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Across the UK, investors are holding underperforming office and retail assets, and the smartest are turning to hospitality as the answer. With UK hotel investment volumes reaching an estimated £5bn in 2025, the appetite is clear. But hotel conversions are far from straightforward.
They demand simultaneous navigation of planning constraints, title issues, structural realities and operational risks. We see deals stall or collapse entirely when any one of these elements is underestimated. And increasingly, branded residences are reshaping project economics in ways that investors and their advisers cannot afford to overlook.
This article explores the key legal and commercial considerations that arise when repurposing existing buildings for hospitality use, and examines how branded residences are making these projects viable.
Hotels have evolved, and so has the opportunity
Hotels are no longer single-purpose buildings. Today's hospitality assets are multi-functional destinations encompassing leisure, workspace and residential uses under one roof. Lobbies double as co-working lounges, rooftop bars pull evening crowds, and wellness and F&B offerings serve local residents as readily as overnight guests.
Across the UK and Europe, this repurposing trend is playing out at both ends of the market. At one end, secondary office stock is being repositioned as budget and mid-market hotel product, offering stranded asset owners a viable exit and meeting persistent demand for affordable accommodation in key urban centres. At the other end, luxury conversions represent the standout opportunity. Heritage properties and landmark buildings are being reimagined as lifestyle-led hospitality destinations, where the building's inherent character becomes integral to the guest experience. We discussed this trend in our recent podcast with Rocco Forte Hotels.
In the luxury segment, the existing building is itself the competitive advantage. A Victorian warehouse or a Georgian townhouse carries a narrative that no new-build can replicate. Guests are drawn to properties with provenance and authenticity, and operators recognise that a building's history can be as powerful a brand differentiator as the service offering itself. The strongest developers understand this instinctively. The role of legal advisers is to protect and maximise that inherent value through careful transaction structuring.
Whilst this article touches on the broader repurposing trend, its primary focus is on the luxury and upper-upscale segment, where the legal and commercial considerations are at their most complex and where branded residences are most commonly deployed.
Planning: the critical first hurdle
Hotels occupy Use Class C1. Conversion from offices (Class E) or residential use (Class C3) will generally require full planning permission. Local planning authorities scrutinise proposals closely where office loss conflicts with local employment policy, in areas where there is residential undersupply, or where tourism growth raises concerns about overloading infrastructure.
Emerging hybrid formats add further complexity. Aparthotels and extended-stay products blur the C1/C3 boundary. In some cases, local authorities have taken divergent approaches to classification, creating uncertainty for developers seeking to establish the planning baseline for a project. Early engagement on classification, combined with a clear reading of local planning pressures, is essential.
It is worth noting that permitted development rights, which have facilitated a significant volume of office-to-residential conversions, do not extend to hotel use. Every hotel conversion therefore requires a bespoke planning strategy, and getting ahead of this issue early and understanding local planning pressures is essential to project success.
Title and structural realities
Restrictive covenants may limit permitted use, whilst vertical extensions, a common feature of conversion schemes, can trigger rights of light claims from neighbouring properties. Hotels also demand servicing infrastructure (access, deliveries, plant) that most office buildings were never designed to accommodate. Developers must create or secure these rights at the outset through legal groundwork rooted in practical understanding of hotel operations.
Where buildings to be converted are currently occupied, security of tenure under the Landlord and Tenant Act 1954 can directly affect redevelopment timelines. This must be factored into acquisition strategy from day one. Leasehold ownership may introduce further complexity, depending upon the underlying lease terms and controls imposed by the landlord.
Developers should also anticipate issues around listed building consent, party wall obligations and environmental contamination, each capable of introducing material delay and cost if not caught early. In a conversion, the building is the product. A thorough understanding of its legal and physical condition is non-negotiable.
Operating model: getting the structure right
Hotels can be operated under a lease, management agreement or franchise arrangement. Each carries distinct implications for income stability, lender security and asset valuation. The wrong structure can fundamentally undermine the economics of an otherwise viable conversion.
Certain investors may prefer to invest in a conversion project post-planning, once the development pathway is clear, with early-stage risk typically sitting with specialist developers. The London market illustrates this well: institutional capital frequently enters at the point of planning consent, with forward-funding or forward-purchase structures providing the developer with certainty of exit, whilst giving the investor a de-risked entry point. The operating structure and the legal documentation underpinning it must reflect this commercial reality (and anticipate investor requirements) from the outset.
The choice of operating model is also a key consideration for lenders, particularly in an enforcement scenario. Under a management agreement, the owner retains the direct revenue stream and the operator earns a fee, which can simplify a lender's path to the cash flow and its ability to step in or appoint a replacement operator. By contrast, hotel lease and franchise structures often bring the benefit of an established brand name, which may carry additional reputational weight and underpin asset value in ways that a management agreement does not. Each model presents a different risk and recovery profile, and lenders will assess these trade-offs closely. Getting ahead of these dynamics early in the structuring process avoids costly renegotiation later.
Branded residences: shifting the economics
Branded residences are transforming the opportunity. These luxury apartments are sold under a hotel operator's brand, with purchasers gaining access to hotel amenities and services. For developers, upfront residential sales help offset the substantial costs of conversion, whilst the brand association elevates both the hotel and residential product.
The legal complexities, however, should not be underestimated. These schemes create mixed-use developments combining C1 hotel and C3 residential uses, requiring careful structuring of title arrangements, long leasehold interests and detailed brand covenants to protect the operator's positioning. The interplay between the operator's brand standards and the rights of individual residential owners is a recurring source of tension. Covenants must be robust enough to preserve the brand's integrity, covering matters such as short-letting restrictions, design specifications and service charge contributions, whilst remaining enforceable and appealing to purchasers.
The Building Safety Act 2022 adds a further layer. Hotels generally fall outside the higher-risk building regime, but where residential units are involved, parts of the building may be caught depending on height and configuration. This triggers obligations around accountable persons, building safety management and the "golden thread" of safety information. This regulatory dimension is increasingly influencing scheme design from inception, with real implications for cost, programme and ongoing compliance.
Finding the sweet spot
Operators require sufficient keys to run efficiently and deliver the full suite of services that define a premium hospitality offering. Residents, by contrast, demand scarcity and exclusivity to justify the price premium. In practice, the optimal ratio is a limited number of residential units within a larger hotel operation, giving residents access to restaurants, concierge, wellness and housekeeping services, whilst preserving the pricing power that makes the model commercially viable. Strike the right balance and you create genuine operational synergy between hotel and residential components, with the economics to match. Misjudge it and neither component performs. This is as much a commercial judgement as an operational one, and the legal structuring must support both dimensions.
ESG: a commercial imperative
Converting existing buildings offers significant embedded carbon advantages over demolition and new construction. This matters because ESG considerations are now embedded in financing and investment decisions. Lenders scrutinise sustainability performance as part of credit assessments, whilst investors factor ESG metrics into underwriting, pricing and exit strategies.
For hospitality conversions, ESG performance directly influences profit and loss, financing costs and exit liquidity. Beyond the financing dimension, guests themselves are increasingly making booking decisions based on a hotel's sustainability credentials. Developers who embed sustainability into both the design and operational strategy of a conversion project position themselves for a tangible competitive advantage, both in securing capital and in achieving premium exits.
Where this is heading
Hotel-led repurposing represents one of the most compelling and commercially sophisticated opportunities in UK real estate today. But these are complex transactions where planning, title, operational structuring and regulation must all work in concert. Branded residences are raising both the bar and the stakes.
The macro environment is supportive. Interest rate stabilisation is improving the debt landscape, whilst structural oversupply in the office market continues to produce acquisition opportunities at attractive pricing. But getting these projects right requires more than a good building in a good location. Success demands advisers with integrated legal and commercial expertise who understand how all the moving parts fit together, and who can see problems before they materialise.
Macfarlanes is a pre-eminent law firm advising a global client base across Private Capital, Private Wealth, M&A and Disputes.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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