Associate solicitor Gemma Smith, in our Commercial Property team, explains the RICS Code for Leasing Business Premises 2020, which will come into effect on 1 September 2020.
The RICS Code for Leasing Business Premises 2020 (the Lease Code 2020) will replace the current RICS Code for Leasing Business Premises which was published in 2007. Like its predecessor, the Lease Code 2020 aims to improve the fairness of the negotiation of terms for business leases and in addition make the lease drafting process more efficient by encouraging the issue of a comprehensive heads of terms at the outset.
The RICS Code for Leasing Business Premises 2007 was entirely voluntary and therefore difficult to implement. RICS registered firms, member agents and landlords will be obliged to comply with the Lease Code 2020.
To which leases will the Lease Code 2020 apply?
The code is intended to apply to commercial leases in England and Wales where tenants carry on a profession, trade or other business activities at the premises. This will include renewal leases other than where the terms are the same as the existing lease.
The Lease Code 2020 will not apply to lettings for a period of six months or less, agricultural tenancies, leases of premises which will be used only for advertising or to house plant and equipment and lettings of premises to be wholly sublet by the tenant.
The mandatory requirements of the Lease Code 2020
The terms of the lease must be negotiated in a collaborative and constructive manner with negotiations seeking to achieve a fair balance between the parties and their commercial interests.
Any party not represented by a RICS member or other property professional must be informed by the other party (or its agent) about the Lease Code 2020 and it must also be recommended that they seek independent legal advice.
Once agreed between the parties, the terms of a lease of a vacant premises must be set out in written heads of terms. There is a template checklist covering the matters to be considered when agreeing a lease but as a minimum, the heads of terms must cover:
- The identity and extent of the premises. A Land Registry compliant plan must be arranged by the landlord if the lease will be registerable. It must also be specified what, if any, elements of the structure will be included
- Details of any special rights to be granted, for example parking
- The length of the term and whether the security of tenure provisions in the Landlord and Tenant Act 1954 are to apply to the lease or be excluded
- Any break rights or options for renewal
- Any requirements for a rent deposit or a guarantor
- The amount of rent, frequency of payment and whether business rates are included
- Whether VAT will be payable on rent and other sums due under the lease
- Any rent-free period or other incentive
- Whether there will be any rent review and the frequency and basis for them
- Any liability for service charge or insurance premiums
- Rights to assign, sublet, charge or share the premises
- Repairing obligations
- The permitted use and if any changes will be allowed
- Rights to make alterations and the reinstatement obligations, including any initial alterations/fit-out (if known)
- Any conditions of the letting, for example, subject to board approval or planning
The best practice elements of the Lease Code 2020
Whilst the other provisions of the Lease Code 2020 are not mandatory, they do indicate best practice. The best practice section of the Lease Code 2020 sets out in more detail what is considered to be a fair compromise between the parties in certain key areas, such as break clauses, rent review, rights to assign and sublet and insurance.
The onus for complying with the Lease Code 2020 is on the landlord or their agent (where applicable). Even though the best practice elements of the Lease Code 2020 are not strictly mandatory, RICS members and regulated firms may be required to justify their decisions where they depart from the recommendations. Such departures should only be for justifiable and good reasons otherwise legal and/or disciplinary action may be taken. Difficulties may arise where the landlord’s agent is regulated by RICS but the landlord is not. Agents should make a file note of the reason for any departure from the Lease Code 2020 in case they are later required by RICS to justify the reasoning.
In order to prepare themselves, commercial agents should familiarise themselves with the code and its requirements ahead of it coming into force. Landlords and tenants will need to give thought to and be prepared to agree all of the terms of agreement listed in the mandatory requirements at the outset. This will be a change from current practice, where quite often only a number of those terms are agreed at the outset with the remainder being dealt with by solicitors in negotiating the draft documents.
A full copy of the code is available from the RICS website.
For further information or legal advice, please contact email@example.com or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.