Case Study: Mixed-Use Commercial Purchase of a Let Shop and Holiday Let Flat on One Title

The Client

Richard and Claire live in Hertfordshire and have spent most of their summer holidays in Cornwall for the last twenty years.

Both are employed, they own their home with a modest mortgage, and they have let a single buy-to-let flat near home for several years with no problems. They have a clean credit history.

They wanted a second property in Cornwall that would pay its way, give them somewhere to stay out of season, and eventually become part of their retirement plans.

The Objective

The building sits on Fore Street, a short walk up from the harbour. The shop has been an art gallery and framing business for a decade, run by the same owner throughout. Three years ago the tenant renewed on a new 10-year lease with no break clause, and the rent has always been paid on time.

The flat above had been let on a long-term tenancy by the seller and was now empty.

Richard and Claire planned to refurbish it, list it with a local holiday letting agency and use it themselves for a few weeks a year. They obtained an income projection from the agency, which put gross holiday let income at around £26,000 a year across the high, mid and low seasons.

Taken together, the building would produce two separate incomes: a secure commercial rent from the shop and holiday let income from the flat.

The Complication

Because the shop and the flat are on one freehold title, this is a mixed-use commercial purchase, not a holiday let mortgage. Mainstream holiday let lenders lend on the flat on its own title, not a whole building with a commercial tenant on the ground floor.

Splitting the title by granting a long lease of the flat was not an option before completion. The seller would not agree to it, and it would have added time and legal cost to a purchase the clients wanted to secure quickly.

So the question was which kind of commercial lender would look at the building the way Richard and Claire did: a let shop and a holiday let, each earning its own way.

How We Assessed Options

We started by gathering everything a lender would want to see: a copy of the shop lease, the tenant’s rent history, the holiday letting agency’s income projection, details of the clients’ existing buy-to-let and confirmation that nothing in the title restricted holiday letting of the flat.

We then looked at three possible routes.

Step 1: Mainstream holiday let lenders

We contacted two mainstream holiday let lenders to confirm the position. Both confirmed they could not consider a building where the flat shares a title with a let shop, however strong the tenant. They would only look at the flat if it sat on its own leasehold title, which was not available here.

Step 2: Commercial lenders

On paper, the shop is exactly what a commercial lender likes to see: a non-food retail use, a tenant who has traded from the premises for 10 years, and 8 years left on a lease with no break clause.

We approached a commercial lender to test the case. It was comfortable with the shop and the tenant, but it would only count the flat at a long-let rent, not holiday let income. On that basis, the combined income did not cover the loan at its stress rate, and it confirmed the most it could offer was around 60% loan to value. That would have left Richard and Claire roughly £41,000 short.

The loan size was also towards the lower end of what the lender usually looks at, so there was little room to negotiate. For the clients, the numbers simply did not work.

Step 3: A specialist mixed-use lender

Drake works with specialist lenders that lend on mixed-use property and underwrite each case individually. One of these will consider a holiday let flat above a commercial unit on the same title, and will take holiday let income into account alongside the commercial rent.

Identifying the Right Route

We presented the case to the specialist lender in full before any valuation was booked. That included the shop lease and rent history, the holiday letting agency’s income projection, the clients’ track record as landlords and their plans for refurbishing the flat.

The lender confirmed it was willing to proceed at 70% loan to value, assessing the shop rent and the holiday let income together, subject to its valuer’s report on the building and the lease.

We were clear with Richard and Claire that the rate would be higher than a commercial lender would charge, and that the arrangement and valuation fees would be higher too. Set against borrowing the amount they needed and securing the building, they were happy to go ahead.

We also explained that once the holiday let has a trading record, and the shop lease has a few more years of rent history behind it, it may be possible to review the mortgage when the initial product ends. Splitting the title in future could also open up other options.