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New Lease Code for Old

The professional statement, “Code for leasing business premises”, published by the Royal Institution of Chartered Surveyors (RICS) incorporates the proposal for a new lease code. The consultation period in relation to this proposal ends on 12 April 2018.

Following the consultation period, the RICS intends for the revised Code to replace the existing Code for Leasing Business Premises in England and Wales 2007 (the 2007 Code), which was first published on 28 March 2007.

Unlike the 2007 Code, the revised Code will contain a number of mandatory statements that must be complied with by agents and landlords who are RICS members or registered firms.

Failure by members or registered firms to act in accordance with the mandatory requirements may lead to a finding of negligence against a surveyor as the court is likely to take account of the relevant statements in cases where allegations of professional negligence are made against a surveyor.

The revised Code states that there must be written heads of terms. It is mandatory to provide certain information in the heads of terms, and as a minimum the heads of terms must state the position on the following:-

  • the identity and the extent of the premises
  • any special rights to be included
  • the duration of the lease
  • whether rights of renewal are to be included or excluded
  • details of any break rights
  • whether there is a requirement for a rent deposit or a guarantee
  • the amount of rent, the instalment frequency of rent, such as quarterly or monthly payments, whether VAT is payable on the rent, any rent free or other inducement and the basis of any rent review and review dates
  • the tenant’s rights to assign, sublet, charge and share the premises
  • service charges, insurance costs and other outgoings
  • repairing obligations
  • use or range of uses permitted at the premises and details of alterations permitted and/or restrictions to be imposed on different types of alteration
  • insurance and damage

In addition to the mandatory requirements, the revised Code contains best practice statements, which should be complied with. The guidance states that these best practice statements should only be departed from for “justifiable good reason”. However, further clarification is required as to what constitutes “justifiable good reason”. Importantly for landlords, it is not clear whether commercial reasons alone would sufficiently justify a departure from the best practice statements.

Accordingly, inclusion of the best practice statements in the revised Code raises the following questions:-

  • To what extent will the best practice statements be enforceable i.e. will they have any “teeth” or will they in practice still be voluntary?
  • If the best practice statements are enforceable, where will the liability lie? Will it lie with the corporate entity or the individual surveyor who structures the deal? In practice, if the industry sees these best practice statements as being enforceable and having teeth, there will be pressure on both parties to adhere to the statements. At the minimum, members of the RICS will be conscious of reputational consequences for non-compliance.
  • Should the best practice statements be considered in light of sector-specific requirements? For example, could a landlord or agent argue that it is appropriate to depart from certain statements on retail or office lettings?

Despite the uncertainty surrounding enforceability, the following elements of the best practice statements are likely to cause concern to landlords and their agents:-

  • Renewal rights – “Leases should carry rights of renewal under the Landlord and Tenant Act 1954 unless there is good reason to exclude them”. If enforceable, this statement could restrict landlords in the management of their assets. For example, if retail landlords are required to offer leases with statutory renewal rights as standard, they could be prevented from regulating tenant mix.
  • Rent review – “Landlords should explore possible alternatives to upwards only reviews to market rent”. Although landlords are increasingly using alternative methods of rent adjustment, such as index-linked rent reviews and turnover rents, open market rent review is still the most common method of periodically recalculating commercial rent. Any departure from this industry standard is likely to be unpalatable to most landlords, particularly if such alternatives do not involve an upwards only review model.
  • Subletting – “Leases should allow tenants to sublet the whole of the premises”. Landlords may be concerned that this default position is inappropriate for certain types of asset. Once again, restricting subletting is conducive to regulating tenant mix. Although the revised Code does acknowledge that a more restrictive approach to subletting may be appropriate for “shorter term leases or leases of particular types of property”, many landlords will still feel that the revised Code is too prescriptive in this respect.
  • Repairs – “Tenants should not normally be obliged to give the premises back at the end of the lease in any better condition than they were in at its grant”. This statement is a considerable departure from market practice, as a commercial landlord will generally expect a tenant to keep the premises in good and substantial repair and condition. This means that, if the premises are not in good repair at the beginning of the lease, the tenant has to put and keep the premises into good repair. The best practice statement contradicts this concept, suggesting that tenant’s repairing obligations would ultimately need to be evidenced by reference to a schedule of condition instead.
  • Insurance – Landlords should “give the tenant the benefit of any premium discounts and disclose to the tenant whether the landlord is receiving commission”. For landlords with large property portfolios who are able to negotiate group policy discounts because of their unique bargaining position, adherence to this statement is likely to be unappealing.

As with the 2007 Code, the revised Code will also contain an updated template for heads of terms (which are not compulsory), and a checklist. While most landlords and agents are likely to want to use their own heads of terms, the checklist will be a useful tool in ensuring that the minimum mandatory information required by the Code is being included.

The revised Code will include an updated occupier’s guide which is aimed at tenants and which explains the main factors that a tenant should consider when agreeing a lease.

Given the potential for legal and/or professional disciplinary consequences as a result of departing from the revised Code and particularly given the uncertainty surrounding the enforceability of the best practice statements, all interested parties are encouraged to review the recommendations and participate in the consultation before it closes on 12 April 2018.