Mixed use developments in disrepair

14 Sep 2016

Mixed use buildings, developments and estates, encompassing both residential and commercial units, have become more widespread. They however bring with them unique issues which a freeholder or those managing such units need to be aware of. In addition to issues over the apportionment of service charges between the residential and commercial units, disputes can arise over noise, smell and other nuisance emanating from the commercial units affecting the residential units and the financial impact on the commercial units of the exercise by the residential leaseholders of their statutory rights to buy, manage and enfranchise. This article will consider some of the issues arising in disrepair cases involving mixed use buildings.

What can a residential leaseholder faced with a leaking roof or a load bearing wall in a dangerous condition do where the freeholder fails to fulfil their responsibility for maintaining and repairing the roof or wall? How can the leaseholder in a mixed-use development or building ensure that adequate funds are available to carry out the necessary repairs?

Those in long leasehold residential flats will pay service charges apportioned in accordance with their leases. This will usually include a provision for contributing to the cost of repairs through the service charges. What practical steps can the tenant take if the freeholder fails to undertake those repairs so that the building becomes dangerous?

The freeholder in a mixed use development which contains residential, commercial and social housing units, will be obtaining rent and owe different obligations to each type of unit. For example:

  • The social housing tenants will pay less than market rent and may pay a service charge. They will enjoy the benefits of s.11 of the Landlord and Tenant Act 1985 and their landlord will be expected to maintain and repair the structure and exterior and various installations within the demised premises.
  • The leaseholders on long leases will pay a low rent but will pay a service charge, which may be a fixed charge or described as a fair and just proportion, to cover various services relating to the maintenance and repair of various parts of the building.
  • The commercial tenant will typically have a shorter lease and pay market rent in relation to the unit. Such tenants are also likely to have full repairing covenants but may be required to pay a contribution towards the costs of repairing the building.

If a freeholder is in breach of the covenant to repair and as a result the leaseholder has suffered loss, the leaseholder is entitled to compensation in the form of damages. When determining the quantum of an award of damages, the court will attempt to place the leaseholder in the position he would have been in if the freeholder had performed the repairing covenants properly.

In Moorjani v Durban Estates Ltd [2015] EWCA Civ 1252, the tenant was held to be entitled to recover rental value and repair costs for damages for loss of amenity (but not personal inconvenience, discomfort or distress) in relation to disrepair in the mixed use building despite not residing in the building.

However, if the building is in a dangerous state, the tenants’ immediate concern is likely to be that works are undertaken quickly.

The substantial cost of collective enfranchisement under s.1(1) of the Leasehold Reform Act 1967 is likely to make the option of acquiring the freehold unattractive to residential leaseholders in mixed-use buildings. The right to manage under the Commonhold and Leasehold Reform Act 2002 would enable the leaseholders to take over the management functions provided under the lease but the Right To Manage company would not be able to manage the commercial units or residential property which is not held by “qualifying tenants” within the meaning of the statute.

A freeholder who fails to comply with their repair obligation in a mixed-use development may find themselves not only liable to pay damages for inconvenience and distress but in a position in which the FtT makes a management order appointing a manager for both the residential and commercial units. Such a manager could be given the power to retain the rent obtained from the commercial units to deal with management issues, including disrepair.

Section 24 of the Landlord and Tenant Act 1987 provides that the FtT can appoint a manager to carry out such functions in connection with the management of a premises as it thinks fit. The FtT will consider whether the landlord, or any person (other than the landlord) with obligations under the tenancy agreement to manage the premises, is in breach of the tenancy obligations and whether it is just and convenient to make an order in all the circumstances of the case.

The fact that the freeholder does not have sufficient funds to undertake the necessary repairs will not prevent the appointment of a manager.

In Queensbridge Investments Ltd v Lodge [2015] UKUT 635 the Upper Tribunal upheld the right of tenants of a mixed use building to appoint a manager for carrying out the necessary works. Such works would be funded through the collection of rent from the commercial tenant and the collection of a contribution from the landlord for maintenance under s.24 LTA 1987. In addition, the FtT placed a Restriction on the register at the Land Registry for 2 years, requiring the consent of the appointed manager before any disposal of the landlord’s interest. This was considered a proportionate means of satisfying the rights of the tenants to live in a building unaffected by severe disrepair. The requirement for a management order to be proportional to the tasks which the tenants are entitled under their leases to look to their landlord to perform has to be considered in light of the fact that tenants of residential units which constitute part of a building are entitled to expect that the building will be properly managed including in particular that it is kept in repair.

So, whilst the commercial units are likely to provide the greater financial yield to a freeholder in a mixed use building, a failure to maintain and repair the building as required under the leases of the residential units can lead to greater financial loss than simply damages in compensation for distress and loss of amenity.


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