Repurposing real estate to achieve net zero

Out-Law Guide | 06 Sep 2021 | 9:12 am | 3 min. read

New buildings are nearly always more energy efficient and sustainable than the buildings they replace but developing them involves generating significant carbon emissions. In some cases, it may be more sustainable to look at ways of repurposing redundant buildings and giving them a new lease of life.

For example, a town centre retail asset could be converted into use for residential, leisure or office purposes, or an industrial unit could be given a new lease of life as a “dark kitchen” or for use for life sciences purposes. In many cases, the viability of repurposing an asset will depend largely on the location and physical characteristics of the individual building, but there will be legal considerations to take into account when seeking to implement any repurposing initiative.

Legal due diligence

Before spending time and effort on developing proposals for repurposing a building, an owner should investigate whether there are any legal issues which need to be taken into consideration.

Thought should be given to:

  • Title and headlease issues – are there any restrictions or covenants in any title or head lease documents?
  • Occupational interests – will it be necessary to terminate any existing occupational interests and, if so, what is the vacant possession strategy, particularly if any tenants have security of tenure under the Landlord and Tenant Act 1954?
  • Planning – is an alternative use permitted under the existing planning permission? In particular, is there an opportunity to swap between uses – especially in light of the new Class E? Are there opportunities to use permitted development rights to introduce other uses or carry out alterations works without the need for planning permission?

A prudent owner might ask their lawyers to prepare a development constraints report that considers such issues at an early stage as this will help shape their proposals and establish whether a viable scheme can be implemented.

Implementation

There are planning and construction and procurement issues from a net zero perspective to navigate, and many of these will be relevant to the implementation of a repurposing scheme.

Other issues that will be particularly relevant in the case of repurposing include:

  • Building safety – this is particularly relevant where repurposing involves making assets available for residential use. Repurposing, by its very nature, involves older buildings which may not meet modern building safety regulations. The building owner should consider building safety and how the regulations apply across the whole asset and not just the residential parts;
  • Planning – thought should be given to what the right approach is to securing any necessary planning permissions for the scheme. An owner’s lawyers can help advise on a strategic approach to securing the necessary consents or avoiding the need to submit a planning application altogether.

Funding and structuring

A repurposing project may involve multiple landowners as well as, in some cases, local authorities. Accordingly, there is a range of funding structures that could be looked at, each with their own legal and practical considerations.

As well as developing a structure and strategy that works for the implementation of the project, it is important to anticipate potential exit routes to ensure that whatever structure is used will facilitate a smooth exit at the appropriate stage.

Questions to consider include:

  • Funding – is there an existing funder who will need to be consulted and whose consent will be required? How will any works required to implement the repurposing project be funded? It may be that green financing arrangements could be an option.
  • Other parties – if other parties are to be involved, the terms of any joint venture or other agreements will need to be considered carefully. How will the parties collaborate to bring the project to fruition? Who will have control over the project and how will decisions be made? What financial or other contributions are to be made and how will the parties share the upside of any returns? What will the exit arrangements look like? Such issues are usually ironed out during the legal negotiations, but it is often helpful for them to be considered at an early stage as this will help shape future discussions.
  • Procurement – if a public sector body is involved, as may be the case on the repurposing of a town centre shopping centre, for example, thought will need to be given to the impact of the public procurement rules. Legal experts will be able to identify whether a scheme does fall within the procurement regime and guide an owner through the process if it does.
  • Tax – there are a number of tax implications that will need to be taken into consideration as part of a repurposing scheme. In particular, there can be issues relating to VAT recovery in the case of change of use or residential development. Structures can be employed to mitigate the effects of irrecoverable VAT on land and works. The timing for implementing these is important, so this should be considered at the outset.

Considering these issues at an early stage of a repurposing project will help a building owner optimise the implementation of the scheme and achieve the best outcomes for all involved.