Local authorities have long played a key role in delivering regeneration projects across the UK. This activity has gone through stages. At points over the last 10 years, one in five shopping centres changing hands were acquired by local authorities (LAs), often enabling new commercial development.
While continuing to target strategically important areas, LAs are increasingly focusing on residential-led regeneration, frequently with the support and resources of private sector partners.
From a legal perspective, this poses a major – often overlooked – risk, which arises from LAs retaining freehold ownership of mixed-use schemes and using forfeiture powers.
Where multi-let, mixed-use developments are underpinned by long-leasehold interests, forfeiture can be an issue, particularly if residential units are sold on long leases to individuals, if there is a substantial rent attached to the head lease or if capital underleases of buildings are granted to investors.
The impact of forfeiture in this scenario could result in a default at head-lease level – potentially terminating all underleases, even if the underlessee is not at fault.
A common remedy for a tenant is to seek ‘relief from forfeiture’, which is granted at the court’s discretion and is intended to put the landlord in the position they would have been in but for the breach. This usually involves the granting of a new lease to an undertenant on the same basis as a head lease.
Where a development features multiple buildings and leasehold interests, the relief-from-forfeiture route is plagued with legal complexities, especially where the court considers granting a new lease.
Presently, there is no established market practice for this point and a case-specific approach is necessary.
It is, therefore, critical that developers, investors and funders recognise forfeiture risks before undertaking a mixed-use scheme, while redoubling efforts to purchase the freehold. This is key to securing a property and minimising the legal and financial risks of forfeiture from the outset.
Patrick Duffy is a real estate partner at law firm Shoosmiths
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