The Royal Institute of Chartered Surveyors (RICS) has launched a consultation on a professional statement, which proposes a new lease code for leasing business premises. The intention is to replace the existing Code for Leasing Business Premises in England and Wales 2007, known as the “Lease Code” or the “2007 Code”.
It is worth remembering that the existing Lease Code is the third in a series of voluntary industry codes, the first of which was published by RICS in 1995 and developed by a committee that included members of the property industry, occupiers and professional advisors. The purpose of the codes have generally been to promote a level playing field for tenants, especially smaller commercial occupiers and to provide a more efficient way of negotiating terms of a lease. Uptake of the Lease Code in the property industry as well as its predecessors has however been limited. The Lease Code is rarely mentioned in heads of terms and does not generally form part of lease negotiations. Many smaller business tenants, whom the codes have been specifically aimed at, have never heard of them.
Specific reference to the Lease Code is sometimes made when negotiating a break clause in a lease when removing references to a tenant being obliged to give vacant possession of their premises on the basis that this is not code compliant. Aside from this, the majority of commercial leases still contain upwards only rent reviews (with landlords not offering their tenants the opportunity to consider alternatives), an absolute requirement for a tenant to provide an authorised guarantee agreement (“AGA”) as a condition of assignment (irrespective of the financial status of the assignee) and a requirement to obtain landlord’s consent for all internal non-structural alterations regardless of whether the works affect the services of systems in the building, all of which are not in accordance with the Lease Code.
Considering the poor uptake in the property industry of the previous voluntary codes, it is unsurprising that the proposed code will contain mandatory requirements that must be adhered to by agents and landlords whose firms are members of RICS or which are registered. As and when the new code comes into effect, providing heads of terms will be mandatory and they must also contain confirmation of various matters, such as whether the tenant will have any special rights granted, whether the tenant will be liable to pay a service charge and whether the landlord intends to charge VAT on the annual rent.
Whilst the provision of heads of terms will be mandatory, there are no mandatory requirements as far as the terms of a lease are concerned. It would no doubt be considered unpalatable for the code to provide that a lease must contain certain provisions, or vice versa. The proposed code therefore still contains guidance for best practice, which means there is still scope for smaller or inexperienced commercial tenants to be at a disadvantage when negotiating a lease. Landlords should therefore be encouraged to fully consider the provisions of the code once implemented, especially where there is an unequal bargaining position.
Where landlords depart from recommended terms, they should only do so for sound commercial reasons, which are fully explained to the tenants or its advisors. Whilst RICS members will be obliged to do this under the proposed code, it will be impossible to enforce this requirement amongst non-members or during a transaction where agents are not involved. Those in the property industry who represent tenants, including solicitors, should therefore be advising their clients on the terms and requirements of the code and endeavour to challenge landlords who do not adhere to the spirit of the code.
Francine Blanc is an associate at Russell-Cooke