The Royal Institution of Chartered Surveyors (RICS) has launched the Code for leasing business premises, 1st edition.
Although the new Lease Code is dated February 2020, it does not come into effect until September 2020. It follows a consultation by the RICS which ended in May 2019.
This isn’t the first Lease Code, despite it being called a first edition, as it will replace the 2007 Lease Code (and there were other versions of the code dating back to 1995). However, the 2007 Lease Code is voluntary, whereas the 2020 Lease Code takes the form of a professional statement.
The 2020 Lease Code will, for the first time, contain mandatory requirements (especially relating to the contents of heads of terms) which must be complied with by agents and landlords who are members of the RICS or registered firms . Other parts of the 2020 Lease Code will constitute good practice and are broadly similar to the 2007 Lease Code.
There may be legal and/or disciplinary consequences for departing from the 2020 Lease Code.
The RICS recognises that for the non-mandatory parts of the 2020 Lease Code there may be exceptional circumstances in which it is appropriate for a member to depart from them.
However, any RICS member who departs from good practice might have to justify their decisions and actions and may result in a finding of negligence against a surveyor.
The objective of the 2020 Lease Code is to improve the quality and fairness of negotiations on lease terms and to promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient.
The 2020 Code applies to most lettings of business premises in England and Wales, but there are exceptions including agricultural lettings, advertising media such as hoardings, premises that will be wholly underlet by the tenant, and premises that are let for a period of not more than six months.
The key mandatory requirements are:
· Lease negotiations must be approached in a constructive and collaborative manner.
· An unrepresented party must be advised about the existence of the 2020 Code and its supplemental guide and must be recommended to obtain professional advice.
· There must be written heads of terms, subject to contract, which must include as a minimum:
o the identity and extent of the premises (and requiring the landlord to arrange for a Land Registry-compliant plan if the lease is registerable);
o any special rights to be granted such as parking or telecom/data access;
o length of term and whether the Landlord and Tenant Act 1954 will apply or be excluded;
o any options for renewal or break rights;
o any requirements for a guarantor and/or rent deposit;
o the amount of rent, frequency of payment and whether exclusive of business rates;
o whether the landlord intends to charge VAT on the rent;
o any rent-free period or other incentive;
o any rent reviews including frequency and basis for review;
o liability to pay service charge and/or insurance premiums;
o rights to assign, sublet, charge, or share the premises;
o repairing obligations;
o the initial permitted use and whether any changes of use will be allowed;
o rights to make alterations and any reinstatement obligations;
o any alterations or fit-out (if known); and
o any conditions of the letting, such as subject to surveys, board approvals or planning permission.
· The same requirements apply to a lease renewal or extension, except for any terms that are stated to follow the tenant’s 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 landlord or its letting agent will be responsible for ensuring compliant heads of terms are in place before the initial draft lease is circulated.
The Code includes as an appendix a template heads of terms which mirrors the 2020 Code. The template does not have to be used, but the 2020 Code also includes a checklist enabling those with their own form of heads of terms to ensure compliance with the 2020 Code.
The non-mandatory elements of the 2020 code are statements of good practice, similar to the 2007 Lease Code, which include matters to be covered in negotiations for the heads of terms as well as in the negotiations of the lease itself.
You should refer to the 2020 Code for the comprehensive list of those elements, but a few which stand out include:
· Where the landlord proposes that the lease is to be contracted out of the Landlord and Tenant Act 1954, the tenant should be notified at the outset, so that they can obtain early professional advice as to the implications.
· Unless stricter conditions have been agreed in the heads of terms, a tenant’s break should be conditional only on the tenant paying the basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry. Landlords should be required to repay rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charge may be deferred until the service charge accounts are finalised.
· Definitions of market rent should not result in a “headline rent”, unless that has been expressly agreed by the parties, such as in return for a financial inducement.
· The parties should have regard to the current edition of the RICS’s Professional Statement “Service charges in commercial property” and, so far as practicable in the circumstances, the service charge provisions in leases should be drafted in conformity with the core principles and mandatory provisions of the statement.
· The requirement for an authorised guarantee agreement (AGA) from an assigning tenant, or a guarantee for the AGA, or a new guarantor or rent deposit should only be where the landlord reasonably requires.
· Except where the heads of terms state there will be a reinstatement specification or an obligation on the tenant to remove alterations, a lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal.
· Leases should cater for damage to the property by an uninsured risk (as well as insured risks).
· Consider inclusion of “green” provisions such as those in the Better Building Partnership’s Green Lease Toolkit. Landlords should act reasonably if they reserve the right to choose which energy performance certificate assessor the tenant may use.
The 2020 Code also contains a supplemental guide for landlords and tenants.
The 2020 Code will be particularly useful in the negotiation of heads of terms, and before it comes into effect regulated businesses should review their model heads of terms and any model forms of lease and consider making them compatible with the 2020 Code.
The model heads of terms set out in the 2020 Code provides the person drafting the lease with a comprehensive list of matters that must be included.
Not only will this help considerably with the drafting of the lease at the outset of the transaction, but it will also dispose of many items straight away that used to clog up lease negotiations, waste a great deal of time and try everyone’s patience!