New practice code for commercial leases

The new RICS backed Code of Practice for Commercial Leases was launched by the Department for Transport Local Government and the Regions on 22 April 2002.

The new Code is the result of nearly two years' work by a cross industry group set up as a result of the present government's identification of a need to improve flexibility and choice in the commercial property market.

Whilst the Code is presently voluntary in nature the government has expressed its intention to monitor its effectiveness and use over a two year period (There will be an interim review after 1 year). It has indicated that if the commercial property industry does not take the Code seriously then the government will consider legislative action in this area and in particular will ban "upwards only" rent reviews

RICS are of the opinion that:

"It is important that the industry takes note of what the Code requires and takes the necessary action so that government is not tempted to legislate which would only be in a blunt fashion and of no benefit to either landlords or tenants"

What action is therefore required from the industry under the Code ?

The Code contains ten detailed recommendations to be considered by the parties on negotiation of a lease and another 13 to be taken into account over the duration of the lease once in place. As the party in control of preparation of heads of terms and documentation the onus is on the landlord to take on board the recommendations and to demonstrate that it has done so.

Among the recommendations to be considered by Landlords on negotiation are :

a. Landlords should consider offering tenants a choice of length of term including break clauses if appropriate and where alternative lease terms are offered different rents should be appropriately priced for each set of terms.

b. The basis of rent review should generally be to open market rent. Wherever possible landlords should offer alternatives which are priced on a risk-adjusted basis including alternatives to upwards only rent reviews.

c. If the premises are so damaged by an uninsured risk as to prevent occupation the tenant should be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost. This recommendation is of particular current interest following September 11 which has of course brought to the fore the question of damage to buildings for uninsured risks such as terrorism.

d. The tenant's repairing obligations and any repair costs included in service charges should be appropriate to the length of the term and the condition and age of the property at the start of the lease. The Landlord should consider appropriately priced alternatives to full repairing terms.

Landlords need to put in place policies to take the recommendations of the Code on board during their lease negotiations and subsequently. Audits will have to be undertaken of standard lease terms and to put in place procedures to compile evidence of compliance with the Code for passing on to DTLR - no doubt Tenants will be keeping records of the extent to which they think Landlords are complying with the Code

The cross industry group responsible for the Code has produced an alert notice to be included on letting particulars, heads of terms and draft leases to draw attention to the Code in the market place as follows :

" You should be aware that the Code of Practice on Commercial Leases in England and Wales strongly recommends you seek professional advice from a qualified surveyor, solicitor or licensed conveyancer before agreeing or signing a business tenancy agreement". The Code is available through professional institutions and trade associations or via the website www.commercialleasecodeew.co.uk

As far as tenants are concerned the main aim of the Code is to encourage them to be aware of the obligations they are taking on in entering into a lease and to encourage them to take appropriate professional advice at an early stage. The Code of Practice website (see link below) contains a useful leaflet called "Thinking of Renting a Business Property" to which landlords may wish to consider directing non-institutional and particularly non-represented tenants.

It must however be remembered that the Code is designed to demonstrate best practice and to promote flexibility and choice rather than to foist lease terms on unwilling parties. If a landlord can show that a choice was given then even if a tenant ultimately chose (perhaps on price grounds) to take a more traditional 15 year lease with upwards only rent review then it would be difficult to argue that the Code had not achieved its objectives. If landlords are considering the Code recommendations at negotiation stage they must keep accurate and tangible records of having done so. This make take the form of Heads of Terms detailing several choices of lease terms and levels of rent. The tenant could then be required to formally accept the terms it chooses by letter confirming that it is aware of the Code and is happy that it has received the benefit of the Code recommendations.

A full copy of the Code and the advisory leaflet for tenants can be downloaded from www.commercialleasecodeew.co.uk

For further information please contact Mark Heighton at [email protected] or on +44 (0)20 7367 2177 or Sarah Allonby at [email protected] or on +44 (0)20 7367 2851.