Lease structures in mixed-use developments

While the demands placed on the landlord and managing agent by commercial and residential tenants will probably differ, they will all be looking for the delivery of a management regime that offers good value for money, costs apportioned on an equitable basis and transparency.

In mixed-use properties, the daily business operation of the busy ground floor bar operator, possibly trading into the early hours, must be considered in context with the 9am to 5.30pm office user at first floor level, which must, in turn, be considered in context with the 24/7, 365-days-per-year management of the residential apartments on upper levels. It is a niche business, and also challenges managing agents to operate within differing disciplines and codes of professional practice, while maximising the value of the client’s asset.

Careful consideration should also be given to the delivery of the services, as this may result in various schedules of service charge being put in place to avoid a tenant paying towards a communal service where they don’t receive any benefit. This apportionment should always be undertaken in accordance with the terms of the occupational leases, but hopefully a well-drafted lease will permit a fair and reasonable apportionment of the costs incurred providing the communal services to the building.

It would not be uncommon for an equitable estate management regime to include a purely residential schedule, a structural and shared schedule and a car park schedule as a minimum. Depending on the consumption of other communal services by the tenants, further schedules may be required, such as the communal heating system or where bulk water meters exist.

Focusing on the residential element of mixed-use schemes, any ‘challenge’ to the management regime or service charge will be driven from the residential plot lease upwards. So, developers who spend hours with solicitors drafting complex over-arching headlease structures to maximise the value of their asset and exit strategy should be equally concerned about the terms of the residential plot lease.

It is the residential lease that will be scrutinised if the reasonableness of the service charge is challenged in the First-tier Tribunal and - even if a claim is successfully defended - the mechanisms for cost recovery in the Tribunal are very limited.

The landlord may end up picking up the bill for the legal and surveyors fees resulting from the proceedings, or they will be passed on to the tenants if they have to be paid from the service charge.

Ian Hodgson is Senior Surveyor at Livingcity