Knowing the answer saved my client a small fortune.
It has taken a year to settle, but I have saved a client an incredible 99.2 per cent on the proposed £2.5 million premium he faced for removal of a restrictive covenant. The successful settlement, resting on the legal definition of “house”, allows him to convert a former hotel into a grand Kensington home.
My client had bought the large Kensington building (basement plus four stories) with the freehold. Originally a fine terraced house, it was being used as a hotel. The seller had acquired it in the1970s from the Church Commissioners. The freehold, purchased in 1977, came with a restrictive covenant placed on the building’s use: it could continue as a hotel or be converted to flats/maisonettes, but could not be used as a single house. There were further restrictive covenants on other changes, for instance preventing demolition or major alteration of non-original extensions.
My client employed planning advisers to support his wish to convert the property into a single house. (At first he wanted to extend downward by adding a sub-basement floor, but it soon became clear that construction costs would be prohibitive for him, irrespective of the added value let alone obtaining final planning consent). For the plans to be achievable, he had to get the Church Commissioners to agree to vary the covenant to allow use as a single dwelling house.
A slow start
Along with the valuers for the Church Commissioners, I inspected the property in January 2015. It was not until September that they came back to reveal their required premium for the variation. They wanted £2.5 million. This was based on the assumption that my client would profit by £5 million (after development costs) if he sold the property on the open market as a house as opposed to several converted flats – and they wanted half of the anticipated profit!
I felt that this figure was at least a highly optimistic exaggeration, notwithstanding that houses carry a special premium value in the rarefied prime central London market. In any case, the Church Commissioners’ valuer had misinterpreted my client’s purchase price as being lower than was the case, so I was confident that I could negotiate a substantial reduction – providing I could prove the actual price paid as well as temper the other side’s expectation of the potential realisable resale value once converted.
However, having by now studied the drawings in my client’s planning proposal, I thought I might have a solution that would outflank the usage covenant altogether. My client was considering the option of making the basement floor a self-contained garden flat, and converting the rest of the house into a large four-floor maisonette. I thought this would be both drastic and unnecessary: drastic because it would in my view produce a “failed” maisonette, reduced in value and very difficult to sell with no outside space; and unnecessary because my solution would be preferable (and involve much less work).
The drawings showed a large room at the front of the basement labelled “staff accommodation”. I advised my client that if he simply blocked up the internal door connecting this room to the rear half of the basement, he could create a self-contained studio flat with its own entrance from the building’s front area.
The technical twist
A house is defined legally as a self-contained dwelling, separated vertically from any adjoining building. In this case I felt I could argue that, with its horizontal division above the basement room, the remainder of the building would technically not be a house. Rather, in legal terms, it would be a four-and-a-half-floor maisonette. Happily, however, in my client’s terms it would be a splendid “almost-house”, including the rear garden-level basement and the garden itself, a significant amenity (or crucial attraction to the market if he decided to sell).
I was therefore confident that merely blocking this one internal door would allow my client to pass the test of the covenant and still achieve the house he wanted (the only practical difference being self-contained servants’ quarters with no internal access to the house, not necessarily a disadvantage). Nevertheless, it took three negotiation meetings with the Church Commissioners’ valuer to agree that this plan would not infringe the covenant, and then to settle on a premium for release from all the Church’s other restrictive covenants.
Clearly, the initial £2.5 million floated by the Commissioners’ valuers was just plain wrong – at our second meeting they admitted that £250,000 was more realistic. Even so, I had to work long and hard to prove the value of the property as a house opposed to flats, and to calculate the residual valuation (with all costs such as professional fees and agency commission taken out).
The result: in February 2016 we settled at £20,000, a saving of 99.2 per cent on the premium initially suggested, and 92 per cent even on the “more realistic” later figure. My delighted client is free to create his house – because that one room with its own entrance from the street means it is not a house!