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12 May 2020

192: RICS Lease Code

Background

The Royal Institution of Chartered Surveyors launched the Code for leasing business premises, 1st edition (the Code), in February 2020. It comes into effect on 1 September 2020 and will replace the voluntary Code for Leasing Business Premises in England and Wales 2007. The Code is a RICS Professional Statement, which means RICS members must comply with the mandatory parts and may be required to justify departures from the good practice parts of the Code.

It comprises of the Code itself and an accompanying template heads of terms and checklist. The template heads of terms do not have to be used, but the checklist enables those with their own form of heads of terms to ensure compliance with the Code.

Objective

RICS state that the objective of the 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.’ It is not intended that the Code prescribes the outcome of terms. Instead they seek to achieve a fair and balanced negotiation process by identifying key terms and encouraging parties to obtain advice to make an informed decision about whether to proceed.

The Code applies to lettings of premises (in England and Wales) to tenants who will carry on trade, professional or other business activities in them. It is not intended to apply to: agricultural lettings; advertising media (such as hoardings); premises that will only be used to house plant and equipment (such as telecoms); premises that will be wholly underlet by the tenant; or premises that are let for a period of not more than six months.

The Code is split into mandatory requirements and best practice.

Mandatory requirements

The mandatory requirements are as follows:

  • lease negotiations must be approached in a constructive and collaborative manner;
  • an unrepresented party must be advised about the existence of the Code and its supplemental guide and must be recommended to obtain professional advice;
  • there must be written heads of terms, subject to contract, summarising the position on a number of specified aspects including the identity and extent of the premises; length of term; whether the Landlord and Tenant Act 1954 will be excluded; break rights; guarantor / rent deposit requirements; amount of rent, any rent-free period, rent reviews, VAT; liability to pay service charge and insurance premiums; rights to assign, sublet, charge, share; repair; permitted use; alterations and reinstatement; conditions of the letting such as subject to survey, board approval;
  • 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; and
  • 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.

Best practice

The rest of the Code indicates good practice, including matters to be covered in the negotiations for the heads of terms as well as for the preparation and negotiation of the lease itself. Examples of the Code’s good practice are (but this is by no means a comprehensive list of the best practice guidance):

  • where it is proposed that security of tenure is to be excluded the tenant should be notified at the outset so they can obtain advice as to the implications;
  • unless stricter conditions have been agreed, a tenant’s break should be conditional only on the tenant paying the annual rent, giving up occupation and leaving no subtenants or other occupiers. Landlords should be required to repay any rent, service charge and insurance rent paid by the tenant for any period after a break date;
  • definitions of market rent that result in a higher than market rent should not be included, unless that has been expressly agreed, 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, the service charge provisions in the lease should be drafted in conformity with the core principles and mandatory provisions of that statement;
  • the requirement for an authorised guarantee from an assigning tenant, a guarantee for the authorised guarantee, or a new guarantor or rent deposit should only be where the landlord reasonably requires;
  • if repairing obligations are to be limited to the current condition of the premises a schedule of condition would normally be required and parties should agree who is responsible for the cost of this;
  • a lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal;
  • leases should include provisions in respect of damage to the property by uninsured risks (as well as insured risks). The insurance policy should include terrorism cover where available at reasonable rates; and
  • parties should consider the 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.

Conclusion

The Code marks a material departure from RICs previous guidance as compliance with its mandatory provisions is compulsory for RICS members.

A good set of heads of terms will already encompass the majority (if not all) of the information required by the mandatory requirements. In theory compliance with the Code will be a benefit to all parties as a compliant heads of terms should streamline the process for issuing draft documentation and avoid unnecessary negotiation on key points that should have been picked up at heads of terms stage.

What impact the best practice elements of the Code have remains to be seen, however they could potentially affect the content of commercial leases going forward.

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