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Planning Pitfalls For Property Professionals

The fundamental profitability of any property investment is underpinned by the level of income it produces. It is for this reason that valuers see many attempts made by investors/developers to maximise the income from their property portfolio by exploring asset management opportunities. This can be in the form of converting single residential units into multiple studios or into Houses in Multiple Occupation (HMO), loft conversions and the conversion of outbuildings into residential use, often without appropriate planning or Building Regulations approval. Although a stronger rental income can be achieved from such properties, from a valuers' perspective the market value is not necessarily improved.

For example, Houses in Multiple Occupation are known to produce a good return on investment and this has led to an increasing number of properties being converted. Given the shortages in the supply of housing options in today's market, HMOs are fast becoming a viable solution from both landlords' and tenants' perspectives. However, it is important that such conversions are carried out with the benefit of all necessary Local Authority consents, including licensing where appropriate.

In the instance of properties with unlawful use as a HMO, we visit many properties that comprise small non self-contained bedsits. They may share sanitary facilities with other occupiers and lack the requirements stipulated by Building Regulations, however, from an investors point of view, they will derive a stronger level of rental income from the private sector, especially considering demand for small single occupant units is high. However, from a valuation point of view, the property will not comply with the Local Authority planning requirements, so it's therefore open to enforcement action. Such risk of enforcement is factored into the valuation, as appropriate reinstatement costs will hinder the Market Value. Similarly, if the property does not benefit from planning permission, it is unlikely to benefit from Building Regulations, which require appropriate thermal, sound insulation, fire retardant doors and means of escape. Henceforth, unlawful HMOs or any property which does not comply with statutory requirements will affect the valuation. Although proprietors could, and more often usually do, apply for a Certificate of Lawfulness of Use, thereby protecting themself from any enforcement action, the lack of Building Regulations approval will notably hinder the Market Value.

In the typical scenario of a ground floor retail unit with residential upper parts, we have often seen the conversion of the upper parts into 3 or even 4 self-contained or non self-contained residential units. With many retail units being centrally located, strong rents can be achieved and even more so in a residential property market which is pricing out first time buyers. Local Authorities have local development frameworks which specify planning policies concerning the creation of further residential units, especially in town centres or commercial districts, and it is for this reason that planning approval can often be difficult to obtain. Nevertheless, some investors will alter a building without Local Authority consent and do achieve enhanced rental income once the converted units are fully let. We are of the view that such unlawful conversions are a short term income generator, with no guarantee of long term income.

We were recently instructed to value a ground floor shop with 3 self-contained flats situated above; we noted from our extensive research into the planning history of the building, that no such approval existed for the third flat. We therefore made appropriate allowances for the reinstatement of the property to its original and compliant layout as a shop and two flats. Our valuation was therefore £1,200,000, incorporating a deduction of £100,000 to reflect the costs of works to reinstate the property to its compliant configuration. Following on from communications with the lender, we were informed that the lender had taken a charge over the property based on a previous higher valuation undertaken by another valuation firm which had failed to discover the lack of planning consent and had incorporated the value of the flat which contravened planning permission. The lender had therefore relied upon a Market Value of £1,600,000.

As valuers we have to protect the lenders' interests at all times, a property may be producing a good income unlawfully but what happens if the lender has to repossess? The lender will need to dispose of the property and that may be difficult if there are breaches in the approval process. Would you, for example, purchase a converted flat with no planning or Building Regulations approval?

Most breaches of the planning rules are brought to the attention of the Local Authority by neighbours. Complaints are investigated and can be followed with a "planning contravention notice". In some cases where a breach of the planning system has been found, enforcement action could lead to the demolition of a building or a requirement to reinstate to its original configuration. The Localism Bill will also seek to strengthen planning authorities' power to tackle abuse of the planning system.

It must be borne in mind that there are no permitted development rights for any building other than a single residential unit. Therefore all significant alterations or additions to a commercial or retail unit or a flat will require planning permission.

Sometimes small extensions are built, particularly on retail units, and these are often in the form of single skin construction with poorly constructed roofs, which have a limited life span. Extensions of this nature cannot be considered as valuable as those with Building Regulations and planning approval and are normally given as nominal value.

In summary, although one could argue that the planning system is intricate and is a form of red tape limiting development potential, it needs to be addressed and adhered to. Failure to comply can result in costly enforcement action and less optimistic Market Valuations, hindering future prospects for re-financing.

Prepared by:
Michael Yianni BSc (Hons) MRICS
Managing Director | Belleveue Mortlakes Chartered Surveyors
myianni@bmortlakes.com