November 28

PDR extension brings confusion

Making office-to-residential permitted development rights permanent creates fresh uncertainty for lenders and insurers
Developers up and down the land were breathing a sigh of relief after the announcement on 13 October 2015 of the government’s intention to extend office-to-residential permitted development rights. Insurers, meanwhile, were not quite so quick to celebrate.

The original office-to-residential legislation allowed the conversion of office buildings to residential within a period of three years, expiring in May 2016. There was a lack of clarity, because the legislation was not specific as to what was required to be completed by the May deadline. There had been a number of conflicting views. Some commentators thought that everything needed to be complete, effectively to a point equivalent to practical completion under a building contract. Others thought that the conversion could be completed sectionally on a multi-floor development so that one could finish and sign off each floor without risk of enforcement. Others thought that at least one flat on each floor needed to be substantially completed.

A number of funders had been reluctant to lend where it was not clear that the whole conversion would be completed by the May 2016 date or, indeed, given the above, exactly what works had to be completed to avoid enforcement, post May 2016.

As is so often the case, specialist insurers stepped in to fill the gap between developer confidence and funder caution. Insurance could, broadly, cover the cost of legal proceedings to challenge any enforcement, the cost of reinstatement, a lender’s loss of interest and the loss in market value between the original valuation/purchase price and the value after enforcement.

In many cases that dealt with the developer’s funding issues but there was still uncertainty as to the effect on sales, as a cautious purchaser may not have been quite as happy as a commercial lender to rely on that insurance. Because there was no clear cut understanding of what had to be done by the May 2016 deadline, purchasers were going to have to take a view, but taking a risk that a flat might be turned back into offices (even with the benefit of an insurance policy) is a different kettle of fish to worrying about historic restrictive covenants.

However, until mid-October, insurers felt that they knew what the risks were and were fairly confident in their ability to assess potential losses in relation to any particular scheme should enforcement occur.

Things are no better now

The recent government announcement has changed that. At first one might think that developers and indeed insurers were home and dry and that insurance was no longer needed but, on further examination, it is not quite so straightforward. Looking at the government announcement on office-to-residential permitted development, it says:

“These permitted development rights will now be made permanent. In addition, those who already have permission will have three years in which to complete the change of use – ending potential uncertainty for developers and enabling the development of much needed homes.”

So far, so good. Three years to complete the change of use, but from when? It could be the date of the announcement, 13 October 2015. Most likely it will be the end of May 2016, when the original permitted period expires. It could be the date that the new regime comes into force, which, if is to be by way of new legislation, might take months. The current legislation will be by way of amendment to exist in provisions, but this is not clear. This lei to uncertainty in the meantime, the vet thing the government said it wanted to avoid.

And in terms of future permitted development rights, there will now be a right to demolish and rebuild, rather than just convert. This right will be“subject to limitations and prior approval by the local planning authority” and “further details will be provided in due course”.

We have little idea at this stage what is meant by “limitations and prior approval” and how much scope is to be given to local authorities to request, say, affordable housing, or section 106 contributions for new permitted developments.

So the government announcement, while aiming for more clarity, has confused the position further.

Insurers to the rescue

Out in the real world, developers mid- scheme are breathing a sigh of relief as, given the previous looming deadline, any extension is better than none. They will already be on the lookout for buildings to demolish where previously the planning risk may have been too great. There will be a lag as lenders will be askedto consider permitted development opportunities before the ink is dry on the new legislation, and again the insurers will be asked to plug the gap. The insurers are back in the market and we have yet to see how they are covering the new risks.

Some lenders, once they work out that everything is not what it seems, will no doubt sit on their hands until they know what is actually proposed.Some will be prepared to take the risk with the developer and others will want the comfort of insurance. Purchasers will no doubt want to wait until the ink is dry on the legislation. Not quite the end to uncertainty that the government wanted.