One of the highest returns on investments in real estate may be expected in the cases where an acquired neglected real estate item is regenerated. However, not only renovation of property requires substantial financial investment in repairs or reconstruction works, new interior or equipment, but it might also be necessary to change the intended use of the premises or building. In certain cases this may be quite complicated, even though at first sight the property acquired seems to be located in a place well suited for putting the new idea into action.
There are a number of examples on the market where former pasture areas, warehouses and unused buildings that seemingly lack interest are transformed into modern housing estates or lofts of highest standards, and cultural centres dating back to the soviet times, old town cellars or secluded sites are brought to life as attractive restaurants, cosy cafés or young people’s favourite bars. Nevertheless, before buying premises or a building with a view to transforming the same for a new activity, it is recommended to carry out a thorough analysis in order to understand the intended use of the property concerned, the types of activity feasible and allowed to be pursued there and the possibilities of changing the current use if it is inconsistent with the new idea and the vision of how to use the property.
Possibilities of using of premises for other uses
The law establishes a general rule that the user is obliged to operate the building (premises in the building) for the intended use, except for certain types of activity which do not necessarily require the change of the intended use of the building (premises in the building). For example, hairdressers and other beauty treatment services may be provided in administrative and commercial premises. Accounting, architectural, translation or pre-school-age children education activities may be pursued in a one-, two- or multi-apartment house. Notably, the latter activities, if include customer visits, might inter alia require a consent of the majority of owners of apartments and other premises in the multi-apartment building. The legislation provides an exhaustive list of activities which are permitted without converting the premises to other uses. In all other cases, if a planned activity is not consistent with the current use of the premises in question, the intended use must be changed. For example, in the case of a restaurant of a café, the intended use of the premises must be catering.
Works and documentation necessary for changing the intended use of premises
In certain cases the change of the use might entail major repairs or even reconstruction, but sometimes only ordinary repair works or no such repair would be needed. The legislation defines which works are regarded as reconstruction, major repairs and ordinary repairs. The complexity of documentation and the procedure for changing the intended use depends on the scope of necessary works.
The purpose of reconstruction of a building is to convert the existing bearing structures of the building and thus modify (increase, reduce) any external dimensions of the building – the length, width, height, diameter, etc. The bearing structures are considered to be converted in the following cases:
- building of new levels, equipping of a new basement or extension of the existing basement, removal of some of the existing levels;
- construction of an extension to the building (or in between adjacent buildings), provided that such construction entails the replacement, weakening, strengthening, etc. of the bearing structures of the building;
- replacement of any bearing structures with other bearing structures, installation of new bearing structures or removal of some of the existing bearing structures.
The purpose of major repairs of a building is to convert the bearing structures of the building concerned without having any effect on the external dimensions – the length, width, height, diameter, etc. The bearing structures of a building are deemed to be converted where they are reinforced (except for securing of the existing openings), weakened or replaced (whether partially or fully) with the same or different type of bearing structures.
The aim of ordinary repairs of a building is to renew the existing building without reconstruction and major repairs. Ordinary repairs of a building include all works which are not classified as reconstruction or major repairs. Thus, ordinary repairs cover such works as replacement of the façade or roof covering, thermal upgrading of buildings, installation, replacement or removal of general, individual or user engineering systems, glazing of balconies and loggias, etc.
With regard to premises of certain uses, the legislation sets out obligatory requirements. For example, a dwelling in a multi-apartment building which needs to be given another use must be reconstructed so that it can be accessed from the outside and that such reconstruction is in line with the architectural, hygiene, fire safety, environmental and technical construction requirements. A building used as a hotel must have at least ten (10) single and/or double rooms. A motel must have at least five (5) rooms and good road access conditions and needs to be adjusted for the provision of additional secured parking and maintenance (garage) services. A guesthouse is supposed to provide accommodation and tourist reception services and must have at least five (5) rooms, etc.
Any change of the intended use of premises or buildings where no construction works take place or ordinary repairs are carried out in buildings that have been accomplished in accordance with the established procedure requires preparing a design for the conversion of the premises or building concerned to other uses. In the case of reconstruction or major repairs of a building that has been completed in accordance with the established procedure, the intended use of premises or buildings is changed in conformity with the provisions of the Technical Construction Regulation “Documents Permitting Construction” and the Technical Construction Regulation “Completion of Construction” that apply with regard to reconstruction or major repairs of buildings.
It should be noted that a written approval of a public servant authorised by a municipal government administration for the use-change design of a building (room, premises) is obligatory in all cases.
If an area in question is located in a multi-apartment house or a building which has a few owners, in the light of the applicable requirements of legal acts it has to be assumed that, irrespective of the type of works to be performed (ordinary repairs, major repairs or reconstruction) there or whether any works will be carried out at all, any change of use of the premises in such building in all cases will require the consent of the majority of owners of apartments and other premises.
When giving the premises another use, it should also be kept in mind that the conversion to other uses might have both beneficial and adverse effects on the liquidity of the premises. For example, if two small apartments are joined for a commercial activity and the idea does not work as planned, selling the premises might be more complicated and is likely to be more time-intensive than in the case of two separate apartments. In order “to restore” the former use of the premises, relevant procedures will have to be followed in accordance with the requirements of the legislation then in force, which may even be more stringent in the future.
Cases requiringthe change of the use for the entire building
As a rule, a building falls under one or another category (subcategory) of the intended use if this is the use of its overall area or the largest part. Where the building consists of premises with different uses formed as separate items of property (catering, sports, education, etc.), the type of use of the building is determined as the use of the largest area in that building having the status of a separate item of property. Such premises with different uses formed as individual items of property must be in conformity with the requirements of normative documents of technical construction, building safety and use and other regulations.
The conversion of the dominating premises to other uses also entails the change of use of the entire building, therefore, when buying any property, it is recommended to find out the type of use and the area of the adjacent premises.
The conversion of a building to other uses may be more complicated than in the case of individual premises, especially given that in the case in question it is necessary to take into account the purpose and use of the land plot on which the building is located. In order to give the building another use on the land plot on which the building is situated, a relevant construction permit should be accordingly obtained for buildings. Otherwise the type of land use will have to be changed or supplemented.
The change of the type of the land use might take much time and financial costs, and in certain cases this might be hard to achieve. For example, if a building is planned to be converted to commercial use or the use for the provision of services, but the master plan of the city provides only for the conservation area in that land plot, the conversion of the land purpose and use might also require changes in the master plan of the city. If, for example, a land plot is identified as the area of commercial facilities, it may be used for hotels, buildings intended for commerce, services, catering, sports activities, etc., but the dominating premises on such plot cannot not be given the residential use. In order to convert the existing building to residential use, the type of land use here should accordingly be the area of one- and two-apartment residential buildings or the area of multi-apartment buildings and boarding centres. It is also true, that a land plot may have a few uses if so provided in the relevant planning document or design of the holding.
Depending on the type of works performed and the buildings they concern, the conversion of the premises or building to other uses will require relevant documents certifying the completion of construction. For example, in the case of ordinary repairs, a declaration of completion of construction (change of use) needs to be drawn up, the cadastre file must be accordingly revised and an application has to be filed with the Real Property Register for registration of relevant data changes and recording of the new type of use. Reconstruction of a building will entail a more complicated procedure, which is drawing up of a certificate of completion of construction.
Most common mistakes made in practice when acquiring an unused property for investment purposes:
- Investments required are underestimated; e.g. it subsequently appears that the planned activity will need an expensive conditioning system;
- It is not taken into account that the conversion to other uses might affect the liquidity of the property;
- It is not considered that the premises acquired dominate in the building and that the change of their use necessitates the change of use for the entire building, which may be difficult to achieve in practice.
Jolanta Liukaitytė-Stonienė, Senior Associate, Law Firm GLIMSTEDT
The article was published in the Investuok magazine and Lexology.