User Clauses & Planning Use Classes - for Retailers as Tenants

User Clauses and Planning Uses for Retail Locations - with Gary Marshall

Join Gary Marshall in this episode of 'That Retail Property Guy' as he delves into the complexities of user clauses in commercial leases, and the planning legislation that also impacts Use. Gary discusses why User Clauses impact tenant mix and the broader retail environment, about planning changes, and what to look for in both old and new leases. Don't miss this insightful discussion offering invaluable advice for both tenants and landlords.

00:00 Introduction to Retail Property Management

02:13 Understanding User Clauses in Leases

02:56 Importance of Tenant Mix

04:18 Specifics of User Clauses

09:07 Planning Permission and Legislation

10:45 Changes in Planning Legislation

12:35 Impact of Planning Changes on Lease Clauses

14:36 Conclusion and Final Thoughts

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Transcript

0:00

Hello, and welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics relating to estate management from the perspective of a retailer as tenant sharing stories and insights through Gary's unique lens. We hope you'll be entertained, enlightened, and maybe a little inspired. In many other episodes, we've discussed the basic concept of reading the lease to understand the terms and the conditions which the landlord has imposed on the tenant, and vice versa. For varying reasons. One of the most important clauses will always be the permitted user clause to a non-specialist. It might seem strange that Elise doesn't allow the tenant to use the property for whatever purposes they want. After all, they pay the rent. Over many years in this business, I've come across this misunderstanding many times, a sales director or operations manager proposing a shakeup of the retail offer without once considering that the lease even has a permitted user clause, let alone that the user permission might be limited. So maybe a sandwich shop can't just become a hot food takeaway. If the lease restricts the sale of hot food, maybe a ladies wear store can't expand to sell children's clothes and toys. If the lease specifies the permitted use as ladies wear, maybe an office can't become a shop or vice versa. Generally speaking, most modern commercial leases will specify a use or a limited range of uses, which the landlord permits. Remember at this point we're talking about landlords granting permissions in the lease, which the tenant or a proceeding tenant signed. At this moment, we are not talking about planning permission or local zoning regulations or other town hall bylaws. More on that later. A leases user clause might also specifically mention other uses, which are prohibited. And whether a use is permitted or prohibited under the lease might be absolute. So the landlord has no obligation to consider being flexible. Or perhaps the lease might allow a tenant to request landlord's approval to change it, though the landlord might still be able to decline any change for any reason. So in this episode, let's start by discussing the minefield, which is. User clauses. The primary rule as always is don't assume, always read the lease. There's no substitute for knowing the precise wording straight from the horse's mouth in the actual document, rather than from a summary like a lawyer's report or from a generalized field in a database. And don't forget to check any subsequent documents. Deeds of variation or side letters or other concessions, which might have varied the original lease in some way. Don't overlook this obvious point. You might inadvertently be taking a step backwards and ignoring or wasting an advantage that was added to the lease some years ago. So why do leases have user clauses? Why isn't it up to the occupier to choose what they want to do? Well, user clauses with modest restrictions are generally intended to promote a good tenant mix, which is important, especially in managed schemes or mals, although less important or less achievable in a high street location. Where all the shops have different landlords, the idea is that a wider range of differing retail offers is more appealing to a wider range of customers than lots of similar retailers. Jostling cheap by jowl, offering the same products and undercutting each other in a bid to appear most appealing to the customer. A mix of retail offers should entice more shoppers, which drives an increased footfall, which is better for all the retailers, and ultimately makes the location more sought after, therefore better performing from the landlord's perspective, which could of course then lead to fewer voids and a better yield on the purchase investment. Of course, it could also lead to higher rents for the tenants. A good tenant mix also helps to ensure that the retailers don't have to cut each other's throats. In competition, it might sound a bit of a restrictive cartel keeping prices up, but the underlying purpose is to sustain the viability of the location rather than to line one specific retailer's pocket. A user clause in the lease might be very specific, such as butcher or baker or candlestick maker, but not all three. The clause might restrict the sale of alcohol. The list of prohibited uses might be longer than the list of permitted ones. No gambling, no immoral bordellos, no preparation or sale of hot food. No sale of live animals. No loud music, no rendering of body parts into tallow candles. Maybe user restrictions might lean more towards the actual operation of the retail business, like maybe prohibiting Sunday trading, or insisting that the windows are kept lit and well dressed with goods offered for sale, are not blocked by opaque posters. Simply advertising sale items. The user clause might vary from one part of the building to another. Maybe sales is permitted at ground floor, but only storage of stock at first floor. And this might scupper a retailer's plans to expand the sales area. I recall a specific example of this where a client was looking at a property which was being used as a spacious restaurant, but when we checked the lease, it became clear that only half of the space was actual permitted to be used as dining space. The rest, in theory at. Was specified as storage. The assigning tenant had taken a chance and made some unauthorized alterations, but there was a very strong risk that the landlord could inspect and realize what had gone on, and then easily enforce the specified use, or at least demand a substantial payment to release consent to change the use. In that case, the client chose to walk away, but in theory, they could have made a conditional offer subject to the assigning tenant pre-op. Obtaining that consent at a personal level, meaning specific to a named tenant. A user clause might be slightly more flexible. For example, it might allow a range of uses under a personal concession only to the first named tenant who signed the lease, but not allowing these privileges to be transferable to any occupier who follows later. So a diligent estate manager should always know what's fixed, what's personal, what can be transferred at disposal, what came over on the assignment. All of this to avoid complications or embarrassment, a user clause might allow a very wide range of uses. It might even simply state retail, so that means anything. Retail, food, clothes, toys, cars, jewelry, hardware. In some circumstances, this wide ranging permission can be a two-edged sword. It can be great while the tenant is exploiting the clause and reaping the sales profits, but less great when the landlord negotiates the first rent review and points out that all the neighboring comparable properties have more restricted user clauses, and therefore insisting that the tenant pays more rent for the beneficial commercial advantages of a wider user clause. The lease might specify that the tenants can seek the landlord's consent to vary the user clause, but that doesn't necessarily imply that the landlord's consent will be forthcoming or without cost. There might be a reference that the consent should not be unreasonably withheld, but there's a bucket load of litigation about what constitutes good reason. In terms of obtaining landlord's consent or at least expecting to obtain it. Some leases might specify user conditions, which are even more subjective, such as use as a high class shop, what constitutes high class? How can we mere mortals determine the boundaries between high class and high Street? In 2014, the London Evening Standard reported a case which highlighted this perception of class. A few years earlier, the well-known retailer TK Maxx had tried to take a store in Piccadilly. The deal was subject to the consent of the building's freeholder, which was the Crown Estate in the Crown's opinion. TK Maxx didn't sit well alongside their view of a high class retailer. Even though it's famous for selling high class brands. Perhaps the fact that TK Maxx discounted those brands had counted against it. So the lease was granted to another retailer. Cool. Britannia, you might be familiar with this. If you visited Piccadilly, you might even have an opinion of whether it seems high class or not. It took another five years before T km Max was able to secure release of other premises in another building nearby, which wasn't subject to control by the Crown estate. So in the end, what was the point? All in all, a user clause determines what the landlord will permit the property to be used for. But that doesn't necessarily mean that planning permission or zoning or other town hall local bylaws will allow it. A diligent estate manager will always check that the relevant planning permission exists before signing the lease or launching the operations director's new plan for world domination. So let's discuss planning permission, the standardized classes of use under planning legislation, and the ease or challenges of movement between these classes and the impact when planning uses in a retail location. Get relaxed. Planning legislation and its nuances is a well litigated minefield, so let's try to keep it simple. But remember, this isn't advice. It's just a friendly discussion that might trigger some thoughts to check out later. In a nutshell, the retailer's view of planning generally means the town and country planning use classes order 1987 as amended and until 2020. Retail tenants usually focused on Class A, which itself was split into subcategories, a one to a five. Class A one was general retail, which included cold food takeaways like sandwich bars, while a two was financial and professional services like estate agencies or insurance brokers. A three was sit in dining, so that's restaurants and cafes, but not takeaways. Class A four was drinking establishments, and a five was the hot food takeaway. Distinguished from the cold food, which came under a one. In general, it was acceptable to change up the classes, say from a two S eight agent to a one retail, but not to go down the classes such as from a one retail to a five hot food takeaway Recognized or established planning use was an important and valuable commodity. For example, there was often a tangible value added to premises with an existing a three sit-in dining permission in a location that was booming for the nighttime economy. In 2020, though there was some sweeping changes. The Business and Planning Act 2020 introduced a significant change to the use classes order effective from the 1st of September. That year it introduced a new broad category, class E, which means commercial, business and services use. It also introduced Class F community and learning, but that's less commonly an issue for retailers. In creating Class E, it revoked the old classes, a one to a three, and it merged them all into one bigger class. And then for good measure, it threw in some extra bits like health or medical uses, crashes, nurse reason, indoor sports or recreation, which were all formally D one or D two use. So under the new Act, planning permission is no longer required to change between any of the uses in the new Class E. The old Snakes and Ladders idea of climbing up the classes but never down, went out the window. So from a planning perspective, occupational use in many retail locations or more generally for buildings which look like they should be retail, became much more liberal. But note, class E doesn't include the old A four drinking establishments or a five hot food takeaway. Both these classes were also revoked, but they didn't get merged into Class E. Instead they became sui generous, which means without or beyond classification. And a particular aspect of sui generous is that there are no permitted development rights. There's no flexibility in planning terms. So let's review our checklist. Old planning classes gone. New single class introduced liberal change of use from a planning perspective, except for pubs, bars, and hot food takeaways. All good. Right, but it's all moved on. So why are we even discussing the old classes, those now defunct classes? Well, some older leases were granted pre 2020 and specifically mention uses under the old planning legislation. The planning laws might have changed, but that doesn't overwrite the existing leases. Consider this, what if the tenant's lease specifies the old class may be just a one retail or only a three dining? So not withstanding that the town planners might say that no planning application is required to shuffle between those older classes. The older definition is still the legal basis under the lease. Yep. Notwithstanding the liberalization of planning rules, many older leases are still restricted to a specific use as defined by the previous legislation. Nevermind what the planners say. It still might be necessary for a tenant with such a lease to seek landlord's consent to change from one old revoked class to another old revoked class, and maybe landlord's consent can't be assumed to be forthcoming. At least not without a price food for thought before jumping ahead. Right? Read the lease. But back to the original purpose for user clauses, which was tenant mix. This is particularly important to landlords of managed schemes. It can also be important in High Street locations. Getting the balance right is important. Competition is healthy. Too much competition is a dead weight dragging profits down, and of course lower prices. Lots of retailers elbowing each other aside with smart offers and discounts galore. It all sounds great for the customer, but it could also be the start of a slippery slope to degradation of a retail pitch. If retailers can't make a profit, they vote with their feet and their replacements have different expectations, and a once noteworthy retail destination could soon deteriorate. So putting aside the liberalization in planning regulations, a good tenant mix managed by reasonable user clauses can help with positivity, which benefits the landlord, the tenants, and the shoppers. But as retailers, we need to read our leases. We need to know the flexibility of use, understand the possibilities for flexing that, and monitor that our landlord doesn't undermine it by offering new leases to other retailers on terms which are distinctly different to our disadvantage. Have you read your lease and any subsequent variations or amendments? If you or your ops director are considering any changes in the retail offer, including the use of space, be sure to get sound professional advice from a property professional with the relevant experience in this sector. Bear in mind that the value of good advice often outweighs the cost of it. Thanks for tuning in to that retail property guy. I hope you enjoyed the discussion and found the subject both entertaining and insightful. Check out more podcast episodes and if you have a suggestion for a future topic, please leave a suggestion or send us a message. Remember to like, share and subscribe to never miss an episode. And if you'd like more info, go to thatretailpropertyguy.com. Thanks for listening.