The Sky’s The Limit

Kevin Marshall takes a look at the increasingly popular trend for adding penthouses to blocks of flats

A lot of us will have seen examples of the increasingly popular roof extension projects now going on around the country, particularly in major cities. So what's behind the trend? The most obvious explanation is the additional value unlocked by such schemes, in tandem with the increasing shortage of places to build new homes. In the same way that increasing numbers of private home owners are developing loft extensions, why not use the roof of a block of flats?

For flat owners in existing blocks, the natural reaction to such a suggestion may well be alarm but it doesn't have to be bad news - there are plenty of positives. For shareholders in an enfranchised/RMC situation the benefits are obvious:

  • A cash injection to the company funds which could be distributed to shareholders as a dividend.
  • Reducing service charge percentages for the existing flats.
  • Money may not need to be spent on renewing the roof.
  • A sensitively designed penthouse level can enhance an otherwise basic looking block.
  • Free improvements to the block –such as lift renewals to suit new floor levels etc.

Even if your block is still owned by an external freeholder who would take the benefit of the cash paid for the roof space, many of these plus points still apply. Also, in return for residents' support for a scheme, freeholders will often offer some incentive in terms of cost free improvements to a block which helps the sale of their new units.

However, there can of course be disadvantages:

  • If poorly handled, the construction phase of development can be a highly disruptive period for residents to endure.
  • If poorly designed, a development can blight the block long term.
  • If complex circumstances exist, getting a project off the ground can take some considerable upfront investment and potentially a period of many years.

Assuming these problems can be overcome, how do you take a penthouse development project forward?

Much depends on what the ownership structure is and what the leases allow, so the obvious starting point is to see if this is worth doing. Before incurring any professional fees, a good place to start will be to approach local estate agents and seek their input. Try a firm that regularly sells flats in the building; most will be keen to offer some guidance free of charge on the basis of a possible future commission. In most cases, it is the technical or planning/legal issues that thwart schemes, rather than the values achievable.

Assuming the values do stack up, the board needs to make some policy decisions and consider if they should canvas the wider resident/shareholder community for opinion before proceeding. If so, a meeting to discuss the principles should be arranged and a resolution to proceed - or not - made at the end. If this provides a mandate to proceed then the next stage will involve procuring professional advice.

Legal advice will be needed to clarify whether the leases permit such development and, equally, if the company constitution allows for such expenditure. A surveyor or similar professional practice will also be needed to develop the outline technical aspects of the project, so a firmer feel for what might be attainable can be presented to residents. Leaseholders should however be aware that any costs incurred may not be legitimate service charge expenditure.

Alternatively you could approach one of the specialist construction companies or developers, who will be able to provide holistic advice and guidance, as well as perhaps start some commercial negotiations directly.

There are several ways to proceed:

  • Go through the whole process and deliver the project yourselves. This maximises return but is highly risky and a cash thirsty approach. Usually best avoided as the risk can outweigh the benefits.
  • Develop the project to planning stage and sell to a third party, letting them complete the build.
  • Enter into a joint venture with an experienced developer where the company provides the space and the developer fronts the design and build costs, thereafter splitting profits on a pre-arranged percentage basis upon sales.

There are many horror stories surrounding blocks with poorly handled works, causing a nightmare period for residents and thereafter a legacy of resolving shoddy workmanship in the longer term. So whatever option is chosen, it is important to retain professional input in a monitoring capacity. Proposals should be carefully vetted as work progresses. The final aspect to consider is that the funds released will be subject to taxation and therefore early advice needs to be taken from tax advisors.

If your block has a roof that you and your fellow leaseholders think may be suitable for development – and you can get buy-in from your fellow residents - then it is certainly worth investigating the possibilities. When it comes to rooftop development, the sky (and your lease) really is the limit.

Kevin Marshall is managing director of Cardoe Martin Burr, a wholly-owned subsidiary of Rendall & Rittner.