PROPERTY JOURNAL

Understanding the Leasing and letting competency

Commercial property APC candidates must comprehend process, legislation and RICS guidance to successfully gain the Leasing and letting competency

Author:

  • Jen Lemen

05 February 2021

Leasing and letting is an optional technical competency on the Commercial Real Estate, Corporate Real Estate, Property Finance and Investment, and Valuation pathways, among others. It involves understanding the market for leasehold property, including new lettings, sublettings and assignments. 

At Level 2, candidates should have experience of dealing with leasing or letting transactions from start to finish. At Level 3, candidates should have provided reasoned advice to clients on a variety of different leasing or letting instructions and evidencing experience on instructions from start to finish. Ideally, candidates' experience will include acting for both landlords and tenants, although this may not always be possible.

This article will take candidates through a typical disposal instruction, highlighting key issues to consider. It does not provide an exhaustive list, and candidates will need to ensure they can give diligent advice on complex transactions. 

Instruction timeline

At the point of initial instruction, candidates need to check they are sufficiently competent, knowledgeable and experienced to act and that there are no conflicts of interest, as per the RICS Conflicts of interest professional statement. 

They must also ensure they comply with the EU's anti-money laundering directive, which will still apply in most respects regardless of Britain having left the EU. This requires commercial letting agents to carry out customer due diligence (CDD) checks when a property is let for a month or more at a rent that, for at least part of the term, is at a monthly rate of more than €10,000 or equivalent. 

CDD must be undertaken on both the lessor and the lessee to identify potential red flags of money laundering, terrorist financing or corruption. For further information, candidates can refer to the RICS professional statement Countering bribery, corruption, money laundering and terrorist financing.

During the course of the instruction, candidates must also comply with the Consumer Protection from Unfair Trading Regulations 2008 and Business Protection from Misleading Marketing Regulations 2008. This requires candidates to treats consumers fairly and to avoid engaging in unfair commercial practices, e.g. giving false information in marketing material or not acting in good faith. 

Candidates must follow the requirements of the RICS professional statements Real estate agency and brokerage 3rd edition and UK Commercial real estate agency or Purple Book as well. The first sets out 12 core principles, on which the Purple Book expands. 

The Code of practice for the commercial property sector, published by the UK government to encourage commercial tenants and landlords to work together to protect viable businesses during the COVID-19 pandemic, should also be referred to while it is relevant.

Before commencing work on a disposal, candidates must ensure that terms of engagement are agreed in writing with their landlord client. 

Due diligence

After accepting a new instruction from a landlord to dispose of a property – that is, to agree a new lease – candidates will want to start preparing their desktop due diligence. They should ask the landlord, their client, for copies of any documentation held on file, including historic correspondence.

They will also want to research various issues, using online databases, such as:
  • tenant demand
  • supply of competing space
  • tenure held by the client (landlord) and any terms of a head lease
  • location
  • specification
  • accommodation
  • planning history
  • asbestos
  • energy performance certificate; if none is available then this must be obtained at the latest by 28 days after going to market, unless exemptions apply, e.g. low energy use industrial building
  • other factors affecting value such as planning use class, permitted development rights and any restrictions
  • health and safety risk assessment.

Candidates carrying out health and safety assessments should be informed by the RICS Surveying safely 2nd edition guidance note and any considerations in light of COVID-19 such as maintaining social distancing and taking appropriate Personal Protective Equipment, e.g. mask and gloves.

"Candidates will want to ask their client for copies of any documentation held on file"

Leases and liabilities

Candidates may encounter situations where a client is seeking to dispose of their existing leasehold interest, prior to contractual expiry. Candidates will need to review the lease, in particular the alienation clause, which deals with subletting and assignments. 

Subletting is where the client agrees a sublease with another party, but remains contractually liable for the property under their existing lease. In contrast, assignment effectively creates a new contractual relationship between an incoming party and the client's landlord, with the client being able to step away from their contractual liability unless an authorised guarantee agreement (AGA) is required. This requires the outgoing tenant to guarantee the lease obligations of the immediate assignee, which will fall away upon future assignment of the lease.  

Candidates must be familiar with the provisions of the Landlord & Tenant (Covenants) Act 1995, which automatically releases a tenant from their liabilities on assignment. 

After inspecting and measuring the property, candidates will need to advise their client on issues including market rent, incentives and marketing strategy, such as entries in online databases and circulation of details to relevant agents, as well as VAT position and impact of the letting on capital value. 

Candidates will then need to produce marketing literature and potentially consider installing a to let board, ensuring compliance with the Town & Country Planning (Control of Advertisements) (England) Regulations 2007

Once potential tenants express an interest in the property, candidates will enter into negotiations to secure the best possible rent and lease terms. At all times they must adhere to the RICS Code for leasing business premises professional statement, which mandates the provision of written heads of terms, including the minimum required terms. When agreeing detailed terms, candidates need to consider issues such as repairing covenant, service charge, alienation and commencement date.

Candidates will also need to provide reasoned advice on why a particular tenant is preferred, with a review of their audited accounts, a credit report or application of the profits test, and references, to ensure due diligence on the prospective tenant's financial position. Suitable security should also be requested, such as a rent deposit, guarantor, personal guarantor or payment of rent in advance. 

Committed until completion

The candidate's involvement continues after heads of terms are agreed, as ensuring smooth progression to completion is an essential part of the letting process. Many deals fail to complete or become protracted because of delayed internal approval processes. Careful liaison with all parties, including solicitors, will help to get the deal over the line.

Candidates may also need to liaise with solicitors, contractors and building surveyors over licences to alter for fit out works or to obtain superior landlord's consent. This may require the expertise of another professional, such as a building surveyor or property manager. 

Leasing and letting has a solid foundation in legislation, lease analysis and RICS standards and guidance, and therefore needs excellent commercial negotiation and communication skills to ensure diligent client advice is provided, and that deals proceed to completion in a timely manner. 

jen@property-elite.co.uk

"Many deals fail to complete or become protracted because of delayed internal approval processes"

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