Nikki Bensoor and Julian Hindmarsh take a look at the potential dangers of ignoring planning and lease restrictions and share some practical advice on how to get it right.
A breach of planning can be serious and may result in enforcement action from the Council, while a breach of the user clause in a lease may result in claims for forfeiture of the lease. It is, therefore, vital that operators think carefully about how their business is structured and how they plan to operate going forward to accommodate changing consumer behaviour, whilst also remaining on the right side of planning and landlord and tenant law.
The issue: use clauses confusion
User clauses in leases in the restaurant industry may not reflect the service the restaurant provides or contain the flexibility to enable a change in use to keep pace with the operator’s changing business, so breaches are all too common. For example, Pret a Manger may sell cold food under Use Class A1 (retail), but also have seating and serve hot food, which falls under Use Class A3 (restaurant and café). The rise in popularity of takeaway services such as Deliveroo could be argued as pushing traditional A3 restaurants into A5 hot food takeaway. These takeaway concepts often form a big part of a restauranteurs' businesses. It could be very difficult if restaurants would be forced to stop this takeaway offering if they do not have the requisite A5 Use Class. The challenge in classifying the use of a property lies in the fluidity of the planning regime and the varying factors, which need to be taken into consideration, such as the primary or ancillary use of the premises: no two cases are the same.
Councils can also decide to designate streets or neighbourhoods in special policy areas, depending on what they want to see on the high street. If a Council decides it needs more A1 shops, for example, then it is going to be more relaxed on planning for A1 uses (which a coffee shop may fall into). A Council may permit a café such as Starbucks to operate under A1 retail, but come down hard on an occupier for operating outside the lawful use when their business begins to veer into A3 Use and starts to impact on the amenity or character of a neighbourhood, which may result in an enforcement notice. Councils also need to consider objections by local residents at the application stage, but only insofar as these relate to material planning considerations, for example, impact on residential amenity such as noise, smell or traffic impacts.
"There is an assumption that retail is A1 and restaurants are A3, but there are some overlaps such as cafés."
Tarek Malouf, managing director of The Hummingbird Bakery
The problem with the use classes system is that it is not transparent or straightforward. According to one of our clients, Tarek Malouf, managing director of The Hummingbird Bakery in London has first-hand experience of what is involved. He says: "There is an assumption that retail is A1 and restaurants are A3, but there are some overlaps such as cafés."
Mr Malouf’s advice to other operators trying to avoid acting in breach of user classes is to always have a dialogue with the Council to explain how your business operates and whether it can operate from the premises under its present planning position. He would like to see a register so that operators can confirm what use classes the cafés and restaurants are operating under in an area.
Clearly, it can be confusing, so what can businesses do to ensure they are not in breach of the operating use under the planning regime and the user clause in their leases?
Firstly, operators should do their homework before taking on new premises, raising relevant enquiries and even getting in touch with the planning authority to see what use class the premises currently benefits from. Further enquiries may be necessary to ensure that not only does the use benefit from planning permission, but that the permission has been lawfully implemented. Where there is no planning permission the use can become established where it has been continuous and uninterrupted for at least 10 years. Prospective occupiers need to know how the premises have been used and how long the current occupier has been in situ.
"Always have a dialogue with the Council to explain how your business operates and whether it can operate from the premises under its present planning position."
Tarek Malouf, managing director of The Hummingbird Bakery
Planning due diligence
Due diligence on the planning should be carried out as soon as possible, as any issues need to be ironed out before agreeing to sign on the dotted line. There is nothing to stop the occupier checking the permissions on the Council's website or starting a dialogue with the Council, although before taking this approach it needs to be considered that this may also alert the Council to any potential breaches. The advantage of bringing forward due diligence is that the operator knows exactly where they stand from an early stage and whether the premises fits in with their business use. If the business needs A3 use to operate, but the premises does not have this as an operating planning consent, then the operator may need to make the tenancy subject to obtaining planning permission for change of use, which might affect their timescales and the overall cost of the transaction. It may even prove to be in contradiction with Council policy and prove too difficult to obtain, thus bringing down the entire transaction. It is, therefore, crucial that any planning concerns are picked up on at an early stage in the process.
"An operator should take time to really understand their business and their future requirements"
Nikki Bensoor, Associate: Commercial Real Estate
As well as ensuring the use of the premises is in compliance with planning, an operator should take time to really understand their business and their future requirements by ensuring that the user clause contained in their lease is a broad one, covering the premises for current use and permitting change of use not to be unreasonably withheld or delayed by the landlord. When applying to change use, the occupier will ordinarily need to make an application to the Council, but the landlord must also give permission so it is important that the user clause is drafted so that it is wide enough. However, it is worth bearing in mind that if the premises benefit from a broadly drafted user clause this may have an impact at rent review because it may allow the premises to be valued as an alternative use which commands a higher value. In the absence of flexibility in a user clause a landlord may charge a premium for changing the user clause so including flexibility at the outset is sensible.
When operators are considering how to operate their businesses from desired premises Mr Malouf advises caution: ‘There are practical considerations to bear in mind, such as the fact that A1 locations may not have the necessary ventilating duct out of the premises to act as a restaurant (A3).’
Restauranteurs need to check they have the requisite permission for A3 use and for extraction from the premises at the outset of the transaction. It is clear that it is not just use that requires planning permission – there are other operational elements requiring planning. For example, any external works such as installing ventilation ducts will require planning permission or could be secured by way of planning condition. It is important to consider therefore not only the change in use, but also the implications of any planning conditions and that the premises can be operated in compliance with these.
"Restauranteurs need to check they have the requisite permission for A3 use and for extraction from the premises at the outset of the transaction."
Julian Hindmarsh, Partner and Chairman of Real Estate
While user clauses and use classes can seem confusing, first and foremost operators must remember that the user clause in the lease and the lawful planning use of the premises are separate and may not always be aligned with one another. Operators must ensure that they aren’t in breach, and won’t be in breach in the future, of either the lease or the lawful planning use. It is important to check the operating use of the premises in planning terms at an early stage and consider the use clause contained in the lease to check they correlate with one another, and also with the operator's intended use. Whether the business has a lease assigned to it and accepts the terms as they are, or opts for a fresh lease and negotiates from scratch, it is important to ensure the premises can be used in the way the operator desires from the outset (at heads of terms stage if possible) and taking planning advice at the beginning, rather than trying to correct any issues later.
This article originally appeared in Estates Gazette.