this and the grant of a head lease that require advance contemplation of the sale of the landlord’s interest.

We are aware that sometimes landlords set up associated companies years prior to any sale to satisfy the requirement that the company must have been an associated company of the landlord for a period of two years.

Alternatively, if a company, a landlord might consider selling the shares in the company but this would only work in practice if that company only held that one asset (unless a portfolio sale is intended).

Some might feel that if the tenants accept the offer made by the landlord under the right of first refusal process then does it really matter who they sell to? However, most rooftop and airspace leases (and this is the type of transaction envisaged by this note) would be far too complicated and expensive for the existing leaseholders to consider taking it up. Very few residential leaseholders fancy themselves as developers (although never say never and we saw one instance of this in 2021). Generally speaking and in reality: not many residential leaseholder would want to pay the sort of premium that a developer would pay to the landlord to thwart that development.

 

If you have any questions on right of first refusal, please contact Meaby & Co at nc@meaby.co.uk or on 020 7703 5034.

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