Lease conversions: a market shift for 2026

Rising lease conversion applications are being driven by both landlords looking to safeguard asset values and commercial tenants seeking to remove restrictions that block residential use.

Economic pressures and social change top the drivers behind this change. Empty offices resulting from post-pandemic working patterns are creating cashflow issues for landlords and tenants alike. Repurposing underused commercial premises into homes offers a practical route for landlords to stabilise income and reduce losses from prolonged vacancies, while for tenants it provides a way to gain income from surplus office space. Tax changes add urgency, with an extra 2 per cent property income tax due from April 2027 prompting landlords to rethink long-term strategies.

Combined with housing shortages and a shrinking private rental sector, conversions can present a compelling solution. While such projects are not new, the scale forecast for 2026 is unprecedented – and the sector must be ready.

Navigating the legal landscape

Converting a lease from commercial to residential use involves a complex legal process. Securing planning consent for change of use is the first hurdle, requiring compliance with local authority policies and development plans. Without approval, projects risk delay or refusal.

Building regulations also demand attention. Standards under legislation such as the Building Safety Act and the Decent Homes Standard must be met to ensure properties are safe and habitable, often requiring additional costs and time for compliance measures such as structural checks, fire safety measures and quality benchmarks.

Where existing leaseholder rights apply, landlords must follow statutory procedures for variation or surrender to avoid disputes and ensure compliance with leasehold law.

Removing restrictive covenants 

Another legal consideration is restrictive covenants in leases blocking residential use. Both landlords and commercial tenants can apply to the Upper Tribunal (Lands Chamber) for discharge or modification of such restrictions under Section 84 of the Law of Property Act 1925.

Although normally reserved for freehold decisions, the Tribunal can consider Section 84 applications where the lease was originally granted for more than 40 years and at least 25 years have elapsed. Additionally, applicants must satisfy one of the statutory grounds under Section 84(1):

• The restriction has become obsolete due to changes in the property or neighbourhood.

• It impedes reasonable use and offers no substantial practical benefit, or is contrary to public interest, with compensation available for any loss.

• Beneficiaries of the covenant have agreed to its removal.

• Modification will not injure those entitled to the benefit.

However, meeting these grounds does not guarantee success. The Tribunal will also consider planning policies, the original purpose of the restriction and robust expert evidence substantiating the impact of the change of use on the area and on the finances of the property owner. 

Lessons from the legal precedent

A landmark ruling in Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC) demonstrated the Upper Tribunal’s willingness to apply Section 84 to leasehold interests for the first time.

The dispute centred on a building let in 1985 on a 150-year lease restricted to office use. By 2019, the property stood empty and in poor condition. The tenant had secured planning permission to convert the site into 114 residential flats, but the covenant limiting use to offices remained in place. When the Council refused consent to vary the lease, the tenant turned to the Tribunal.

The Tribunal agreed to modify the covenant, concluding that it obstructed reasonable use and offered no significant benefit to the Council. In reaching its decision, the Tribunal weighed planning policy, local development trends and expert evidence on both rental income and capital value. Although residential conversion would slightly reduce rental yield, it substantially increased the property’s capital value – a decisive factor. Arguments that retaining office use supported economic wellbeing or that granting the application would set an undesirable precedent were dismissed.

Planning ahead to win lease conversion applications 

Lease conversions demand foresight and structured preparation. The starting point is a thorough audit of existing leases to pinpoint properties that could be repurposed – and to flag where tenants might rely on Section 84 to challenge restrictive terms.

This review should go beyond identifying covenants. Stakeholders need to weigh up financial viability, factoring in potential returns against conversion costs and the costs of fighting an application that is likely to succeed. Spotting obstacles early enables informed decisions and avoids costly delays.

Engaging the right expertise is equally important. Legal and planning professionals should be involved from the outset to manage applications, ensure compliance with statutory requirements and navigate complex processes, such as covenant modification. Budgeting for conversion costs, professional fees and potential void periods during works is also essential to maintain financial stability throughout the project. 

Property professionals can play a pivotal role by coordinating these moving parts. Acting as a central hub for communication and oversight helps streamline the process, reduce risk and deliver smoother outcomes for landlords and leaseholders alike.

Turning challenges into opportunities

Conversions are just one driver set to shift the leasehold landscape significantly over the course of this year; the implementation of the Renters’ Rights Act this May adds yet another piece to the complex jigsaw. The abolition of ‘no fault’ evictions and tighter controls on rent increases – together with the increased tax in property income – are resulting in many landlords selling residential assets, reducing supply further in the private rental sector. Offsetting the decline in traditional commercial instructions are the opportunities for newly converted residential properties. 

Property professionals who want to come out on top will need to adapt to these parallel pressures. Those who will be most in demand will be far more than intermediaries; rather, they will act as professional partners offering expert strategic advice to enable landlords and investors to optimise the returns on their portfolios. They will need to offer expertise in residential lettings and sales, together with a thorough understanding of compliance obligations under evolving tenancy regimes, as well as being able to guide landlords through the complexities of conversions. 

Mustafa Sidki is a Commercial Real Estate Litigation Partner at Thackray Williams