26 May 2022
Lending Focus - May 2022 – 1 of 6 Insights
In the latter part of 2020, the English planning law's Use Class system saw a series of changes aimed at providing greater commercial flexibility for businesses, including the creation of the new umbrella “Commercial, Business and Service” use class, known as Use Class E, and associated permitted development rights. This was spurred by the increasing need for businesses to respond quickly to changing market demands and shifting consumer behaviour with the rise of online shopping – the move towards a digital high street being magnified by the COVID-19 pandemic.
This was just the beginning, with flexible, mixed and 'meanwhile' uses most recently being a strong theme in the new London Plan adopted in March 2021 (the London Plan). Flexible developments are now more fact than fiction, and with these come new challenges, but also new opportunities, for developers and lenders alike.
Use Class E promotes the creation of more flexible mixed-use developments, as any changes of use which fall within this Use Class will not require planning permission.
So, the creation has widened the scope of uses which now fall within the same Use Class, and includes uses such as:
Under these rules, a Commercial, Business and Service building could transform from a gym, to a restaurant, a day centre, an office and then a gym again without any involvement from the local authority. It can also be all of these things at once – think an activewear shop with a gym studio and smoothie bar with co-working space by day, and a small plates restaurant by night.
Use Class E also benefits from new PDRs, with Class MA permitting the change of use from Class E to Class C3 (dwellinghouses) being a notable focus of the legal press over the past year or so. Under this PDR, a building with Use Class E can change to Use Class C3 subject only to prior approval of the local authority, which is a much more 'light-touch' process when compared to full planning applications. These PDRs were introduced with the aim to grant further flexibility to developments, particularly in relation to responding to housing need.
Overall, this merger of a number of use classes into the new Use Class E not only opens up the existing built environment and makes it responsive to change in market demand: it further allows disused buildings to be quickly repurposed, providing more opportune land for developers.
The importance of flexible and mixed space is also recognised by the London Plan, which encourages a mix of land uses, as well as co-locating different uses to provide communities with a wider range of services and amenities. The recognised benefits are very significant, from providing more homes to maximising job opportunities and fostering a community.
Boroughs are also encouraged to support opportunities to use vacant buildings and land for ‘pop-ups’ especially for alternative cultural day and night-time uses. We have seen such flexible and temporary 'meanwhile' uses all over the Capital reaping the benefits of disused space mid and post-pandemic, with success coming in the form of infinite queues outside places like Vinegar Yard, Pop Brixton and Peckham Levels. 'Meanwhile' uses are nothing new, though in practice, the preference to find the 'right occupier' coupled with inflexible planning uses made temporary uses difficult to put in place. We believe that should now be increasingly a thing of the past with the introduction of flexible use classes and the need for flexibility in less certain and faster moving times. Indeed, the swathes of opportunity offered by meanwhile uses are recognised and now encouraged by policy.
Flexibility is not without limits.
Planning permissions relating to existing use classes now replaced by Use Class E may not benefit from the full flexibility Class E offers if they are subject to conditions which narrow their use.
The new permitted development rights may also be fettered, as local authorities are at liberty to disapply them in the usual way through Article 4 directions. This can only be done in limited circumstances where it is 'necessary to avoid wholly unacceptable adverse impacts’ and where it is based on ‘robust evidence and applies to the smallest geographical area possible'. We have seen this in a number of boroughs already – the London Borough of Camden has withdrawn the right to change from Use Class E to C3 (dwellinghouses) for parts of the borough 'where there exists strong justification' for the withdrawal. A consultation regarding the same by the Royal Borough of Kensington and Chelsea closed in the latter part of 2021, seeking to withdraw the PDR for the whole borough (though the Council appears to have been asked by the Secretary of State to reconsider this proposed Direction). Article 4 directions are also encouraged in the London Plan, particularly where boroughs wish to ensure that their office functions are not undermined by the office to residential PDR.
On a commercial level, the move from one practical use to another within Use Class E (which does not require planning permission) does not cover any external works to the building (which would generally require planning permission). Developers will therefore need to be creative if they would like to market a restaurant within a building which was once an office without any external alterations.
Further, there may be reputational risks with changing uses quickly and without thought, as there are public concerns around unchecked developments resulting in a confused and inconsistent high street. In any event, developers still have an interest in ensuring any proposed scheme is viable and will attract footfall, which is unlikely to be achieved through misguided and rushed development.
With flexibility comes some uncertainty for lenders. Developers should be alive to the fact that when it comes to their financing arrangements, lenders seeking more certainty are likely to push for control through contractual arrangements by way of representations and covenants relating to land use, meaning negotiations around existing and proposed real estate uses will require more time, attention and cost.
This flexibility has also brought opportunity and cost-saving on other fronts. Developers will be able to carry out quicker and more targeted regeneration of sites which were previously disused, and can respond to changing market demand to attract footfall on existing sites, without having to go through the planning system in the usual (and sometimes time-consuming) way.
And finally, looking across London and with the push towards 'meanwhile' uses on a Spatial Plan level, developers will be able to benefit from income-generating activities while their larger development proposals are moving through the planning system, simultaneously regenerating their site and creating community interest in its long-term use.
For many lenders, these planning reforms may well be a blessing. Those that have financed retail assets that are now struggling may find the wider-scope Use Class E throws their borrowers a lifeline. Rethinking tired offerings and repackaging them as shopping destinations may well be sufficient to restore profitability to some retail clients.
Thinking more radically, change from Use Class E to C3 will help other borrowers and in turn, the lending entities that support them. It is now abundantly clear that UK banks are trying to reduce their lending commitments to the retail sector, whose woes are well-publicised and have only been exacerbated by COVID-19 and the stampede to online shopping. Existing borrowers with a larger footprint such as John Lewis are now contemplating change of use from retail to resi. Lenders are likely to welcome the increased flexibility around PDRs as a positive outcome for borrowers and lenders alike.
In the medium term, changes to Use Class E will stimulate business, as new developers get going and existing developers launch more projects. This will create more funding opportunities and a larger potential borrower client base for lenders in the Real Estate space.
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