Impact of Use Classes Order changes on leases of commercial property

England

The Government has published legislation to bring sweeping changes to the Use Classes Order for England (see our related Law-Now), which take effect on 1 September 2020. References to uses and use classes in the General Permitted Development Order remain as currently defined until 1 August 2021.

What will be the impact of these changes on existing and new leases of commercial property and their provisions governing what the premises can be used for?

Existing leases

If the use permitted by the lease either does not refer to the use classes order (for example, the permitted use is simply offices) or it refers to a use within a class of the use classes order as at the date the lease was entered into, then there is no change in the extent of the use permitted by the lease. This is because the extent of the use was crystallised by referring to what was in the use classes order when the lease was granted. Most leases adopt this approach. This is beneficial to the landlord because it controls what the premises can be used for. However, it may be detrimental to the landlord if there is a rent review.

An assumption in the rent review provisions that refers to an old use classes order may mean that the hypothetical tenant would pay less rent, because the hypothetical permitted use referring to the old order may be a narrower use than what may be offered in comparable new leases at the time of the review that refer to the new use classes. It may be, however, that new leases adjust their approach to the extent of the permitted use in the light of the new use classes order so the difference is not material, but the possibility cannot be discounted.

On a statutory renewal of a lease referring to the old use classes, there will be some uncertainty as to whether and how a court would agree to update this to the equivalent new use classes, although updating for changes in the law is a legitimate ground for seeking a change to existing terms on a renewal.

If the use permitted by the lease refers to the use classes order as amended or replaced from time to time, the change in the use classes order will potentially impact on the use permitted by the lease. Take the following example of a permitted use definition:

(a) the retail sale of particular items; or

(b) any other retail use complying with the Landlord’s retail and tenant mix policy and within Class A1 of the Schedule to the Town and Country Planning (Use Classes) Order 1987 (as amended or replaced from time to time) as the Landlord may approve;

When the new use classes order takes effect, the reference to any other “retail use within Class A1” becomes a reference to a retail use within new Class E. Class E is a general “commercial, business and service” use class, which absorbs previous classes A1, A2, A3, B1 and parts of D1 and D2 and covers retail, food, financial services, indoor sport and fitness, medical or health services, nurseries, offices and light industry. While the landlord in the example still has to approve the new use, often they must not unreasonably withhold their approval.The effect of the change is that there is a potentially wider set of permitted uses, albeit the permitted use definition mentioned limits it to a retail use complying with the Landlord’s retail and tenant mix policy. Landlords will also usually seek to control tenant applications for planning permission for change of use by requiring their consent to be obtained first, but with the change in the use classes order, there may be a question as to whether planning permission is required for the new use. The rent review provisions may also be impacted by the effect of the change in the use classes order on the permitted use.

New leases

For leases being granted going forwards, consideration needs to be given to how they cater for the new use classes order. The greater breadth of the new order may lead to a more focused permitted use under the lease with more extensive landlord control over change of use, but care will need to be taken by landlords to avoid the permitted use being too narrow because of the potential adverse rent review implications. It seems quite possible through careful drafting to achieve an equivalent to what is included in existing leases.

The new use classes order introduces the concept of a “part use”, allowing a change of use of part of a building, use or planning unit to an alternative Class E use without permission and landlords may introduce contractual controls on that. The potentially greater variety of uses within particular new use classes may make it appropriate to include an obligation on the tenant (where landlord’s prior consent is not required) to inform the landlord if the property's use or any part of it changes and/or keep the landlord informed of the precise current use or uses to which the premises are put.

Conclusion

While many existing leases refer to the use classes order as at the date of the lease, some will not. Therefore, it is important to examine and seek advice on existing drafting to understand the implications of the changes in the use classes order. Also carefully consider the approach to the new use classes in leases being granted going forwards.