The new Code for Leasing Business Premises (2020 Code) comes into force on 1 September 2020. Rob Harrison and James Atkins analyse the changes.
The new Code will apply to most business tenancies in England and Wales which are let out for a period of over six months with certain exceptions.
The most significant change from the current Code (2007 Code) is that whilst the 2007 Code is voluntary, the 2020 Code has the status of an RICS Professional Statement which means that some parts are mandatory for RICS members and registered firms.
So what does the 2020 Code contain and what is its likely impact?
The mandatory requirements are covered in Part 2 and include:
- an obligation to approach lease negotiations in a constructive and collaborative manner with the aim of striking a fair balance between the parties
- guidance when dealing with non-RICS members who must be advised of the 2020 Code with a recommendation to take professional advice
- confirmation that the mandatory requirements will also apply to lease renewals and lease extensions, except for any terms that are stated to follow the tenant’s existing lease, subject to reasonable modernisation
Heads of terms form the main section in Part 2 with a requirement that they are provided in writing before the initial draft lease is circulated. The following must be summarised as a minimum:
- the extent of the premises with details of any special rights to be granted
- a new obligation on the landlord to provide a Land Registry compliant plan
- the length of the term and whether it will be contracted out of the Landlord and Tenant Act 1954
- any options for renewal or break rights, any requirements for a guarantor and/or rent deposit
- the amount of rent, frequency of payment, rent reviews including frequency and basis of review
- liability to pay service charge and/or insurance premiums, business rates and VAT
- rights to assign, sublet, charge or share the premises
- repairing obligations, permitted use, alterations, fit-out and reinstatement obligations
- any conditions such as whether subject to survey, board approval or planning permission.
Part 4 contains a template and checklist for heads of terms to ensure none are missed – particularly helpful when checking against non-template heads of terms.
Part 3 sets out good practice when negotiating heads of terms and the lease itself. Key points are:
- Premises and rights. In addition to clearly identifying the extent of the premises being let, the tenant should be granted all necessary rights; this could include requiring the landlord to grant wayleaves for data cabling as well as the more obvious rights such as parking.
- Length of term, renewal rights and break rights. In relation to the Landlord and Tenant Act 1954, the tenant should be allowed time to take professional advice as to whether the tenancy should be included or excluded. Any tenant's break right should be conditional only on vacant possession and the payment of basic rent up to the break date; any advance payments of rent, service charge or insurance rent for the period after the break takes effect should be repaid to the tenant.
- Rent deposits and guarantees. This is largely unchanged from the 2007 Code, so rent deposit provisions should state how the deposit will be returned to the tenant and how any guarantor will be released. Landlords should require rent deposits, guarantees and authorised guarantee agreements only where it is reasonable to do so.
- Rent and rent review. This section varies slightly from the 2007 Code but with a similar approach to fairness. Either the landlord or the tenant should be allowed to start the rent review process. Tenants should be notified of the method for review to allow them time to take professional advice. The rent review clauses should be clear and indexed reviews should not use “obscure formulae” resulting in a disproportionate increase outside of any agreed cap or collars. Unless expressly agreed (usually through a financial inducement) definitions of “market rent” should not result in a “headline rent”.
- Service charges, insurance costs and other outgoings. The current RICS Professional Statement “Service Charges in Commercial Property” will still apply to the 2020 Code and where possible, service charge provisions in leases should adhere to the Statement. Landlords should disclose events they are aware of which may have a significant impact on the amount of future service charge.
- Assigning, subletting, charging and sharing. These provisions differ in several respects from the 2007 Code; leases should contain standard provisions for assignment of whole, underletting of whole or part (where appropriate) charging and sharing with group companies. The 2020 Code allows a landlord to specify reasonable circumstances where consent can be refused e.g. non-payment of rent where there is no legitimate dispute, which is not in the 2007 Code.
- Repairs. Repairing obligations should be appropriate to the length of the lease and the condition of the premises.
- Change of use, alterations and fit out. Tenants should be allowed to leave alterations in place - controls on alterations and change of use should not be unduly restrictive and only imposed where necessary. Where reinstatement of alterations is required these should be included in the heads of terms so that more onerous obligations are stated at the outset.
- Insurance and damage. Where the landlord insures, lease provisions should include damage by insured and uninsured risks and full terrorism cover should be provided (but only where available on reasonable terms).
- Green provisions. New provisions include consideration of “green” clauses such as those set out in the BBP Green Lease Toolkit. Landlords should only stipulate which EPC assessor can be used if it is reasonable to do so.
The 2020 Code undoubtedly has more teeth than its predecessors; if the mandatory requirements are not complied with RICS members could face legal and/or disciplinary consequences. The good practice set out in Part 3 should be followed unless there are exceptional circumstances, and so RICS members may have to justify why they have departed from it.
Overall, the aim of the 2020 Code is to promote fairness in lease negotiations and the recommendations in Part 3 in many ways reflects what happens in practice now, so having this documented can only be seen as a positive step. Clear heads of terms make lease-drafting much easier, so time (and money) is not wasted on trying to second guess what they mean or having to renegotiate provisions which are either unfair or misunderstood by clients. Overall, the 2020 Code is an improvement on the 2007 Code but only time will tell if it is any more effective.