New mandatory requirements for heads of terms for commercial leases in England and Wales

The RICS has launched a consultation on a replacement for the current Code for Leasing Business Premises in England and Wales 2007. Importantly, the new Code (which also applies to England and Wales) will be an RICS Professional Statement, which RICS members must act in accordance with.

There are new mandatory requirements in relation to what the heads of terms must contain, which are set out below and must not be departed from. The new Code also contains recommendations on best practice advice – where RICS members depart from them, they should only do so for justifiable good reason and the client may need to be informed. The new Code has a more formal professional status for RICS members as compared to the current one. As with the current Code, there is a Template heads of terms and a Guide for Occupiers. There is also a heads of terms checklist.

The objective of the new document is to improve the quality and fairness of initial negotiations on lease terms and to promote the issue of comprehensive heads of terms. Landlords should be transparent about departures from the Code and the reasons for it and should ensure that prospective tenants and guarantors are made aware of the Code. Greater clarity in heads of terms is a positive and the new Code is therefore to be welcomed.

To respond to the Consultation, click on https://consultations.rics.org/consult.ti/leasecode/consultation
The Consultation lasts until Thursday 12th April.

The Mandatory requirements:

Negotiations over the lease must be approached by all parties in a constructive manner that displays integrity and respect.

The agreement as to the terms of the lease must be recorded in written heads of terms, containing, as a minimum, the position on each of the following aspects:

The premises

The heads of terms must state the identity and extent of the premises being let.

The heads of terms must give details of any special rights to be included, such as car parking.

Length of term, renewal rights and break rights

The heads of terms must state the proposed duration of the lease.

The heads of terms must state whether rights of renewal under the Landlord and Tenant Act 1954 are to be included or excluded.

The heads of terms must give details of any break rights for either party.

Rent deposits and guarantees

The heads of terms must state whether there is any requirement for a rent deposit or a guarantee.

Rent and rent review

The heads of terms must state the amount of rent and the instalment frequency, such as quarterly or monthly payments.

The heads of terms must state whether the landlord intends to charge VAT on the rent.

The heads of terms must state any rent-free period or other inducement.

The heads of terms must set out the basis of any rent review and the review dates.

Assigning, subletting, charging and sharing

The heads of terms must state the tenant's rights to assign, sublet, charge and share the premises.

Service charges, insurance costs and other outgoings

The heads of terms must state if the tenant will be liable to pay a service charge.

Repairs

The heads of terms must state all parties' repairing responsibilities.

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 heads of terms must state 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.

Insurance and damage

The heads of terms must state whether the tenant is to pay towards insurance premiums.

The landlord, or their letting agent where relevant, will be responsible for ensuring the heads of terms are in place before the initial draft lease is circulated.