PROPERTY JOURNAL

The commercial lease code is here

The new commercial lease code has been published as part of an RICS professional statement to promote best practice

Author: Philip Freedman

24 May 2020

A new edition of the Code for leasing business premises in England and Wales has recently been issued as part of a new RICS professional statement, which comes into force on 1 September. The lease code has also been published as a non-branded document, without the mandatory requirements.

The first commercial lease code was published in 1995 by a property sector working group, with government support. It was largely a response to political pressure against the prevalence of landlord-biased leases, which were often of 15-25 years' duration and had multiple upward-only rent reviews. The code was particularly aimed at helping small businesses to negotiate lettings that suited their business requirements.

Subsequently, many parts of the commercial lettings market became more evenly balanced between landlords and tenants, with lease terms shortening and many rent reviews being abandoned or leading to only modest increases. Nevertheless, the code remained valuable, and was updated in 2002 and 2007.

RICS has taken a lead in updating it again with the first edition of the Code for leasing business premises professional statement for England and Wales, published in February, giving supplemental guidance for landlords and tenants in Appendix B. The document was prepared in collaboration with the Law Society, and consulting with a range of professional organisations and representatives. It has enabled RICS to set rules intended to promote balanced letting negotiations and awareness and dissemination of the code, for the benefit of landlords and tenants alike. Detailed heads of terms will be compulsory on most commercial lettings.

The code was particularly aimed at helping small businesses to negotiate lettings that suited their business requirements

By incorporating the code into a professional statement with mandatory obligations for RICS members and regulated firms, and addressing the guidance to landlords as well as tenants, this marks a significant step towards ensuring that all parties understand the issues, and the desirability of obtaining appropriate professional advice when negotiating letting terms.

The introduction to the statement explains that the code applies to premises in England and Wales being let to tenants who will carry on trade, professional or other business activities there. But it does not apply to agricultural lettings; to premises that will only be used for plant and equipment, such as transformers or telecommunications, or advertising, such as hoardings; to premises that are intended to be wholly sublet by the tenant; or to premises being let for six months or less.

"It is now mandatory to advise unrepresented tenants to employ a property professional and to read the guidance"

In Part 2 the statement sets out four mandatory requirements, to which an RICS member or regulated firm is expected to adhere. These have regulatory implications and departure from any of them may have disciplinary or legal consequences, or even both. In outline, these requirements are as follows.

  • Negotiations over the lease must be approached in a constructive and collaborative manner.
  • A party that is not represented by an RICS member or other property professional must be advised by the other party or its agents about the existence of the code and its supplemental guide, and must be encouraged to obtain professional advice.
  • The agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating that it is subject to contract and summarising, as a minimum, the position on 16 specified aspects of the letting mentioned below.
  • At lease renewal or extension, the heads of terms must comply with the same requirements, except for any terms stated to follow the tenants existing lease, subject to reasonable modernisation.
  • Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.

The matters to be covered in heads of terms are an expanded version of the list at the beginning of the 2007 code. They relate to the premises, including preparation of lease plans; rights to be granted; length of term; statutory and contractual renewal rights; break options; guarantors and rent deposits; rent payment and review; VAT; rent-free periods and incentives; service charges; insurance contributions; repairs; assignment subletting and sharing; permitted use; alteration rights, fit-out and reinstatement; and any conditionality on surveys, board approvals, planning permission or other pre-conditions.

The lease code itself is set out in Part 3 of the statement, and makes recommendations on each of the topics required for the heads of terms. Achieving those outcomes is not mandatory, though the code indicates good practice. It includes not only matters to be covered by the parties and their agents in negotiations leading to the heads of terms, but also those to be considered by the parties and their legal advisers in preparing and negotiating the draft lease.

The new code builds on the 2007 version, but focuses on ensuring that the negotiations clarify all the main terms and lead to fair outcomes on issues that might otherwise be traps for the unwary, such as headline rents at review, unfair time limits, obscure indexation formulas, excessively strict controls on alterations and use, and inappropriate break option conditions.

Landlords are no longer exhorted to offer up or down rent reviews or alternative lease terms at different rents, since it is now mandatory to advise unrepresented tenants to employ a property professional and to read the guidance, which makes clear that many terms offered will be negotiable, explains the effect of upward-only rent reviews, and mentions different review mechanisms that might be agreed, including indexation and fixed increases.

Most of the recommendations in the new code are uncontroversial, but it follows the previous versions in recommending that an authorised guarantee agreement should only be required on an assignment if it is reasonable to do so. However, the guidance acknowledges that this may not be acceptable to landlords in certain circumstances, such as where the tenant's financial strength is a particularly important element of the letting.

The appendices to the code are set out in Part 4 of the statement, and include a template for heads of terms that can be used if needed. For those who prefer to use their own template, there is a checklist to ensure that all the required matters are included.

The appendices also include a very detailed guide for the parties. This replaces the previous guide for occupiers and addresses landlords as well as tenants. It follows the topic sequence of the code for ease of cross-reference, and extends to good practice on certain matters that may arise during the term of the lease, such as defaults, dilapidations and termination and renewal.

As well as setting out in straightforward language the reasons for and the implications of many provisions that are commonly found in commercial leases, it explains what factors the parties should have in mind when considering each of the main terms of the letting. It might even be usefully read by more experienced practitioners as a refresher.

Philip Freedman solicitor is a consultant at Mishcon de Reya LLP and has chaired the lease code working group since 2001. He is a member of the Law Societys Conveyancing and Land Law Committee  philip.freedman@mishcon.com

Related competencies include: Leasing and letting

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