What’s new
As you may know, the new RICS Code for leasing business premises comes into effect on 1 September. The aim of the Code is to improve the quality and fairness of lease terms and to improve efficiency by having a comprehensive set of heads of terms at the outset.
What’s that got to do with me?
We all know that the last (2007) Lease Code was selectively ignored, so why should you care?
Well, the 2020 Lease Code is an RICS “practice statement” which means that parts of it (relating to heads of terms and negotiations) are mandatory for RICS members/regulated firms. The remaining parts are “good practice”, but that isn’t as anodyne as it sounds. The RICS requires that the good practice requirements should also be followed save in “exceptional” circumstances and, though members may depart from the good practice requirements, the RICS may require them to “justify their decisions”.
But I’m not a member of the RICS…
Even if you’re not a member of the RICS, the Code should not be ignored. If you’re a landlord you may well find that the agents that you use are RICS members. Even if your agents aren’t RICS members, a lot of large institutional landlords who might wish to purchase your property in the future are RICS members or regulated firms and will need to comply with the Code.
Real change?
The upshot is that the new Code is likely to be taken seriously and to have an impact on practice. Many, if not most, of the Code’s recommendations and requirements reflect current market practice in any event, but there are some areas (highlighted below) where the frontier for negotiations will be pushed back as a result of the Code.
Mandatory requirements
What are the mandatory requirements?
The mandatory requirements include:
- approaching lease negotiations in a constructive and collaborative manner;
- advising unrepresented parties about the existence of the Code and recommending them to obtain professional advice;
- providing detailed written heads of terms, covering a variety of matters including: length of term; whether the lease is to be contracted out; break rights and options to renew; requirements for guarantors and/or rent deposits; basis of rent review; liability to pay service charge/insurance; alienation rights; repairing obligations; and rights to make alterations.
The heads of terms must be in place before the draft lease is circulated. Helpfully the Code includes a template set of heads of terms, which reflect the Code.
Good practice
The majority of the Code relates to good practice requirements. The Code provides detailed guidance as to the matters to be covered by the parties and their agents in the negotiations leading to the heads of terms, and matters for them to consider when negotiating the lease.
The vast majority of the recommendations are unsurprising, and simply reflect the position that most commercial landlords and tenants already arrive at. However, some of the changes are more noteworthy.
Our top ten, most notable changes as a result of the new Code are:
- Authorised Guarantee Agreements – only if reasonably required.
- Alterations – for leases of whole, consent should not be required for internal non structural alterations that do not adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building.
- Reinstatement – tenants should be allowed to leave alterations in place unless it is reasonable for the landlord to require their removal.
- Uninsured risks – there should be a rent suspension and a right for both parties to break unless the landlord elects to rebuild at its own cost.
- Green leases – consideration should be given to including "green" provisions to encourage co-operation between the parties to improve operational efficiency.
- Services – landlords should not make their obligation to provide services subject to the tenant paying the service charge and should have regard to the RICS Professional Statement “Service charges in commercial property”.
- Breaks – should only be conditional on “principal” rent as opposed to “all rents” being paid and on giving up occupation and not leaving behind any subtenants.
- Breaks – should include an obligation to repay rents paid in advance.
- Alienation preconditions – should be reasonable and appropriate.
- Repair – obligations should be appropriate to the length of term and the condition of the premises.
These are, of course, the headlines only and the full code be found here.
End result?
How far market practice changes to reflect the Code’s requirements and recommendations will become clearer in due course, once the Code has had a chance to make its presence felt. By early next year we should have a good idea about how far the Code is being adopted, but we do expect real changes to be made to reflect the core principles.