Permitted Development Rights: Financing Conversions Without Planning

Permitted development rights, often abbreviated to PD rights, are a national grant of planning permission that allows certain types of development to proceed without the need for a full planning application. For property developers, the most significant PD rights are those that allow the change of use of commercial buildings to residential dwellings. These rights, set out in the Town and Country Planning (General Permitted Development) (England) Order 2015, as amended, have created a significant market for commercial-to-residential conversions, particularly in town centres and business parks where office and retail demand has declined.

The most commonly used PD right for conversions is Class MA, which permits the change of use from Class E commercial, business and service uses to Class C3 residential dwellinghouses. Class E encompasses a wide range of uses including offices, retail, restaurants, light industrial, gyms, and health centres. Class MA replaced the previous Class O office-to-residential right and broadened the scope of PD conversions significantly. In our experience arranging development finance for PD schemes, the volume of transactions has increased substantially since the introduction of Class MA.

It is important to understand that PD rights are not an automatic entitlement. The developer must apply to the local planning authority for prior approval, which is a lighter-touch assessment than a full planning application but still involves scrutiny of specific matters including transport and highways, contamination, flooding, the impact on the character of the area, and adequate natural light in the proposed dwellings. The prior approval process takes fifty-six days from the date the application is received by the local planning authority, and the authority can either grant prior approval, refuse it, or determine that prior approval is not required.

Class MA includes several important conditions and limitations that developers and lenders must understand. The building must have been in a Class E use for at least two continuous years immediately before the date of the prior approval application. This prevents developers from acquiring a building with a non-Class E use, briefly changing its use to Class E, and then immediately converting it to residential under PD rights. Evidence of the two-year use is required as part of the prior approval application and may include business rates records, lease agreements, or other documentary evidence.

There is a size limit of 1,500 square metres of floorspace that can be converted under a single Class MA right. For larger buildings, only 1,500 square metres can be converted under PD, and any additional conversion would require a full planning application. The building must not be in an area excluded from Class MA rights, which includes certain conservation areas, areas of outstanding natural beauty, national parks, and sites of special scientific interest, where the local planning authority has made an Article 4 direction removing PD rights.

Article 4 directions are particularly significant for developers because they remove PD rights in specific areas, requiring a full planning application for any change of use. Numerous London boroughs and other authorities have made Article 4 directions removing Class MA rights in their commercial centres to prevent the loss of employment floorspace. Before acquiring a building for PD conversion, developers must check whether an Article 4 direction applies. A check of the local authority's planning records and a pre-application enquiry will confirm the position. We have seen developers purchase buildings for PD conversion only to discover that an Article 4 direction prevents them from using PD rights, leaving them with a building that requires full planning permission for a residential conversion, a significantly more uncertain and time-consuming process.

Financial contributions are another consideration. Since April 2021, Class MA conversions are liable for Community Infrastructure Levy where applicable. The CIL charge varies by local authority and can range from £0 in areas without a charging schedule to over £200 per square metre in high-value areas such as parts of Greater London. On a 1,000 square metre conversion, a CIL charge of £150 per square metre represents a cost of £150,000, which must be factored into the development appraisal.

Development finance lenders view PD conversion schemes somewhat differently from schemes with full planning permission. On one hand, the prior approval process is faster and less uncertain than a full planning application, which reduces planning risk. On the other hand, PD conversions are subject to specific limitations, such as the size cap and the adequacy of natural light requirement, which can affect the scheme's viability and saleability. The lender's primary concerns are whether the prior approval has been validly obtained, whether the proposed units meet current space and amenity standards, and whether the completed units will be mortgageable.

The mortgageability of completed PD conversion units is a critical consideration for the developer's exit strategy. Some mortgage lenders are cautious about PD conversions because the units may not benefit from the same standard of amenity as units built under full planning permission. Specifically, PD conversions are not required to provide private outdoor amenity space, car parking, or contributions to affordable housing or local infrastructure. While this reduces the developer's costs, it can also reduce the attractiveness of the completed units to buyers and their mortgage lenders.

In our experience, PD conversion schemes are financeable by a wide range of development finance lenders, but the terms reflect the specific risk profile. Typical loan-to-GDV ratios for PD schemes are 60-65%, with interest rates of 8-10% per annum. Build costs for commercial-to-residential conversions vary significantly depending on the condition and configuration of the existing building. A straightforward office-to-residential conversion might cost £800 to £1,200 per square foot, while a more complex conversion requiring structural alterations, new floors, or upgraded building services could cost £1,500 to £2,500 per square foot. For a ten-unit conversion with a GDV of £2,500,000, typical development finance might be £1,500,000 to £1,625,000 with total build costs of £600,000 to £1,000,000. Submit your deal to explore the finance options for your PD conversion scheme.

The prior approval application is submitted to the local planning authority with the required information, plans, and fee. The statutory determination period is fifty-six days, during which the authority consults statutory consultees and assesses the application against the specific matters set out in the legislation. These matters include transport and highways impacts, contamination risks, flooding risks, impacts of noise from commercial premises on the intended occupiers, the adequacy of natural light in the proposed dwellings, and the impact on the intended occupiers from the introduction of residential use in an area that is not primarily residential.

Unlike a full planning application, the local planning authority cannot consider the principle of development when determining a prior approval application. The principle has already been established by the PD right itself. The authority can only refuse prior approval on the specific grounds set out in the legislation. This means that objections from neighbours about the principle of converting an office to flats are not relevant grounds for refusal. However, if the authority determines that the natural light in one or more proposed units is inadequate, it can refuse prior approval for those specific units.

If the local planning authority does not determine the application within fifty-six days, prior approval is deemed to have been granted. This deemed approval provision provides certainty for developers and lenders, as it prevents the authority from delaying a decision indefinitely. However, deemed approval should not be relied upon as a strategy, because the authority may still refuse the application within the fifty-six-day period. In our experience, most prior approval applications for well-designed schemes are determined within the statutory timeframe, with approval rates of approximately 70-80% nationally. For development finance purposes, we recommend that developers obtain prior approval before submitting their finance application, as this removes the remaining planning risk and allows the lender to offer the best available terms.

While PD conversions do not require full planning permission, they are fully subject to building regulations. The conversion of a commercial building to residential use triggers a change of use under the building regulations, which means the converted building must meet the current building regulation standards for residential occupation. This includes Part B fire safety, Part E sound insulation, Part F ventilation, Part L energy conservation, Part M accessibility, and Part P electrical safety.

The building regulation requirements for PD conversions can be substantial, particularly for fire safety in buildings that were not originally designed for residential occupation. A multi-storey office building converted to flats must meet current standards for compartmentation between dwellings, means of escape, fire detection and alarm systems, and emergency lighting. The cost of achieving fire safety compliance in a conversion project is typically £15,000 to £30,000 for a small scheme and £50,000 to £150,000 for a larger scheme, depending on the existing building's construction and layout.

Sound insulation is another significant cost in PD conversions. Commercial buildings typically do not have the same level of acoustic separation between floors and walls as residential buildings. Achieving Part E compliance may require the installation of acoustic floors, wall linings, and ceiling treatments, which add to both the cost and the programme. A realistic allowance for sound insulation works is £3,000 to £8,000 per dwelling. The development finance lender's monitoring surveyor will verify building regulation compliance at each inspection stage, and non-compliance will result in drawdown funds being withheld until the issues are resolved.

The key to a successful PD conversion finance application is demonstrating that the scheme is viable, compliant, and mortgageable. Start by confirming that the building is eligible for Class MA conversion. Check the planning use class, verify the two-year use requirement, confirm that no Article 4 direction applies, and check the CIL charging schedule for the area. Commission a measured survey of the building to accurately assess the gross internal area and the net lettable area after conversion.

Prepare a detailed development appraisal that reflects the true cost of conversion, including structural works, building regulation compliance, fire safety upgrades, sound insulation, new building services, fit-out costs, and professional fees. PD conversion costs are often underestimated by developers who compare them to new-build costs without accounting for the additional complexity of working within an existing building structure. We have seen conversion costs exceed new-build costs on a per-square-foot basis when the existing building requires significant structural intervention.

Ensure that the proposed unit sizes and layouts meet the nationally described space standard, even though PD conversions are not technically required to comply with it. Units that meet the space standard are more attractive to buyers and more likely to be accepted by mortgage lenders. Studios should be at least 37 square metres, one-bedroom flats at least 50 square metres, and two-bedroom flats at least 61 square metres. Designing units to meet these standards from the outset avoids saleability issues later. Finally, budget for the costs of obtaining an EPC rating of at least C for each unit, as this is increasingly required by mortgage lenders and will become a mandatory minimum standard for rental properties. A comprehensive, well-prepared application that addresses all of these points will achieve the best finance terms from the widest range of development finance lenders.