10 September 2020

The New Code for Leasing Business Premises 2020

 RICS has published a new “Code for Leasing Business Premises” (1^st edition, February 2020) (the New Code), which replaces the previous Code for Leasing Business Premises in England and Wales 2007 (the 2007 Code).

The New Code was published on 12 February 2020 and took effect from 1 September 2020.

The New Code contains mandatory requirements that must be complied with by agents and landlords who are RICS members or registered firms, and also contains expectations and recommendations for best practice which members should only depart from for a justifiable good reason.

You can read the New Code in full here.

Background

The 2007 Code was intended to promote efficiency and fairness in landlord and tenant relationships and was used as the “go-to guide” for negotiations before granting a new lease.

The New Code

The majority of the New Code remains the same as the 2007 Code however, one key change is that the New Code contains mandatory requirements which must be complied with by agents and landlords who are RICS members or registered firms. Failure to comply with the New Code could result in legal and/or disciplinary consequences, and a surveyor could potentially be found negligent for failing to act in accordance with the New Code.

The New Code comprises the following:

“Mandatory” requirements and “best practice” recommendations, covering the heads of terms and negotiations in relation to a new letting;

• New updated template for heads of terms that mirror the New Code;
• New heads of terms checklist;
• An updated occupier’s guide (designed to help tenants understand the main factors to be considered when negotiating and agreeing a commercial lease).

The “Must Haves”

Premises and Length of Term

The heads of terms:

• must state the extent of the premises and the landlord is required to provide a Land Registry compliant plan, if the lease is registrable;
• must give details of any special rights to be included e.g. car parking, rights necessary for intended use of the premises, or telecoms/data access.
• must state the proposed duration of the lease;
• must state whether rights of renewal under the Landlord and Tenant Act 1954 are to be included or excluded;
• must give details of any break rights or option for renewal.

In relation to break rights, these should only be conditional on there being no rent arrears, the tenant giving up occupation and leaving no subtenants or other occupiers. The landlord should also repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. 

Rent Deposits/Guarantees/Rent and Rent Review

The heads of terms:

• must state whether there is any requirement for a rent deposit or a guarantee;
• must state the amount of rent and the instalment frequency;
• must state whether the landlord is charging VAT on the rent;
• must give details of any rent review and the rent review dates.

In relation to rent review, the New Code states that “Rent review clauses should be clearly expressed. Definitions of market rent should not result in a ‘headline rent’ unless that has been expressly agreed by the parties, such as where that is agreed in return for a financial inducement.”

Alienation provisions

• The heads of terms must state the tenant’s rights to assign, sublet, charge and share the premises.
• 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 (e.g. arrears of rent, service charge or insurance contributions)
• If reasonable to do so, the lease should also reserve the right for the landlord to require an assigning tenant to provide an Authorised Guarantee Agreement (AGA) and/or require an assignee to procure a new guarantor or rent deposit. This differs to the 2007 Code, which states that an AGA should not be required unless the proposed assignee (together with the guarantor) is of lower financial standing than the assignor (and guarantor) or is resident overseas.
• Leases should allow corporate tenants to share the premises with other group companies, provided that they do not create a formal subletting.
• Leases should allow tenants to sublet the whole of the premises and should allow subletting of parts (where appropriate) without 1954 Act protection, with the landlord’s consent not to be unreasonably withheld or delayed and at rents not less than market rent.
• Subleases should be on terms consistent with the tenant’s own lease.

In some cases, it may be appropriate for short-term leases or leases of particular types of property to have more restrictive alienation provisions, but these need to be reasonable.

Service Charge/Insurance/Other Outgoings

• The heads of terms must state if the tenant will be liable to pay a service charge. Landlords should be aware of the “RICS Professional Statement Service Charges in Commercial Property”, and the service charge provision in leases should be drafted in accordance with the mandatory provisions of that Professional Statement.

Repairs

• The heads of terms must state all parties’ repairing responsibilities.
• If a schedule of condition is required, the heads of terms should state which party is responsible for the costs of obtaining it.
• For lettings in new buildings, the heads of terms should state the extent to which the tenant is being given rights against the building contractor for defects, either directly or through the landlord.
• For leases of newly built premises, a tenant taking on direct or indirect responsibility for repairs should be given suitable protection against inherent defect liabilities.

Permitted Use

• The heads of terms must state the initial use or range of uses to be permitted at the premises

Alterations

• The heads of terms must state the restrictions to be imposed on different types of alterations and give details of any initial alterations or fit-out to be carried out by either party.
• 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. This change represents an improvement for landlords.

Insurance

• The heads of terms must indicate whether the tenant is to pay towards insurance premiums.
• It is recommended that landlords should give the tenant the benefit of any premium discounts and disclose whether the landlord benefits from insurance commissions.
• The policy should include full terrorism cover if available at reasonable rates.
• The lease should state that rent suspension will apply in the event of damage by an insured or uninsured risk.
• In the event that the premises are damaged by an uninsured risk so as to not be capable of normal use by the tenant, either party should be allowed to terminate the lease unless the landlord agrees to reinstate the property at its own costs.

Energy Performance Certificate

The lease should indicate which party is responsible for obtaining an EPC, if required during the term, and landlords should be required to act reasonably if they reserve the right to choose which EPC assessor the tenant may use.

Landlord’s Title

Where the landlord’s title (freehold or leasehold) is subject to enforceable covenants that prevent the landlord from complying with any provision of this New Code, the landlord should act in conformity with those covenants but if challenged should explain the position to the tenant. The landlord should be responsible for obtaining any consent for the grant of the lease required from a superior landlord, mortgagee or other third party.

Conclusion

With the inclusion of the mandatory elements, regulated businesses may wish to take this opportunity to review their model heads of terms and leases and consider bringing them in line with the New Code.