What is the position for partially completed developments ahead of the May deadline?
The permitted development rights scheme, introduced in May 2013, allowed developers to convert tired and unused offices to residential accommodation without having to apply for planning permission, the intention being that this would create much needed housing and allow developers to quickly achieve this. Speed was, in fact, essential as a deadline of 30 May 2016 was imposed for completion of the developments.
At the time little thought was given to the potential uncertainty as to how this legislation would work in practice. Ambiguity surrounds issues such as the impact of the May deadline, the possibility of a planning authority granting an extension and the definition of completion. Of greater concern is the legality of those developments which may fall short of completion ahead of 30 May.
Uncertain updates
In October last year the housing and planning minister, Brandon Lewis, announced that the rights would be made permanent and those developments under way would receive a three-year extension to complete. However, formal details are yet to be published, leaving uncertainty as to the specifics. It is therefore possible that developers may be at risk of being penalised for not completing the conversion in time.
There will also be, from October 2017, an extension that will include the right to change light industrial use sites to residential. This could pave the way for development of more underused land. But this permitted right will come with the caveat that prior approval by the local planning authorities is needed and the local planning authority will consider the impact of employment in the area when approval is sought. So perhaps semi-permitted development right would be a more appropriate name.
Also of interest is that certain areas are currently exempt from permitted development rights. These are ones that are considered to be of significant importance in terms of having sufficient office space. Manchester city centre, parts of Ashford, the City of London and the London Central Activities Zone are all exempt at the moment. Another announcement made was that this exemption will expire in May 2019, potentially raising concerns in these areas.
The uncertainty surrounding how and when permitted development rights will be extended is a risk that both funders and developers should consider carefully. This vagueness seems to counter the very intention of the rights, which was to provide an easy pathway for developers to create much needed housing in the UK.
As the Housing and Planning Bill reaches the final stages of consultation in both houses of parliament, it is understood that some local authorities are keen to make sure that these changes do not affect their objectives, such as affordable housing under section 106.
A possible remedy
Some insurers in the London market are willing to cover the potential risks associated with the deadline not being met. However, it is for the developer or funder to determine what part of the development is at risk and if a financial loss is likely to occur. It should be noted that cover is only available for those developments that are already under way.
The application process for insurance is relatively straightforward and the key issue is determining what part of the development will not be finished in time. The negative impact of not completing is from a financial point of view.
It remains to be seen whether any meaningful updates to the extension are provided in the coming months, but until then the risk is real.
Broker top tips
- Getting the balance right is key. Insurance will provide remedies, but it is important to understand the policy’s strengths and limitations. Complex situations call for a deep understanding of the risks and this is a critical task of the broker.
- It is vital to work with brokers who have specialist teams focused on the property sector.
- The broker should work with the client during the fact-finding process so that all relevant information is presented to the underwriters.
- Some brokers have an in-house claims team that will be able to provide guidance if there is a claim and it is worth seeking out this service.
Case study
Our client started a development in 2012 with the anticipation of completing by May 2016 in order to take advantage of permitted development rights. The client is developing 112 flats. However, only 79 will be completed before May, with the remainder likely to be completed by August 2016.
With May fast approaching, the solicitor has requested an indemnity policy to cover them in the event completion is not achieved by the deadline and enforcement action is taken.
The risk here is the local authority requiring the development to go through the conventional planning process in addition to the potential worst-case scenario of the development being returned back to office premises.
The full developed value on this particular case was £27m. However, careful consideration of the indemnity limit was required as a full limit would not be appropriate for a maximum potential loss. In this instance this was assessed to be £10m.
William Brooks is an account executive at specialist property broker Clear Insurance
