Published by Mani Khiroya, co-founder of ARAD and CEO of Fruition Properties. See image below.
Airspace development has hit the headlines recently, with huge potential to unlock new housing above existing buildings.
When done correctly, this practice should not only bring benefits for the building owner and developer but also the freeholder and leaseholder. So what do you need to look out for if you are a freeholder considering an airspace project, or if you are a leaseholder and your freeholder has presented the idea to you?
Unlike a new build, where the only hidden issues are in the ground below the building, with airspace you must contend with all of the live issues in the building, ranging from the people who live or work there, the structure, the fire risks, health and safety and more.
This complexity means there are many potential pitfalls to avoid, and these have become more relevant and important recently, particularly for leaseholders.
In 2020 the Government relaxed the planning rules to make it a simpler process to add two floors to existing buildings through Permitted Development. The news of this policy highlighting the possibility of this potential opportunity, combined with the lower cost of delivering a permission, has attracted more and more freeholders to seek to develop or sell the potential asset to a third party. Quite often they have done this without consulting the leaseholders who live in the property, and without any benefit to those who will be most impacted by the development.
This can be an alarming prospect for many leaseholders so it is worth understanding the legalities and the rights leaseholders have, as well as the many benefits of airspace development and the value it can release.
Firstly, it’s worth noting that not all buildings immediately qualify for permitted development as there are several key criteria that need to be met such as limitations on where you can build, how high, and the age and type of buildings. If a building doesn’t qualify for Permitted Development this doesn’t mean that the door to this type of development is closed – it just means full planning permission needs to be applied for which generally takes longer and is more expensive to deliver.
Secondly, it’s not always the case but the owner of the property’s freehold usually owns the airspace above, but that doesn’t necessarily mean that they have carte blanche to build without consent from leaseholders. There may be legal encumbrances which prevent development without leaseholder permission.
If a leaseholder has a share of the freehold, together with the other leaseholders they will have the potential rights to develop the airspace. And if they don’t own the freehold, as leaseholders they may have the right to acquire the freehold through a process known as enfranchisement under the Landlord and Tenants Act 1987. This is a specialist process and will need the assistance of lawyers and surveyors and the appropriate funding to ensure they can acquire the freehold at its market value. Unsurprisingly, where the airspace has been identified, and has value, the cost of the freehold will increase to take this factor on board.
Unless the freeholder has followed a specific legal strategy to circumvent the rights of the leaseholders in most scenarios the freeholder of the airspace will be required to give the tenants the opportunity to acquire the airspace on the same terms as being offered to any developer. In this scenario leaseholders will be served a Section 5 notice and if this happens, they will have two months to take up the offer.
A group of leaseholders will then need to mobilise quickly to deal with the notification, as in reality 8 weeks is not that long considering the complexity. Chiefly they may be required to raise significant funds to pay for the airspace and to establish the overall financial viability of the project. This should be done as early as possible as current build costs mean, in our view, that airspace only works effectively at higher price points. This enables enough value to be created so that all stakeholders can benefit from the upside otherwise there may not be enough profit to make it worthwhile for the developer or for the leaseholders to suffer the inconvenience.
As well as being financially viable the building must be structurally viable and have the capacity to take the one or two additional floors. Will it need additional steel grillage to spread the load of the new development? How will services for the building be developed? Delivery of new electricity, gas and water services need to be considered and how they will integrate with the existing services.
Faced with some or all of these challenges it may be easier and more viable to partner with a developer. This won’t prevent the development coming forward but will ensure that leaseholders are part of the process and can have input into the new scheme. As such, Fruition Properties firmly believe any airspace development should be a ‘win-win’, delivering value to all of the stakeholders involved, sharing the development gains with the leaseholders. If a freeholder is unwilling to do this, we will not get involved with the project
We recognise that clearly there will be disturbance to those who live in the property and therefore there should be some recompense. The benefits can be far ranging including everything from updated communal areas, new rooves, to contributions to sink funds for future works. Alongside this, new airspace will need to consider the fire safety of the building and will result in enhancements to the benefit of all occupiers. The addition of more units will mean that future costs are shared between more leaseholders providing a cash saving to each owner in the building.
A good airspace development also upgrades the existing building, extending its lifetime and therefore is a very sustainable way of delivering new homes. The refurbishment works will also improve the value of all units in the building without any cost to the leaseholder.
These are just some of the complex issues involved in airspace development but with the right knowledge and the right professional support and guidance leaseholders are well placed to maximise the many opportunities and benefits airspace development can bring.
