Code for leasing business premises Flashcards
The Code for Leasing Business Premises (2020) exists to…
- improve the quality & fairness of negotiations on lease terms
- promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient’
Do landlords enjoy a stronger negotiating position than tenants?
Yes, generally.
Were the previous codes voluntary?
Yes, and their influence over landlord and tenant negotiations was limited.
Who is the Code written by?
Royal Institution of Chartered Surveyors (RICS).
Who does the code apply to?
Members of the RICS & RICS regulated firms
(many property professionals, whether firms or in-house property specialists who deal with the letting of commercial property, will be RICS regulated).
Example of Code being applied…
A commercial landlord employs a letting agent to find tenants & negotiate head of terms. The letting agent is an RICS regulated firm. The letting agent will be professionally obliged to take account of the Code in negotiations. Neither the landlord nor the landlord’s solicitor is obliged to do so, unless they’re members of the RICS.
Does the Code apply to commercial lettings?
Yes, most commercial lettings, but there are exceptions (eg tenancies of 6 months or less).
What does the Code contain?
The Code concerns itself with negotiations & heads of terms, and is divided into mandatory requirements & good practice.
What word is used to indicate mandatory requirements? Who must follow these requirements?
- ‘Must’
- RICS members & regulated firms must follow them
What word is used to indicate good practice? Who must follow this?
- ‘should’
- RICS members & regulated firms must follow them unless there are exceptional circumstances (they may need to be justified to the RICS)
Does the section on good practice concern itself with what lease provisions should/shouldn’t be included in the lease?
Yes.
What do the mandatory requirements include?
- Lease negotiations must be approached in a constructive & collaborative manner
- An unrepresented party must be advised about the existence of the Code & recommended to seek professional advice
- The landlord (or its letting agent) is responsible for ensuring that heads of terms compliant with the Code are agreed before the draft lease is circulated
Example of mandatory requirements
An RICS regulated property agent is negotiating a lease for an institutional landlord. The prospective tenant is a new business which doesn’t have a property agent or solicitor. The landlord’s property agent MUST advise the tenant about the Code and recommend that the tenant seeks legal advice.
Is it mandatory to prepare written heads of term.
Yes, stating that it’s subject to contract.
Which areas does the Code specify MUST be covered in the heads of terms?
- extent of the premises
- length of term & break rights
- rent & rent review (including basis for rent review)
- repairing obligation
- rights to assign (transfer to a new tenant) or underlet the lease
- permitted use of the property (and whether the tenant can change it)
- rights to alter the property and any obligations to put the property back in its original state
Good practice // area of concern - premises
The heads of terms should clearly define the demise, provide a lease plan & refer to all the rights that the tenant will need for its use of the premises
(eg the right of access to the premises, water & electricity etc)
Good practice // area of concern - length of term, renewal rights and break rights
The heads of terms should clearly specify the length of term & only break rights.
The Code sets out basic conditions to exercising the break that are acceptable; others may be included but must be specified in the heads of terms.
(this is an area where landlord-weighted drafting of the lease can make it very difficult for a tenant to exercise the break)
Good practice // area of concern - rent & rent review
The heads of terms should clearly state the initial rent, frequency of payment (eg quarterly) and whether VAT will be charged .
They should also state whether there’s a rent free period (for example, the tenant may not have to pay rent for the first three months while they are fitting out the premises for their purposes)
If the landlord intends to review the rent, then the tenant should be advised how (eg market rent, turnover) and how often (eg every fifth year)
Good practice // area of concern - landlord’s title
The landlord should be responsible for obtaining any consent needed to grant the lease (such as from a superior landlord, mortgage or any third party).
Good practice // area of concern - repairs
The tenant’s repairing obligation should be appropriate to the length of the term & condition of premises.
(extreme example - it would be unfair to ask a tenant on a 6 month tenancy to take a full repairing obligation of premises that are badly dilapidated)
If the tenant gives a qualified repairing obligation (ie limited to the initial state of the premises) a schedule of condition should be required.
Where the premises are newly built, the tenant should be given appropriate protection against inherent construction defects.
Good practice // area of concern - insurance and damage
The lease should suspend the rent if the premises are damaged by an insured risk (unless the damage is due to something the tenant has/hasn’t done) or an uninsured risk.
What is the aim of the Code?
To make commercial lease negotiations fairer and more transparent.
