The RICS has issued the 1st Edition of a new code which comes into effect on 1st September 2020 as a RICS Professional Statement. The aim is fundamentally to improve transparency and fairness in the negotiation of commercial leases of offices, shops and other business premises.
The new and revised Code for leasing business premises (the “2020 Code”) is endorsed by other organisations including BPF, REVO, Law Society, Federation of Small Businesses, Association of Licensed Multiple Retailers and BCO.
The objective of the 2020 Code is to improve the quality and fairness of initial negotiations on lease terms and to promote the use of comprehensive heads of terms. The intention is to introduce mandatory requirements for RICS members and regulated firms to provide written heads of terms and to provide assurance and clarity for occupiers and promote a less adversarial relationship between occupiers and owners and their advisors. The 2020 Code encourages surveyors and lawyers to work more collaboratively and encourages occupiers to take professional advice.
Compliance with the 2020 Code is compulsory for RICS members and applies to most business premises to be leased for any period over 6 months. The 2020 Code can be found on the RICS website: https://www.rics.org/uk/upholding-professional-standards/sector-standards/real-estate/code-for-leasing-business-premises-1st-edition/
The 2020 Code comprises 4 elements:
- Mandatory requirements on surveyors
- Lease negotiation best practice
- A template heads of terms and checklist
- A guide for landlords and tenants
The Mandatory Requirements are as follows:
- Negotiations over the lease must be approached in a constructive and collaborative manner.
- A party that is not represented by an RICS member or other property professional must be advised by the other party or its agents about the existence of the Code and its supplemental guide and must be recommended to obtain professional advice.
- At a lease renewal or extension, the heads of terms must comply with the above 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 agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating that it is ‘subject to contract’ and summarising, as a minimum, the position on each of the following aspects:
- any special rights to be granted, such as parking or telecom/data access
- the identity and extent of the premises (and requiring the landlord to arrange the provision of a Land Registry-complaint plan if the lease is registerable)
- the length of term and whether the Landlord and Tenant Act 1954 will apply or be excluded
- any options for renewal or break rights
- any requirements for a guarantor and/or rent deposit
- the amount of rent, frequency of payment and whether exclusive of business rates
- whether the landlord intends to charge VAT on the rent
- any rent-free period or other incentive
- any rent reviews including frequency and basis of review
- liability to pay service charge and/or insurance premiums
- rights to assign, sublet, charge or share the premises
- repairing obligations
- the initial permitted use and whether any changes of use will be allowed
- rights to make alterations and any particular reinstatement obligations
- any initial alterations or fit-out (if known) and
- any conditions of the letting, such as subject to surveys, board approval or planning permission.
6. The landlord (or its surveyor) will be responsible for securing that compliant heads of terms are in place before the initial draft lease is circulated.
The good practice provisions of the 2020 Code include:
- Matters to be covered by the parties and their agents in the negotiations leading to the heads of terms and also matters to be considered by the parties and their legal advisers in the preparation and negotiation of the lease itself.
- Before signing a lease, all parties (landlords, tenants and any guarantors) should work with professional advisors to ensure the lease matches their requirements and that they understand all the terms and conditions. Parties should consult property professionals before agreeing heads of terms, since the early stage of negotiations is often the best time to resolve important issues.
- Sometimes the landlord will itself be a tenant of the property and this may restrict the flexibility of terms the landlord can offer. Landlords should always state in advance if this is so and the tenant’s property lawyer should check the terms of the landlord’s lease
- A prospective tenant should not assume that a landlord complies with the 2020 Code unless the landlord confirms that it is doing so, and in any event the 2020 Code does not provide all the protection needed when leasing premises, so obtaining professional advice is essential.
The template heads of terms follow the terms of the 2020 Code and the checklist is a tool to ensure any heads issued mirror the template.