New RICS Code for leasing business premises

Summary

The RICS has launched its new Code for leasing business premises, 1st edition, February 2020, which is effective from 1 September 2020. For the first time, the Code is an RICS Professional Statement, some parts of which are mandatory for all RICS members in England and Wales. They relate, in particular, to the contents of Heads of terms. The Code applies to lettings of business premises in England and Wales.

The Code

The Code for leasing business premises has had various iterations dating back to 1995. While it has become more influential over time, it has not had significant professional status for RICS members. That position changes with the new Code which is an RICS Professional Statement. That means RICS members must comply with the mandatory parts and may be required by the RICS to justify departures from the good practice parts of the Code.

A key objective is to improve the quality and fairness of lease negotiations and to promote the issue of comprehensive heads of terms, so that each party can make an informed decision about whether to proceed on the terms that they negotiate.

While the Code applies to most lettings of business premises in England and Wales, exceptions include premises used for housing plant and equipment (such as telecoms) or advertising media (such as hoardings), premises intended to be wholly sublet by the tenant and premises being let for not more than six months.

What follows is a summary of some key aspects of the Code and please see the Code for full details.

Mandatory requirements

There are a small number of mandatory requirements for RICS members:

• Lease negotiations must be approached in a constructive and collaborative manner.
• An unrepresented party must be advised about the existence of the Code and its supplemental guide and must be recommended to obtain professional advice.
• There must be written heads of terms, subject to contract, summarising the position on a number of specified aspects including the identity and extent of the premises; length of term; whether the Landlord and Tenant Act 1954 will be excluded; break rights; guarantor/rent deposit requirements; amount of rent, any rent-free period, rent reviews, VAT; liability to pay service charge and insurance premiums; rights to assign, sublet, charge, share; repair; permitted use; alterations and reinstatement; conditions of the letting such as subject to survey, board approval.
• The same requirements apply to a lease renewal or extension, except for any terms that are stated to follow the tenant’s existing lease subject to reasonable modernisation.
• Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.
• The landlord or its letting agent will be responsible for ensuring compliant heads of terms are in place before the initial draft lease is circulated.

• The Code includes as an appendix a template heads of terms which mirrors the Code. The template does not have to be used, but the Code also includes a checklist enabling those with their own form of heads of terms to ensure compliance with the Code.

Lease negotiation best practice

The rest of the Code indicates good practice, including matters to be covered in the negotiations for the heads of terms as well as for the preparation and negotiation of the lease itself. This section of the Code Part 3 comprises some 5 pages and RICS members need to pay attention to this particularly in case the RICS requires a justification for the member’s decisions or actions. This may have a trickle down impact on the contents of commercial leases in future.

Examples of the Code’s good practice are:

• Where the landlord proposes that the lease is to be contracted out of the Landlord and Tenant Act 1954, the tenant should be notified at the outset, so that they can obtain early professional advice as to the implications.
• Unless stricter conditions have been agreed in the heads of terms, a tenant’s break should be conditional only on the tenant paying the basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Landlords should be required to repay rent etc paid by the tenant for any period after a break takes effect.
• Definitions of market rent should not result in a “headline rent”, unless that has been expressly agreed by the parties, such as in return for a financial inducement.
• The parties should have regard to the current edition of the RICS’s Professional Statement “Service charges in commercial property” and, so far as practicable in the circumstances, the service charge provisions in leases should be drafted in conformity with the core principles and mandatory provisions of the statement.
• The requirement for an authorised guarantee agreement (AGA) from an assigning tenant, or a guarantee for the AGA, or a new guarantor or rent deposit should be where the landlord reasonably requires.
• A lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal. The heads of terms can provide for a more onerous reinstatement obligation.
• Leases should cater for damage to the property by an uninsured risk (as well as insured risks).
• Consider inclusion of “green” provisions such as those in the Better Building Partnership’s Green Lease Toolkit. Landlords should act reasonably if they reserve the right to choose which energy performance certificate assessor the tenant may use.

The final part of the Code is a supplemental guide for landlords and tenants. It has no mandatory status but is intended to help occupiers by providing information about the lease process and lease specifics including a checklist of occupancy costs.

Conclusion

The mandatory elements of the Code will improve the lease negotiation process through more regulation of the content of heads of terms, recommending unrepresented parties to obtain professional advice and mandating a constructive and collaborative approach to negotiations. The best practice section in many ways reflects the typical position achieved on lease negotiations - while compliance is not mandatory, RICS members may have to justify departures to the RICS.