180: RICS code for leasing business premises makes heads of terms mandatory
The Royal Institution of Chartered Surveyors (RICS) has produced a new Code for Leasing Business Premises dated February 2020 (the Code). This replaces the previous 2007 Lease Code produced by the British Property Federation.
The aim of the Code is to improve the quality and fairness of commercial lease negotiations to ensure equality between the parties. The new Code comes into effect on 1 September 2020 and applies to commercial lettings in England and Wales.
A key point to note is that the new Code imposes mandatory obligations on RICS members. Any departure from the Code by RICS surveyors must be justified, and members could be subject to disciplinary proceedings if the Code is not taken into account.
In particular, the Code requires RICS members to use written, comprehensive heads of terms. The landlord or its letting agent must ensure that compliant heads of terms are agreed before a draft lease is circulated. An example template for heads of terms is included within the Code.
The Code states that written heads of terms must cover a number of detailed matters including:
- the identity and extent of the premises;
- length of term and any break rights;
- whether the Landlord and Tenant Act 1954 will be excluded;
- guarantor or rent deposit requirements;
- amount of rent, any rent-free period, rent reviews and VAT;
- liability to pay service charge and insurance premiums;
- rights to assign, sublet, charge, share;
- repairing obligations;
- permitted use; and
- alterations, fit-out and reinstatement.
It is important to note that a party who is not represented by a RICS surveyor or other professional must be advised about the existence of the new Code at the start of negotiations, and it must be recommended that they obtain professional advice before proceeding.
Apart from the mandatory requirements, the new Code contains a ‘good practice guide’ on lease negotiations, which echoes the guidance given previously in the 2007 Code. It sets out guidance on the key terms that you would expect to see within a business lease.
This good practice guide is not mandatory, but RICS members may also need to justify any departure from the principles laid out when negotiating a fair lease of business premises.