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Consultation On Revised Code For Leasing Business Premises

The Royal Institute of Charted Surveyors (RICS) has published a consultation on a professional statement, “Code for leasing business premises”, which incorporates a new lease code (proposed Code). This will replace the Code for Leasing Business Premises in England and Wales 2007 (Lease Code 2007), which is currently voluntary.
Parts of the statement contain mandatory requirements that must be complied with by agents and landlords who are RICS members or registered firms.
Parts of the statement set out an expectation or recommend best practice and use the word “should”. Where members depart from these, they should only do so for justifiable good reason. Where, in the member’s judgment, the departure may have a material impact on the surveyor’s advice, the client must be informed of the departure and the reasons for it.
There may be legal and/or disciplinary consequences for departing from the statement. Failure to act in accordance with the statement may result in a finding of negligence against a surveyor.
The statement comprises:

  • The proposed Code. This states that the agreement as to the terms of the lease must be recorded in written heads of terms. It is mandatory to include certain information in the heads of terms. This includes many of the details that are set out in the existing (voluntary) heads of terms for the Lease Code 2007.
  • The proposed Code also contains recommendations on best practice for lease provisions.
  • An updated template for heads of terms that mirrors the proposed Code.
  • This is followed by a heads of terms checklist. The statement notes that this is likely to be a useful tool where landlords or their agents wish to use their own form of heads of terms document, and the checklist should then be used to ensure that at least the minimum information required by the proposed Code is captured.
  • An updated occupier’s guide. As with the Lease Code 2007, this is aimed at tenants and describes some of the main factors to be considered when agreeing a lease.

The consultation closes on 12 April 2018.

Proposed Code

Some of the key points in the proposed Code are summarised below. Many of these are already mentioned in the Lease Code 2007 and the current (voluntary) heads of terms.
If the landlord is an RICS member or registered firm, they must ensure that the heads of terms include certain information. In the case of an agent being an RICS member or registered firm and acting for a landlord who is not an RICS member or registered firm, the agent must ensure that they advise the client of the requirement that the heads of terms include the information.

Premises

The heads of terms must state the extent of the premises.
Details of the extent of the premises to be let should state which elements of the structure will be included.
The heads of terms must give details of any special rights to be included, such as car parking.

Length of term

The heads of terms must state:

  • The proposed duration of the lease.
  • Whether rights of renewal under the Landlord and Tenant Act 1954 are to be included or excluded.
  • Details of any break rights.

As under the Lease Code 2007:

  • Leases should carry rights of renewal under the Landlord and Tenant Act 1954 unless there is good reason to exclude them, in which case the landlord should advise the tenant to obtain early professional advice as to the implications. The proposed Code notes that this might apply in the case of short-term leases, and states that the landlord should give reasons for excluding.
  • Leases containing break provisions should provide that break notices given by tenants should take effect subject only to the tenant being up-to-date with the basic rent, 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.

The proposed Code provides additionally that leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charges may be deferred until the service charge accounts are finalised.

Rent deposits and guarantees

The heads of terms must state whether there is any requirement for a rent deposit or a guarantee.
The proposed Code also sets out other details concerning rent deposits and guarantees that should be included in the heads of terms, which are broadly similar to the Lease Code 2007. There should be details of the circumstances in which the deposit will be repaid or the guarantor will be released.

Rent and rent review

The heads of terms must:

  • State the amount of rent and the instalment frequency.
  • State whether the landlord intends to charge VAT on the rent.
  • State any rent-free period or other inducement.
  • Set out the basis of any rent review and the review dates.

The recommendations in the proposed Code vary slightly from the Lease Code 2007, although it takes a similar approach. Landlords should explore possible alternatives to upwards only reviews to market rent, particularly for longer-term leases. Leases should allow either party to start the rent review process.
Additionally, it states that leases should not impose time limits intended to prevent a review or set a new rent through inaction by either party.

Assigning, subletting, charging and sharing

The heads of terms must state the tenant’s rights to assign, sublet, charge and share the premises.
The recommended lease provisions vary from the existing Lease Code 2007 in some respects.
Leases should allow tenants to assign the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed. However, they may set out reasonable circumstances in which consent can be refused. The Lease Code 2007 states that the lease should not refer to any specific circumstances, except that a lease would be compliant if it required a group company assignee (together with guarantor) to be of equivalent financial standing to the assignor (and guarantor).
Leases should also reserve the right, but only if reasonable at the time, for the landlord to require an assigning tenant to provide an authorised guarantee agreement (AGA), to require any existing guarantor to guarantee that the assigning tenant complies with the AGA, and/or to require an assignee to procure a new guarantor or rent deposit. The Lease Code 2007 states that an AGA should not be required unless the proposed assignee (together with guarantor) is of lower financial standing than the assignor (and guarantor) or resident overseas.
Leases should allow tenants to sublet the whole of the premises and should, where appropriate, allow subletting of parts, in each case with the landlord’s consent not to be unreasonably withheld or delayed and at rents not less than market rent. Subleases should be required to be on terms consistent with the tenant’s own lease, except that subleases to be excluded from statutory renewal rights may be granted on different terms where appropriate.
Leases should allow tenants to grant a bank or other reputable lending institution a charge over the lease, without the landlord’s consent needing to be obtained.
It may be appropriate for short-term leases or leases of particular types of property to have more restrictive provisions in relation to assignment, charging, subletting and sharing.

Service charges, insurance costs and other outgoings

The heads of terms must state if the tenant will be liable to pay a service charge.
The recommendations are largely similar to the Lease Code 2007; for example, landlords should, during negotiations, provide estimates of service charge. Service charges provisions in leases should be drafted having regard to the principles in the latest RICS service charge code.

Repairs

The heads of terms must state all parties’ repairing responsibilities.
As in the Lease Code 2007, leases should impose tenants’ repairing obligations appropriate to the length of term and the condition of the premises. 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.
Additionally the proposed Code states as follows:

  • If a schedule of condition is required, the heads of terms should state which party is responsible for the cost of obtaining it.
  • The heads of terms for lettings in new buildings should state the extent to which the tenant is being given rights against the building contractor for defects, directly or through the landlord.
  • Leases of newly built premises should contain appropriate obligations requiring the landlord to enforce remedies against the building contractor and relevant professionals for building defects where the tenant is not being given its own direct remedies against them.

Use and alterations

The heads of terms must state:

  • The use or range of uses to be permitted at the premises and any restrictions on changing the use.
  • The restrictions to be imposed on different types of alteration and give details of any initial alterations or fit-out to be carried out by either party.

The recommendations for lease provisions are largely similar to those in the Lease Code 2007. In relation to tenant’s alterations, the proposed Code states that leases should require the parties to identify the required works in sufficient time before the end date to enable the tenant to comply with any such obligation. The Lease Code 2007 suggests that landlords notify tenants at least six months before termination.

Insurance and damage

The heads of terms must state whether the tenant is to pay towards insurance premiums.
The recommendations for lease provisions are largely similar to those in the Lease Code 2007, although there are some variations to the detail. Additionally, landlords should give the tenant the benefit of any premium discounts.

Energy efficiency

The heads of terms should state whether the tenant is to have any obligations in relation to energy efficiency that might involve material cost or limit how the tenant can fit-out or use the premises.

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