Our Commercial Property department, look at the new Lease Code for Leasing Business Premises in England and Wales 2020 being introduced on 1 September 2020. The new Lease Code aims to make the negotiations of business lease terms fairer and the legal drafting process more efficient.
The Lease Code 2020 will supersede the Lease Code 2007. While compliance with the Lease Code 2007 was only voluntary, the Royal Institute of Chartered Surveyors (RICS) has raised the status of the Lease Code 2020 to a professional statement. A professional statement sets out requirements for RICS agents, RICS regulated firms and landlords that are RICS members and should be adhered to.
Part 2 of the Lease Code 2020 contains mandatory requirements relating to negotiations and heads of terms that must be complied with. Having a collaborative approach to negotiations is the main aim of the new Lease Code. The remaining provisions of the Lease Code 2020 indicate ‘good practice’ and even though not mandatory, RICS members or regulated firms may be required to justify their actions and decisions if the provisions are not followed.
Does the Lease Code 2020 bind landlords who are not regulated by RICS?
The answer is no, unless the Lease Code 2020 provisions are incorporated in the lease. Difficulties can arise if the landlord’s agent is a RICS member. Should they (and will they) be binding? Would it be sensible to have a common approach, regardless of whether or not the landlord is regulated by RICS?
Which premises does the Lease Code 2020 apply to?
The Lease Code 2020 applies to lettings of premises in England and Wales to tenants who will carry on a trade or professional or other business activities in them. The Lease Code 2020 does not apply to the following:
- Agricultural lettings
- Premises that will only be used for housing plant and equipment or advertising media
- Premises that are intended to be wholly sublet by the tenant
- Premises being let for a period of not more than 6 months.
What are the mandatory requirements?
As mentioned above, the mandatory requirements of the Lease Code 2020 apply only to landlords and agents who are regulated by RICS. The following requirements are mandatory:
- Lease negotiations must be handled in a constructive and collaborative manner.
- An unrepresented party (i.e. not represented by a RICS member of other property professional) must be advised by the other party or its agents about the existence of the Lease Code 2020 and its Supplemental Guide. A recommendation to obtain professional advice must be given to the unrepresented party.
- The agreed lease terms on a vacant possession letting must be recorded in writing as heads of terms, stating that it is “subject to contract” and summarising, as a minimum, the position on various specified matters. These include the following:
- identity and extent of the premises. The landlord must provide a Land Registry compliant plan if the lease will be registerable.
- special rights to be granted (such as parking or telecom/data access);
- length of term and whether the Landlord and Tenant Act 1954 (LTA 1954) will apply;
- options for renewal or break rights;
- requirements for guarantor and/or rent deposit;
- basis of rent review;
- liability to pay service charge;
- alienation rights;
- repairing obligations; and
- right to make alterations and initial alterations.
The landlord or its agent must ensure that heads of terms are in place before the initial draft lease is circulated.
Examples of ‘best/good practice’
The Lease Code 2020 does not dictate the actual terms to be set out in the heads of terms, but it does set out the “best/good practice” in relation to lease terms. So, parties will need to bear this in mind when drafting the heads of terms and, if there is any departure, a record should be kept as this may require justification.
- Term – if the landlord proposes to grant a lease that is contracted out of the security of tenure provisions of the LTA 1954, the tenant should be told at the start so that it may obtain professional advice.
- Break – the lease should provide for the landlord to reimburse the tenant for rent, service charge or insurance rent paid in advance for any period after the break date, although repayment of service charges may be deferred until after the accounts are finalised. This did not appear in the Lease Code 2007.
- Reinstatement – except where the heads of terms state that there will be an obligation a lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal. This is different to the Lease Code 2007.
The Lease Code 2020 hopes to be a checklist for negotiations before the grant of a lease and lease renewals. If there is any departure from the Lease Code then landlords should be transparent about this to the tenant and provide reasons.
The issue here is how inclined non-members of RICS will be to follow the Code when a lease is being negotiated with a tenant.
If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact our Commercial Property team.