How to avoid mixed-use development pitfalls
Mixed-use developments can produce strong returns, but you must structure the legal aspects correctly. Let’s find out more.
Property developments that combine commercial and residential tenants have risen in popularity in recent years. You can find them in any UK city centre. When the market is uncertain, these multi-building, multi-use developments can provide diverse income streams, liquidity and a substantial rate of return. However, investors in these kinds of ventures need to focus on their projects' legal structure to avoid pitfalls further down the road.
In this article, we’ll look at some of the issues that can occur with mixed-use developments - and how you can take steps to safeguard your investment now. Let’s get started.
Problems that can arise
There are three problems that investors in mixed-use developments often face.
Firstly, it’s managing the development. As the freeholder, it’s up to you to maintain the buildings’ internal and external structure and common areas to a high standard. However, with tenants that may include institutional investors, owner occupiers and individual investors, all promoting different interests, it can be challenging to keep them all satisfied. This is even more apparent when parts of the development are still to be let.
Most freeholders choose to enlist the services of one or more property management companies to maintain the buildings and common areas, with tenants buying in through shareholdings. This works up to a point, but there is always the question of what to do if the management company defaults.
Next, it’s control over the development. At the end of the day, you’re investing in the project to make a return and the decisions you make over property management, the tenants you choose and the other investors you work with all come with a degree of risk.
Finally, it’s how you will exit the project and realise your return on your investment. How will that leave the legal structure of the project? In addition, residential tenants have legal rights under the Landlord and Tenant Act 1987 around management, votes on control and first refusal on acquisition. It can be a criminal offence not to follow the correct processes relating to these regulations.
Swerving the pitfalls
The best way to avoid these costly and time-consuming legal issues is to make sure you’re meticulously prepared as early as you can. Before you make your investment, you should already have a goal in mind for the return you want and a strategy for how you’ll achieve it. Having a plan in place will mean you’ll make better decisions throughout the life of the project and not suffer the challenges that have derailed many other mixed-use property investments.
When you mix commercial and residential property in one development, the legal side of your investment becomes more complex than it would be for a single-use site. That’s why you need an experienced property lawyer in your corner. Your solicitor knows the details of the law and how they affect you. They’ll be able to explain it to you, set out your options and advise you on the right courses of action. If you need to draft a contract, they can ensure it protects your position. If you need to defend your interests in any way, they’ll work to make sure you get the best outcome.
Don’t dive into a complex investment situation without a great property lawyer on your side. If you need help, talk to your solicitor straight away.
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