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New Commercial Lease Code

Posted on 14 February 2020

A new edition of The Code for Leasing Business Premises in England and Wales has been issued and is to form part of a new RICS professional statement.

As well as setting out in straightforward language the reasons for and the implications of many provisions commonly found in commercial leases, the guidance explains what factors the parties should have in mind when considering each of the main terms of the letting, and might even be used by property professionals as a refresher.

It has been prepared again by a working group chaired by Philip Freedman of Mishcon de Reya, with representatives from the RICS, the Law Society, the British Property Federation and several other organisations. It has focused on ensuring that all parties (landlords, tenants and guarantors) are professionally advised on all the main issues and gives guidance rather than prescribes outcomes. This change enabled RICS to adopt the Code for a new professional statement with mandatory obligations for RICS members and regulated firms taking effect on 1 September 2020. The code is accompanied by a comprehensive guide for the parties on negotiating lease terms and includes a list of matters to be covered by heads of terms.

The Code applies to most business premises in England and Wales, excluding agricultural premises, premises only used to house plant and equipment or for advertising, and premises to be wholly sublet by the tenant. Short lets for six months or less are also excluded.

RICS will impose on its members rules requiring that lease terms must be negotiated in a constructive and collaborative manner; that a party not represented by an RICS member or other property professional must be advised about the Code and encouraged to obtain professional advice; that the heads of terms must cover as a minimum sixteen listed aspects and be subject to contract; and that this will also apply at a renewal or extension except where terms are to follow the existing lease.

The aspects to be included in heads of terms include all the topics identified in the previous (2007) code. They relate to the extent of premises and preparation of lease plans; rights to be granted; length of term; renewal rights; break options; guarantors and rent deposits; rent payment and review; VAT; rent-free periods and incentives; service charges; insurance contributions; repairs; assignment, subletting and sharing; permitted use; alteration rights, fit-out and reinstatement; and any conditionality on surveys, board approvals, planning permission or other pre-conditions.

The Code makes recommendations on each of the topics, not mandatory but put forward as normal good practice. These include matters to be considered when the lease is prepared and negotiated and warn against traps such as headline rents review clauses, unfair time limits, obscure indexation formulae, excessively strict controls on alterations and use, and inappropriate break option conditions.

Landlords are no longer exhorted to offer up or down rent reviews or alternative lease terms at different rents, but to recommend that tenants obtain professional advice and read the Code and its supplemental guidance, which makes clear that many terms offered will be negotiable, explains the effect of upward-only rent reviews, and mentions different review mechanisms that might be agreed, including indexation and fixed increases. It follows the previous code in recommending that an authorised guarantee agreement should only be required on an assignment if it is reasonable to do so. However, the guidance acknowledges that this may not be acceptable to landlords in certain circumstances, such as where the tenant's financial strength is a particularly important element of the letting.

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